United States

Indiana: Equipment Used to Freeze Food Did Not Qualify for Manufacturing Exemption

Jan 23, 2017
From KPMG TaxWatch

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Recently, the Indiana Tax Court held that purchases of freezer equipment and electricity did not qualify for certain sales and use tax exemptions for manufacturing activities. The taxpayer at issue operated a food storage warehouse in Indiana. Its customers, generally food manufacturers, stored their products in the taxpayer’s facility already packaged and loaded on pallets. Upon arrival, the food products were either at room temperature, chilled, or frozen. Certain customers wanted their room-temperature or chilled food products stored in a frozen state, so the taxpayer offered slow or blast food freezing services. The taxpayer argued that the freezer equipment and electricity used to operate it should be exempt from sales tax because freezing the food constituted the last stage in the process of manufacturing the food products. After its refund claims were denied, the taxpayer appealed to the Indiana Tax Court.

Under Indiana law, certain equipment and electricity used in production are exempt from sales and use tax. To qualify for the relevant exemptions, the taxpayer must 1) be engaged in the production of tangible personal property, and 2) use the equipment as an essential and integral part of its production process. The tax court determined that neither requirement was met in the instant case. First, in the court’s view, the taxpayer was not engaged in production because it did not transform materials into a new, distinct marketable good. The tax court reasoned that while there was a physical transformation when food products were frozen, a “distinct marketable good” was not created. Specifically, the taxpayer’s freezing activity did not increase the quantity of economic goods present in the marketplace; it merely extended the shelf-life and geographic availability of the goods that were frozen. Second, the court concluded that the taxpayer’s freezing equipment was not “an essential and integral part of the production process” used to produce food products. The taxpayer argued that because the food products were marketed as frozen, the freezing was essential and integral to the overall integrated production process. The tax court, however, observed that Indiana employs a “double direct” standard, which requires that the taxpayer who purchases the electricity or equipment must use them as part of its own production process, not as part of the process performed by another taxpayer. Therefore, the taxpayer’s purchases of freezer equipment and electricity did not qualify for the Indiana sales and use tax manufacturing exemptions. For more information on Merchandise Warehouse Co. v. Indiana Department of State Revenue, please contact Dave Perry at 513-763-2402.


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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.