Arkansas Discusses Application of Manufacturing Machinery and Equipment Exemption

The Arkansas Department of Finance and Administration issued a revenue legal counsel opinion discussing the application of the state’s manufacturing machinery and equipment exemption in regard to a taxpayer’s manufacturing operations. The taxpayer’s use of an automated palletizer, pallet handling system, automated storage and retrieval system, automated order picking system, and customer coding equipment did not qualify for the manufacturing exemption. Machinery and equipment that are used for the manufacturer’s own convenience to palletize or otherwise package items for warehousing or shipping purposes other than to ship the product to the purchaser do not qualify for the exemption. The taxpayer specified that products come off the manufacturing line and go through a case closer before they go to the automated palletizer. The manufacturing process was completed at the point that the product passed through the case closer since the product was completed and in the form that would be purchased as an article of commerce at that time. The machinery and equipment beginning with the automated palletizer and ending with the customer coding equipment is used for storing or warehousing the finished product for the manufacturer’s convenience and therefore does not qualify for the exemption.

An HVAC system used to maintain product integrity in the automated storage and retrieval area is not used directly in the manufacturing process since it does not cause a recognizable and measurable mechanical, chemical, electrical, or electronic action to take place as a necessary and integral part of manufacturing, the absence of which would cause the manufacturing operation to cease. As a result, the HVAC system does not qualify for the exemption.

The Department confirmed the taxpayer’s view that the original installation of mechanical or electrical components of heating and cooling units in a new building is an exempt service is correct. (Revenue Legal Counsel Opinion No. 20170505-S, Arkansas Department of Finance and Administration, December 12, 2019)

Posted on December 17, 2019