Producer of dry milled corn products claimed it used magnets in its production process

The Indiana Department of Revenue assessed use tax against a producer of dry milled corn products for its purchases of industrial magnets.  Producer claimed the magnets were exempt from sales and use tax because they were used in its corn mill production process.  (The Department notes:  “In effect and practice, the use tax is functionally equivalent to the sales tax.”)  The general rule is that all purchases of tangible personal property by a manufacturer are taxable.  But machinery, tools, and equipment directly used in direct production (the “double direct” test) are exempt.  See 45 IAC 2.2-5-8(a).  The machine, tool or equipment must have an “immediate effect” on the item being produced.  45 IAC 2.2-5-8(c). It must be an essential and integral part of an integrated production process.  See id.

Producer’s protest has one negative, three positive results

To be exempt, the property cannot be used in pre- or post-production.  Identification of the completion point of the manufacturing process was the determining factor, i.e. “when is the [Producer's] milled corn in its final, marketable form?” Three of the magnets checked the milled corn for metal pieces before it was placed in storage.  The Department explained:  “These magnets are components of tubes through which different milled corn products flow on the way to conveyors that transport the product to storage. If metal pieces are found in the milled corn, that batch is returned for further processing.”  These magnets, the Department concluded, were directly used in direct production and therefore exempt. 

Producer used the fourth magnet when stored milled corn was taken from storage for loading into trucks for transport. Taxpayer asserted that the trucks constituted “packaging” and that manufacturing ends at the point where “production has altered the item to its completed form, including packaging, if required.” (citing 45 IAC 2.2-5-8(d) (emphasis added).  Producer reasoned that its “customers pay for this packaging just as they would 50 pound bags.”  Producer’s argument failed.  Customers did not keep the trucks, which were merely a “means of transporting [Producer's] bulk product.”  Because it was used in post-production, the fourth magnet was taxable.

The Department’s ruling (posted 2/27/2013) can be viewed here.