Indiana – Taxability of Acetone Used in the Manufacturing Process

SALT Report 1985 – The Indiana Department of Revenue issued a letter of finding regarding the taxability of acetone used during the printing process.  The Taxpayer in this case designs, engineers, prints, and produces plastic containers and accessories for sale to the food industry. The Taxpayer used the acetone to periodically clean a “rubber blanket”, which it used to transfer designs and text onto the plastic containers.

The Department conducted an audit of the Taxpayer’s business records and determined that the Taxpayer’s use of acetone was “not conducted during production but rather in between production runs.” Because of this the Department assessed additional sales and use taxes on the Taxpayer’s purchases of acetone. The Taxpayer disagreed with the assessment and filed an appeal claiming the exemption pursuant to IC 6-2.5-5-5.1(b).

The regulation states that, “Transactions involving tangible personal property are exempt from the state gross retail tax if the person acquiring the property acquires it for direct consumption as a material to be consumed in the direct production of other tangible personal property in the person’s business of manufacturing, processing, refining, repairing, mining, agriculture, horticulture, floriculture, or arboriculture.”  This exemption includes transactions involving acquisitions of tangible personal property used in commercial printing.

The issue in this case is whether the acetone used to clean the Taxpayer’s printing blankets “has an immediate effect on the article produced” and if the acetone “is an essential and integral part of an integrated process which produces tangible personal property.”

The Department determined that the Taxpayer was able to establish that acetone is an “integral part of an integrated process which produces tangible personal property.”   Further, the Taxpayer was able to prove that its use of acetone was sufficiently distinguishable from the routine use of cleaning supplies commonly used in manufacturing processes.

Accordingly, the Department concluded that the acetone fell within the scope of the exemption found in IC 6-2.5-5-5.1(b) and dismissed the sales and use tax assessment.

For Further Information:

Indiana Department of Revenue – Letter of Findings No. 04-20120337