United States

Arkansas: Jewelry Store Not Entitled to Manufacturing Exemption on Purchase of Welder

Nov 07, 2016
From KPMG TaxWatch

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Recently, an Administrative Law Judge (ALJ) for the Arkansas Office of Hearings and Appeals determined that the purchase of a welding machine used to create custom-crafted jewelry did not qualify for the state’s manufacturing exemption. The taxpayer at issue was a family-owned business that sold jewelry and other gift items at retail. After a routine audit, the Department assessed use tax on the welding machine, and the taxpayer protested. Under Arkansas law, an exemption from sales and use tax applies to purchases of machinery and equipment used directly in manufacturing. The term “manufacturing” “refers to and includes those operations commonly understood within [its] ordinary meaning” (in addition to a list of specific activities deemed to be manufacturing, none of which would apply to jewelry making).

The taxpayer maintained that its activities were no different than any other manufacturer that used raw materials to assemble, make, or fabricate an article of commerce. The ALJ, however, disagreed, noting that the Department has consistently construed the manufacturing exemption to apply only to machinery and equipment used in an “industrial type setting,” and that this construction was entitled to deference. The welding machine at issue was used in the taxpayer’s retail jewelry store, which was not an industrial setting. The ALJ further noted that in the taxpayer’s sales and use tax permit, the taxpayer identified itself as a retail jewelry and gift store. For these reasons, the ALJ concluded that the taxpayer was not entitled to the manufacturing exemption. For more information on this decision, please contact Brandon Fulmer at 214-840-2497.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.