SALT Report 2953 – The Indiana Department of Revenue issued a letter of finding regarding the application of sales and use tax to manufacturing equipment. The Taxpayer is a cardboard box manufacturer who was issued a use tax assessment on its purchase of a scrap baler system and related parts. The Taxpayer appealed the assessment claiming that the equipment is necessary to its production process and is exempt from sales and use tax under IC§ 6-2.5-5-3(b).
In its appeal, the Taxpayer explained that the scrap removal system is used during the manufacturing process to collect the pieces of cardboard that fall below the production machinery. The removal system also carries the scrap to the baler where it is bundled for subsequent shipment. Because of the way the items are used, the Taxpayer claimed that the scrap removal system and baler both fall within the conditions of the exemption because, “if the scrap is not removed, the product cannot be further processed, therefore the removal of the scrap has a direct effect on the boxes being produced.”
However, the Department stated that while the scrap removal system may be necessary, it does not satisfy the “double direct” test as required by IC 6-2.5-5-3(b). The regulation states that the property “must be directly used in direct production.” In this case, the scrap remover is not part of direct production; instead it is part of the post-production process. Once the scrap has been punched out, it is no longer part of production.
Further, the Department stated that the scrap cardboard is a by-product of the manufacturer’s production process and is not an item that is manufactured by the transformation of raw materials into a distinct product.
Based on the above, the Department determined that the removal system and bailer that are used to transport and bundle the scrap do not qualify for exemption. Consequently, the Taxpayer did not meet its burden of proof and the assessment was upheld.
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