United States

Indiana: Equipment Used to Blast-freeze Food Qualified for Manufacturing Exemption

Jan 08, 2018
From KPMG TaxWatch

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The Indiana Supreme Court recently ruled that purchases of freezer equipment and electricity qualified for certain sales and use tax exemptions for manufacturing activities. The taxpayer at issue operated a food freezing and storage facility 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 blast freezer equipment and electricity used to operate it should be exempt from sales tax because blast freezing the food constituted the last stage in the process of manufacturing the food products. After the tax court ruled that the taxpayer was not a manufacturer because it was not creating a new, distinct marketable good, the taxpayer appealed.

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. Reversing the tax court’s holding, the Indiana Supreme Court determined that both requirements were met. First, the taxpayer was engaged in direct production because the blast freezing provided an essential and integral step in the process of making blast-frozen food. The court noted that production ends not when the process yields a potentially marketable product, but rather when it yields the good actually marketed. As a result, the blast freezing transformed the product into a distinct marketable good—the blast-frozen food actually marketed and sold to customers. Second, the court determined that the statutory language did not require that taxpayers engage in their own production process to qualify for the sales tax exemptions at issue. As a result, the taxpayer only needed to prove that it was engaged in the business of manufacturing or processing, not that its blast freezing represented a separate, stand-alone process with its own distinct marketable good. Because the blast freezing process substantially changed the food into a distinct marketable product, the court held that this requirement was satisfied. Therefore, the taxpayer’s purchases of blast freezing equipment and electricity were exempt. 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.