Feb 06, 2017
From KPMG TaxWatch
Recently, a Washington State ALJ addressed whether purchases of reels used to store and ship manufactured cable were exempt from sales and use tax. The taxpayer manufactured various products in Washington State, including aluminum-conductor steel reinforced wire cable. This cable is typically used in overhead power lines. To maintain the shape and integrity of the cable and to facilitate shipping, the cable was stored on reels until used by the taxpayer’s customers. The reels were transferred to customers under a bailment arrangement whereby ownership of the reel remained with the taxpayer, but possession and use of the reel was transferred to the customer until the cable was used. The reels were then returned to the taxpayer, who did not collect a deposit from its customers. During an audit, the Department assessed use tax on the taxpayer’s purchases of reels. The taxpayer protested the assessment, claiming the reels were exempt manufacturing machinery and equipment.
Under Washington law, a sales and use tax exemption applies to machinery and equipment sold to a manufacturer that is used directly in a manufacturing operation. Qualifying use must take place during the manufacturing operation. Recognizing that machinery and equipment can be used in both a qualifying and non-qualifying manner, a Washington rule provides that the exemption applies only if the machinery and equipment is used greater than 50 percent in a qualifying manner. Use may be measured by time, value, volume, or another comparable measure. The taxpayer argued that it met the use requirement, as measured by time, based on the use of the reels while in the taxpayer’s possession (i.e., at the manufacturing plant). In the taxpayer’s view, time related to use by the taxpayer’s customers (i.e., in transit and before installation by the customer) was irrelevant to the determination. The ALJ disagreed with the taxpayer and ruled that the use of the reels for transportation and storage should not be excluded from the calculation of qualifying and non-qualifying use simply because the customer, rather than the taxpayer, was “using” the reels. Notably, the taxpayer never gave up dominion and control over the reels. The ALJ further concluded that the use of the reels for shipping and packing was a non-qualifying use. While the reels served an important purpose in helping to retain the shape and integrity of the cable, the reels were essentially used as a packaging material to ship the cable to the customer. As such, the ALJ concluded that the taxpayer did not qualify for the exemption. Please contact Michelle Baisler at 206-913-4117 with questions on this ruling.
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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.