Manufacturing Process Resumed: DFA Hearing Allows Manufacturing Exemption for Packaging Equipment

An Arkansas manufacturer was allowed to claim the manufacturing machinery and equipment exemption on equipment used in preparing goods for shipment in a notable hearing decision issued at the end of 2016. Department of Finance and Administration Hearing nos. 16-444, 16-445 (Dec. 27, 2016).

The taxpayer was engaged in manufacturing and distribution at a facility in Arkansas. It offered a wide array of products (perhaps cosmetics?), and tended to ship different assortments to different parts of the country depending on the demographic characteristics of the various markets. Most of the manufacturing process occurred upfront. The taxpayer then would keep the manufactured product as in-process inventory until orders were received. Once an order was received, the taxpayer used an item of equipment that would sort the in-process inventory, apply an order sequence number, and then distribute the products into shipping boxes.

The dispute centered around the exemption of this sorting and packaging item of equipment, i.e., whether these final steps still were part of the manufacturing process. The audit had contended that the manufacturing process ended with the initial manufacture and that the equipment was being used as part of the distribution process.

The ALJ's decision turned on the DFA's Rule GR-55(H), which provides that machinery and equipment used in the packaging of products for shipping to customers qualifies for the manufacturing exemption. Since the item of equipment was "used in the packaging of the Taxpayer's finished end products for shipping to the Taxpayer's customers," it qualified for the exemption, despite the delay between initial manufacturing and packaging for shipment.

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