SALT Report 2950 – The Indiana Department of Revenue issued a letter of finding regarding a Taxpayer’s purchase and use of palletizers. The Taxpayer is a manufacturer and distributor of plastic containers, drums, and pails. The Taxpayer stated that the palletizer is used to place, stack, and shrink-wrap its plastic products onto pallets prior to shipment, which it considers to be part of the production process.
During an audit, it was determined that the Taxpayer did not pay sales tax or self-assess use tax on its purchases of the palletizers. As a result, the Department issued a use tax assessment to which the Taxpayer filed an appeal.
Upon review of the case, the Department referred to 45 IAC 2.2-5-8(c). The statute provides that purchases of manufacturing machinery, tools, and equipment that are directly used in the production process are exempt so long as the machinery, tools, and equipment are directly used in the production process and have an “immediate effect on the article being produced.”
An item is deemed to have an immediate effect on the article being produced “if it is an essential and integral part of an integrated process that produces tangible personal property.” According to the Taxpayer’s description of its plastic making process, the production of the plastic containers is complete when the containers are in their final form, which is prior to being placed on the pallets.
Because of this the Department determined that packaging the containers is not necessary to the production process; rather, it is a post-production step and offered as a convenience to the customer. Consequently, the Department determined that palletizing and packaging are not an “essential and integral part” of the plastic container manufacturing process and therefore, the palletizer does not qualify for the manufacturing exemption.
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