NOTICE: Under IC 4-22-7-7, this document is required to be published in the Indiana Register and is effective on its date of publication. It shall remain in effect until the date it is superseded or deleted by the publication of a new document in the Indiana Register. The publication of this document will provide the general public with information about the department's official position concerning a specific issue.

Sales and Use Tax - Material Handling & Packaging Equipment

Authority: IC 6-2.5-2-1; IC 6-2.5-3-2; IC 6-2.5-5-3; 45 IAC 2.2-5-8; 45 IAC 2.2-5-10; Indiana Dep't of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96 (Ind. Ct. App. 1974); Indiana Dept. of State Revenue v. Kimball Int'l Inc., 520 N.E.2d 454 (Ind. Ct. App. 1988).

A taxpayer ("Company") seeks a ruling regarding whether the purchase of material handling machinery and equipment used in its production process, and a bagging line used to package the product, are subject to Indiana sales or use tax.

Company is a multinational corporation with United States headquarters in Indiana. Company provides the following information regarding the transactions at issue:

Company notes that it has twice been under a sales and use tax audit, although it is not currently under audit. The first audit (covering calendar years 2006 and 2007) determined that Company's production process begins at the point where raw ingredients are weighed and measured for mixing a batch. All machinery and equipment prior to this process (including piping equipment from raw material storage to the mixing bins, a freight elevator used to transport raw materials to the mixing bins, carts, forklifts, and talc chutes that feed talc to the mixing bins, and the mixing bins) was deemed to be pre-production and consequently subject to tax.

Company requests the Department to issue a Ruling regarding the application of sales and use tax for the purchases of the material handling equipment and bagging equipment listed within this request.

Indiana imposes an excise tax called "the state gross retail tax" (or "sales tax") on retail transactions made in Indiana. IC 6-2.5-2-1(a). A person who acquires property in a retail transaction (a "retail purchaser") is liable for the sales tax on the transaction. IC 6-2.5-2-1(b). Indiana also imposes a complementary excise tax called "the use tax" on "the storage, use, or consumption of tangible personal property in Indiana if the property was acquired in a retail transaction, regardless of the location of that transaction or of the retail merchant making that transaction." IC 6-2.5-3-2(a).

In general, all purchases of tangible personal property are subject to sales and/or use tax unless an enumerated exemption from sales and/or use tax is available. Property is exempt from use tax if such property is also exempt from sales tax under IC 6-2.5-3-4(a)(2), if ". . . the property was acquired in a transaction that is wholly or partially exempt from the state gross retail tax under any part of IC 6-2.5-5, except IC 6-2.5-5-24(b), and the property is being used, stored, or consumed for the purpose for which it was exempted."

Indiana law provides the standard by which tax exemptions are to be interpreted. In applying any tax exemption, the general rule is that "tax exemptions are strictly construed in favor of taxation and against the exemption." Indiana Dept. of State Revenue v. Kimball Int'l Inc., 520 N.E.2d 454, 456 (Ind. Ct. App. 1988). A statute which provides a tax exemption, however is strictly construed against the taxpayer. Indiana Dep't of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96, 97 (Ind. Ct. App. 1974). "[W]here such an exemption is claimed, the party claiming the same must show a case, by sufficient evidence, which is clearly within the exact letter of the law." Id. at 100-101.

Company notes that effective January 1, 2016, Indiana amended this statute to expand the manufacturing exemption to include the material handling equipment. Company believes this applies to the transport of raw materials from where raw materials are stored. Company states that it utilizes various types of material handling equipment to transport raw materials from where the raw materials are stored to the first step of production. Based on this change in the statute, Company requests a determination as to whether the following tangible personal property qualifies for exemption from Indiana sales and use tax as it relates to Company's production process:

• Piping and vacuuming equipment including motors, compressors, and related machinery and equipment used to convey/transport raw materials from raw material storage (silos, Gaylord containers, raw material loaders) to the mixing bins for production.

• Piping and vacuuming equipment including motors, compressors, and related machinery and equipment used to transport raw materials from the bulk rail cars to the mixing bins.

• Piping and vacuuming equipment used to convey materials from bulk rail car and bulk truck to storage silos.

• Mixing bins that hold and feed the raw materials to the scales for weighing and measuring.

• Forklifts, wheeled carts, cranes, and conveyors used to transport raw materials from raw materials storage to mixing bins and raw material loaders for production.

• Freight elevator used to transport raw materials from raw materials storage, which is located on the first floor, to the upper floors where measuring, mixing, and blending operations take place. This freight elevator is primarily used to transport raw materials, not people or equipment.

• Chutes and hoppers used to introduce raw materials into the mixing bins for production.

• Talc hand loaders and talc feeders that feed talc into the mixed batch of materials on the second floor.

• Scales used to weigh and measure raw materials for blending per product specifications.

