Indiana Rules Rental of Some Equipment Used on Manufacturing/Production Site Tax Exempt

An Illinois based company that manufactures, assembles, and installs automated food processing, packaging, and conveyor equipment in food production lines at food processing plants successfully argued the rental of some equipment should be tax exempt in Indiana. Though the company does manufacture and assemble most of the tangible personal property in in Illinois, the final assembly must be done at their customers’ worksites, which requires the company to rent some equipment, namely scissor lifts and forklifts, in the State of Indiana to complete the installations. It is these rentals the company argued should be tax exempt.

In Indiana, tax exemptions are to be considered in favor of taxation and against the taxpayer; in order to claim any exemptions, the taxpayer must show their arguments are clearly within the exact letter of the law. Indiana law does provide exemptions for transactions involving manufacturing equipment, but only if that equipment has an “immediate effect” on what is being produced and are “an essential part of an integrated process” to produce tangible personal property. In the past, the department has found that cranes, aerial lifts, and booms were exempt only if they were being used to create tangible personal property and stated it will view the rentals in this case in the same manner.

In light of these requirements, the department ruled that the company is entitled to some exemptions. The word “assembly” is key to this ruling, as the department found uses a two-step test for the manufacturing exemption: direct use and direct production of other tangible personal property. The rentals of the scissor lifts and forklifts required for the direct assembly of a distinct piece of equipment are indeed tax exempt because they are creating a finished product. The various parts are not viewed as a finished product and only become a finished product with the use of the rented equipment. However, any instances of rentals that are used only for installation of finished products would not be exempt under Indiana law.

The department added a caveat stating this ruling is in response to a particular set of circumstances and facts, and this ruling may not be relied upon if those change. Other taxpayers may rely on this ruling for informational purposes or to make tax decisions, but if circumstances are different in any material respect, this ruling will not afford any protection to the taxpayer. Further, any subsequent ruling or change in statute could void this ruling; again, this ruling would not provide any protection to the taxpayer.

(Indiana Department of Revenue Ruling No. 2022-05ST, dated August 25,2022)

Posted on January 11, 2023