The Arkansas Supreme Court affirmed a county circuit court ruling that found that Welspun Tubular, LLC (Welspun) qualified for a compensating use tax exemption on its purchases of steel grit because the grit qualified as an exempt purchase of manufacturing equipment. The decision also invalidated an audit assessment by the Arkansas Department of Finance and Administration (ADFA) of compensating use tax for over $162,000 on Welspun’s purchases of steel grit during the audit period of May 2009 to May 2012.
Welspun uses steel grit in its manufacturing process of pipes for the oil and gas industry. Angular pieces of steel called “grit” are blasted at the pipes to create a surface profile that facilitates the adhesion of epoxy coating onto the pipes. After the blasting process, the steel grit is collected and recycled through the blasting process between 2,000 and 3,000 times over.
The ADFA argued that the exemption only applies to a purchase of machinery and equipment that results in the creation or expansion of a manufacturing facility. The ADFA contended that the steel grit Welspun uses in its manufacturing process was not new machinery or equipment, just “replacement purchases”, and was not an “article of commerce” available at retail to the general public as required by the manufacturing machinery and equipment exemption. The ADFA’s final argument was that the steel grit did not have “continuing utility” required for the exemption, stating that the grit begins to break down immediately and must be continuously added to the blasting machine.
The Arkansas Supreme Court held the circuit court findings that Welspun was entitled to the exemption because the grit expanded an existing manufacturing facility and qualified as an “article of commerce” since Welspun’s pipes were sold in the public market in all 50 states, even though the company customized the pipes.
Finally, the Arkansas Supreme Court rejected that the steel grit lacked “continuing utility” to qualify as equipment because the grit was recycled and did not become a part of the pipes themselves when blasted. “To have “some continuing utility,” it is not necessary that grit last forever.” the Court stated. (Larry Walther, Cabinet Secretary, Arkansas Department of Finance and Administration v. Welspun Tubular, LLC, Arkansas Supreme Court, April 22, 2021)