Most states attempt to encourage manufacturers to set up a business in their state. Manufacturers typically provide numerous benefits to a state’s economy such as job creation. One of the carrots typically used by a state is to offer sales and use tax incentive for a manufacturing company. In almost every state with a sales and use tax, machinery and equipment purchased for use in the manufacturing process is exempt from tax. What if a glass manufacturer purchased chemicals, such as nitrogen and hydrogen for use in its glass manufacturing process? Would that be a tax exempt purchase of equipment?
This was precisely the issue before a court in PP Industries, Inc. v. Ill. Dep’t of Rev. As stated above, Illinois had a common manufacturing type exemption that allowed an exemption for “machinery and equipment” used in the manufacturing process. Illinois chose to define machinery and equipment for sales and use tax purposes as chemicals or chemical catalysts that have a direct effect on the product being manufactured.
The court looked to whether this applied to the chemicals used in the manufacturing process. Ultimately, the court determined that nitrogen and hydrogen used in a float bath both directly and immediately changed the glass when it was added to the float bath. Therefore the chemicals, namely hydrogen and nitrogen, were exempt as they qualified for part of the manufacturing process.
This case is one of many that should remind practitioners to push the envelope in the world of what it means to manufacture. Does a fuel pump that combines low and high grade fuel constitute manufacturing? What about ovens and equipment used at pizza or fast food chains? Are they used in manufacturing? When fighting manufacturing exemptions from the refund angle there is often much to gain and little to lose, so be creative.
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini received his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390