More context on the exemption at IC 6-2.5-5-3 is provided by the Department's regulations. 45 IAC 2.2-5-8(c) provides that machinery, tools, and equipment qualify for the exemption only if they have an "immediate effect" on the article produced and are "an essential and integral part of an integrated process which produces tangible personal property."

Regarding preproduction and postproduction activity, 45 IAC 2.2-5-8(d) further provides:

Regarding storage equipment, 45 IAC 2.2-5-8(e) states:

As the exemption applies to transportation equipment, 45 IAC 2.2-5-8(f) provides:

Further, 45 IAC 2.2-5-8(g) provides a detailed explanation of what it means for equipment to have an immediate effect upon the article being produced:

The purpose of the amendment adding the "material handling equipment" language into IC 6-2.5-5-8 was to exempt such equipment that was used to transport materials during the production process from different buildings on an onsite location. IC 6-2.5-5-8 still requires that any equipment, including material handling equipment, to be directly used in the direct production of tangible personal property for sale in order to be exempt. Thus, material handling equipment would not be exempt if it transported raw materials prior to its introduction into the production activity or after the product was completed. Further, the equipment must have an immediate impact on the article produced.

With this information in mind, the piping and vacuuming equipment used to convey materials from bulk rail car and bulk truck to storage silos would be taxable and not eligible for the exemption, because they are used in a preproduction activity that has no immediate effect on the article being produced. Similarly, the freight elevator used to transport raw materials from raw materials storage to the upper floors where measuring, mixing and blending operations take place are not exempt, because the elevator doesn't deliver the materials directly to the production process, but instead into the step before the introduction into the production process. Therefore, the elevator does not have an immediate impact on the article produced and is not exempt.

On the other hand, piping and vacuuming equipment (including motors, compressors, and related machinery and equipment) used to convey or transport raw materials from raw material storage to mixing bins, or from bulk rail cars to mixing bins, are exempt, because they are used to deliver the materials directly into the production process, so they would have an immediate impact on the article being produced. Mixing bins and scales used to weigh and measure raw materials are directly used in the direct production process, as are forklifts, wheeled carts, cranes, conveyors, chutes, hoppers, talc hand loaders, and talc feeders, as they introduce materials into the production process. However, if forklifts, wheeled carts, cranes, and conveyors are used to transport raw materials from raw materials storage to raw material loaders, this would be a preproduction activity, as it is the loaders that may be used to transport raw materials into the production process, so this equipment would be one step removed from the production process.

Turning to the issue of the bagging line, Company states that this equipment is used to package finished pellets into individual white plastic bags as required by its customers. Once the bags are filled, they are sealed shut and conveyed to a palletizer. The palletizer stacks the sealed bags onto pallets for shrink-wrapping. To prevent damage to the bags during shipment, the bags are surrounded with thick cardboard on all four sides. Cardboard caps are also placed on the top and bottom of the pallets for additional protection.

Company points to 45 IAC 2.2-5-8(d), which again states the following:

Company also refers to Letter of Findings No. 04-20080514 (August 26, 2009, 20090826-IR-045090663NRA), in which the Department issued a determination to a manufacturer of bottled products exempting from Indiana sales tax a box turner and palletizer used in the taxpayer's production process. The taxpayer produced drinks and filled them into bottles. After filling, the bottles were capped and sent to cooling tunnels. Cooled bottles were then labeled and placed in cases. The cases were then sealed and labeled and transferred through a wall to the finished goods area where they were palletized and shrink-wrapped. The box turner conveyor turned the boxed products to allow for labeling. The Department determined that the palletizer fell within the production process and therefore qualified for exemption. The box turner conveyor was entitled to the same exemption since its use in the process preceded that of the palletizer. The shrink wrap machine was deemed taxable because its use occurred after final packaging.

Based on 45 IAC 2.2-5-8(d) and the Letter of Findings (the LOF), Company requests a ruling as to whether the following tangible personal property qualifies for an exemption from Indiana sales and use tax as it relates to Company's production process:

• The entire bagging line, including the bagging equipment, bag sealing equipment, conveyors to convey the bagged product to the palletizer, the robotic palletizer, labeling equipment, and shrink-wrap machine.

• If the entire bagging line is not exempt, each individual element of the bagging line:

Each element of the bagging line has to be analyzed in order to determine whether it is directly used in the direct production of a completed product, or if any of the items are used in a postproduction activity. As Company states, the customers require that finished pellets be packaged into individual white plastic bags. Under 45 IAC 2.2-5-8(d), Taxpayer's integrated production process is not complete until Taxpayer performs the required packaging, so the bagging machine and bag sealing equipment are exempt.

