Manufacturing Exemptions

Manufacturing Exemptions

October 01, 2004

Manufacturing exemptions may not be as broad as many power companies think.

And the fact that a sales tax had to be paid when an asset was purchased does not bar the state from treating the asset as “real property” when it comes time for collecting property taxes.

Most states collect sales and use taxes.  The taxes usually apply only to sales of “tangible personal property.” Thus, equipment is subject to tax.  Some project developers try to have power plants classified as real property so as to avoid sales taxes when selling an entire plant.  In many states, equipment purchased for use in “manufacturing” is exempted from sales and use tax.  Use of equipment to generate electricity is often considered manufacturing.

A recent decision in Rhode Island is a warning not to assume that all equipment tied to a power plant is exempted from tax under a manufacturing exemption.  A scrap metal company bought safety equipment and repair parts for cranes it uses to load the scrap metal, after processing, into trucks or ships for transportation to customers.  The state said a sales tax should have been paid because manufacturing has ended by the time the cranes are put to use; the cranes are part of distribution and not manufacturing.  A state tax tribunal agreed in a hearing in July.  Its ruling is administrative hearing no. 2004-11.

Meanwhile, an Indiana tax decision involving Donald Trump is a warning not to assume that just because sales taxes were paid means that annual real property taxes can be avoided.  Trump bought a riverboat to use as a casino.  The boat was made in Florida and shipped to Indiana.  Trump did not pay sales or use taxes in either state.  He paid $1.1 million a year in real property taxes in Indiana.  The state hit him with a $1.3 million use tax, and the Indiana Supreme Court upheld the assessment.

The court said the two statutes — the sales and use tax statute and the real property tax statute — have different definitions.  Thus, the riverboat is subject to tax under both.  The court rendered its decision in late September.  The case is Indiana Department of State Revenue v. Trump Indiana, Inc. 

Keith Martin