Nebraska – Taxpayer Not Entitled to Manufacturing Exemption

SALT Report 1641 – The Nebraska Supreme Court upheld a decision by the Nebraska Department of Revenue that denied a Taxpayer’s claim for a refund of sales tax paid on machinery and equipment used in the construction of an ethanol production plant. The Court determined that the claim was properly denied because the machinery and equipment was purchased not by the Taxpayer, but by its option 3 contractors.

An option 3 contractor is required to remit consumer’s use tax when the materials are withdrawn from inventory and must pay use tax on any machinery or equipment and any related repair or replacement parts they purchase for a customer. Further, Nebraska Revised Statute 77-2701.47(1) provides that machinery and equipment used to manufacture tangible personal property must meet two criteria to be exempt:

  • The purchaser must be a person engaged in the business of manufacturing, and
  • The machinery and equipment must be used in manufacturing

The court determined that the Taxpayer’s use of the manufacturing exemption was based on an incorrect understanding of the exemption. Furthermore, the Court found that the Taxpayer was not eligible to claim the manufacturing exemption as the items in question were purchased by the Taxpayer’s option 3 contractor who was not, “a person engaged in the business of manufacturing.”

Based on the above criteria the Court denied the Taxpayer’s claim for refund.

For Further Information:

Nebraska Supreme Court – Bridgeport Ethanol LLC v. Department of Revenue No S-11-916