Jan 09, 2017
From KPMG TaxWatch
An Administrative Law Judge (ALJ) for the Office of Hearings and Appeals of the Arkansas Department of Finance and Administration recently addressed whether a taxpayer’s purchase of machinery used to sort wholesale product and “in-process inventory” into cases at its manufacturing and distribution facility was exempt from tax as manufacturing equipment. The machinery at issue read bar codes on already-packaged products, added sequence numbers, then eventually sorted and packaged the product into shipping boxes for shipments to customers. On audit, the Department argued that the machinery was not exempt because it was used after the orders were packaged and the manufacturing process was completed. The taxpayer, on the other hand, argued that getting the packaged product sorted and into shipping boxes was a continuance of the manufacturing process. Thus, the issue really was how far the manufacturing process extended.
Under Arkansas law, a sales and use tax exemption applies to machinery and equipment used directly in manufacturing. Machinery and equipment is used directly in manufacturing when it is used “at any time from the initial stage when actual manufacturing or processing begins through the completion of the finished article of commerce and the packaging of the finished end product.” A rule specifically addressing packaging machinery and equipment provides that manufacturing equipment that is used in the packaging of articles of commerce may be purchased by a manufacturer exempt from tax. However, machinery and equipment that is used for the manufacturer's own convenience to palletize or otherwise package items for warehousing or shipping purposes, other than to ship the product to the purchaser, will not qualify for the exemption from tax. Without much analysis, the ALJ ruled that the equipment was used in the packaging of the taxpayer’s finished end products for shipment to customers and therefore the taxpayer qualified for the exemption. Please contact Brandon Fulmer at 214-840-2497 with questions on this ruling.
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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.