Indiana – Taxability of Gloves Used in the Production Process

SALT Report 2562 –The Indiana Department of Revenue issued a ruling regarding a Taxpayer’s appeal of a use tax assessment on gloves used in its production process. The assessment came as the result of an audit where it was determined that the Taxpayer had purchased the gloves without paying sales tax on the presumption that they qualified for the industrial production exemption.

However, the audit summary noted that “most employees did not wear these items all the time,” which led the auditor to conclude that “whether or not the items were worn did not appear to have an effect on the product or the employees’ safety.”

In its appeal, the Taxpayer stated that it specializes in fiber coating plastic, metal, paper, and rubber substrates for various industries. Because of the type of work the employees perform, the Taxpayer requires that the gloves be worn by the employees to protect their hands from chemical adhesives and heat. For example, the nitrile gloves protect the employees’ hands from the adhesives used in the flocking process, which if not worn would, over time, cause serious skin irritations. The brown jersey gloves were worn by employees to protect their hands from temperatures ranging from 180 to 220 degrees and to protect the surface of the finished product. The gripped cotton gloves were worn by employees when handling tools, materials with metal inners, fixtures, tooling, and bands where the temperature also ranged between 180 and 220 degrees.

In its response, the Department stated that generally, all purchases of tangible personal property by persons engaged in the direct production, manufacture, fabrication, assembly or finishing of tangible personal property are taxable under 45 IAC 2.2- 5-8(a). However, the Department noted that there are several exceptions to 45 IAC 2.2- 5-8(a).

For example, IC § 6-2.5-5-3 provides an exemption for equipment used in the direct production of tangible personal property. The language of this law was discussed in the Department of Revenue v. U.S. Steel Corp., 425 N.E.2d 659. In this case, the court ruled that certain items of safety clothing qualified as “equipment” because they were used to protect the employees’ hands from extreme heat during the direct production of steel.

Further, 45 IAC 2.2-5-8(c) (2), provides that certain equipment is considered an essential and integral part of the integrated production process and is exempt regardless of whether the equipment actually touches the work-in-process. This exemption includes safety clothing or equipment that is used to prevent injury to the employee or contamination of the product.

Based on the above, the Department determined that the Taxpayer had presented sufficient documentation to verify that the gloves were used in an exempt manner. Further, the Department determined that the audit incorrectly assessed use tax on the gloves and accordingly, was dismissed.

For Further Information

Indiana Department of Revenue – Letter of Findings #04-20120680