The Indiana Department of Revenue (DOR) determined that certain items purchased by an auto parts manufacturer qualified for the state’s manufacturing exemption. Under audit, the DOR had previously assessed use tax for purchases made by the manufacturer. The taxpayer disputed that use tax was owed on storage containers, non-returnable packaging, banding steel, and conveyor belts that it maintained were used in the manufacturing process.
The DOR stated that items must meet the “double direct” test to qualify for the manufacturing exemption. The state provides a sales tax exemption for manufacturing machinery, tools, and equipment if the property is acquired for direct use in the direct production or manufacturing of other tangible personal property. “Direct use in the production process” begins at the point of the first operation or activity that constitutes part of the integrated production process and ends at the point that the production has altered the item to its completed form.
The taxpayer explained that the storage containers are used internally to hold steel parts that are moved from one step of the manufacturing process to another. Based on the taxpayer’s explanation, the DOR determined that the storage containers qualify for the manufacturing exemption as temporary storage equipment.
The taxpayer manufactures auto parts and packages them directly in nonreturnable packaging, which consists of a base pallet, cardboard box, cardboard lid, and corner posts. Some orders also require internal cardboard walls to secure the parts. All the packaging arrives at the taxpayer’s manufacturing facility assembled and ready for instant use as the parts are completed on the manufacturing line and immediately packaged. Customers do not return any portion of the packaging to the taxpayer. The DOR determined that the packaging is exempt as nonreturnable packaging.
The DOR also determined that “banding steel” which is used during the manufacture and stamping of steel plates is exempt since it is part of the integrated manufacturing process.
Finally, the taxpayer argued that conveyor belts used for scrap metal removal should be considered tax exempt. During the manufacturing of steel plates, a portion of the raw metal is cut away and considered scrap. The scrap metal travels down a system of conveyor belts and is then packaged and sold to another vendor for recycling. The taxpayer argued that the conveyor belts should be exempt because recycling the scrap metal constitutes a separate manufacturing process. The DOR determined that scrap removal was not part of the production process. Therefore, the conveyor belts are taxable. The DOR recognized that the scrap removal system is a necessary part of the taxpayer’s manufacturing process. However, the scrap removal does not satisfy the “double direct” test, which requires the exempt property to be directly used in the direct production of goods. The scrap removal conveyor system is not part of direct production but is rather part of post-production. The DOR doesn’t dispute that the taxpayer sells the scrap metal, but the scrap metal is not a product manufactured by the taxpayer. The scrap metal is a by-product of the manufacturing process. The taxpayer does not change or cut down the scrap metal into a different form.
(Letter of Findings: 04-20221047, Indiana Department of Revenue, posted May 24, 2023)