Regarding the labeling equipment, Company states that a bar-coded shipping label is attached to each Gaylord container which provides product information as required by the customer. The degree to which these labels are incorporated into and become an integral part of the pellet bags Company is selling to its customers would determine whether the labeling equipment is exempt. Company states that the labels provide product information as required by the customer. As such, Company's use of the labeling equipment would be exempt, because the labels are incorporated as an "integral component" of the pellet bags sold to Company's customers. 45 IAC 2.2-5-8(d).

Turning to the shrink wrap equipment and the palletizer, Company states that customers require that the finished pellets be put into individual white plastic bags. However, the palletizing and shrink-wrapping equipment acts outside of Taxpayer's integrated production process because the "article being produced" in this case would be the plastic bags, where the product would be completed. The palletizing and wrapping of the bags would be a postproduction activity - perhaps necessary to deliver Company's products more conveniently, but having no immediate effect on the article being produced at that point. The palletizing and shrink-wrapping equipment are therefore not exempt because the equipment no longer acts within a continuous, integrated process of producing the particular "article being produced," nor are they essential to the finished product either.

The distinguishing components between Company's situation and the LOF are the regulations relied upon to reach the conclusion that the pallets were exempt and the context in which the pallets were used. The LOF relied in part on 45 IAC 2.2-5-10(c)(2)(D) to conclude that the palletizer at issue for the bottling plant was exempt. This regulation provides the following:

This example was very particular, and the company at issue in the LOF employed just such a bottling and packaging process, so the Department concluded that the company's palletizer and box turner conveyor were entitled to the exemption provided under IC 6-2.5-5-3(b). Furthermore, 45 IAC 2.2-5-10 pertains to processing and refining, as opposed to 45 IAC 2.2-5-8, which pertains to production and manufacturing. Company is engaging in production and manufacturing, and not processing and refining, so the provisions of 45 IAC 2.2-5-8 would apply. Additionally, this example is silent as to whether the customers of this company require that the bottles be put into pallets, but given the nature of bottles and the need to keep them stable and protected during shipping, presumably customers would require them to be. As the LOF concludes, "in the particular case of a bottling and packaging process, the production process 'ends with the final packaging of the product onto the case palletizers.'" Had the pallets not been required by the customers, the palletizer would be taxable. A different example in 45 IAC 2.2-5-8(e) shows that pallets can be taxable if used for temporary storage after the production process has ended. See 45 IAC 2.2-5-8(e), Example 3.

Because the palletizing equipment is not exempt, the conveyer is also taxable. The completed product is the bag, and therefore the conveyer is used in a postproduction process to get the completed product to the next postproduction activity of being palletized and shrink-wrapped.

Company's piping and vacuuming equipment (including motors, compressors, and related machinery and equipment) used to convey or transport raw materials from raw material storage to mixing bins, or from bulk rail cars to mixing bins, are exempt, because they are used to deliver the materials directly into the production process, so they would have an immediate impact on the article being produced.

The mixing bins and scales used to weigh and measure raw materials are exempt, as are forklifts, wheeled carts, cranes, conveyors, chutes, hoppers, talc hand loaders, and talc feeders, as they introduce materials into the production process. However, if forklifts, wheeled carts, cranes, and conveyors are used to transport raw materials from raw materials storage to raw material loaders, this would be a preproduction activity, as it is the loaders that may be used to transport raw materials into the production process, so this equipment would be one step removed from the production process.

Company's piping and vacuuming equipment used to convey materials from bulk rail car and bulk truck to storage silos are taxable, because they are used in a preproduction activity that has no immediate effect on the article being produced. Company's freight elevator used to transport raw materials from raw materials storage to the upper floors where measuring, mixing, and blending operations take place are taxable, because the elevator doesn't deliver the materials directly to the production process, but instead into the step before the introduction into the production process.

Company's bagging machine and bag sealing equipment are exempt because the integrated production process is not complete until Company performs packaging required by their customers. The labeling equipment is exempt because the labels are incorporated as an "integral component" of the pellet bags sold to Company's customers.

Company's palletizer and shrink-wrap machine are not exempt, nor is the conveyor, because they are all used in a postproduction activity after the final product is completed, which is the bagged product.

This ruling is issued to the taxpayer requesting it on the assumption that the taxpayer's facts and circumstances as stated herein are correct. If the facts and circumstances given are not correct, or if they change, then the taxpayer requesting this ruling may not rely on it. However, other taxpayers with substantially identical factual situations may rely on this ruling for informational purposes in preparing returns and making tax decisions. If a taxpayer relies on this ruling and the Department discovers, upon examination, that the fact situation of the taxpayer is different in any material respect from the facts and circumstances given in this ruling, then the ruling will not afford the taxpayer any protection. It should be noted that subsequent to the publication of this ruling a change in statute, regulation, or case law could void the ruling. If this occurs, the ruling will not afford the taxpayer any protection.