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 It shall remain in effect until the date it is superseded or deleted by the publication of a new document in the Indiana Register.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 - Rental Equipment Used in Assembly Process

Authority: IC 6-2.5-2-1; IC 6-2.5-5-3; 45 IAC 2.2-5-8; 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); Letter of Findings 04-20170019 (20171025-IR-045170462NRA).

A taxpayer ("Company") seeks a ruling regarding whether their rental of equipment to be used on a customer's manufacturing and production job site would be exempt from sales tax.

Company is based in Illinois. Company provides the following information regarding the transactions at issue, reproduced exactly as submitted in its request for a ruling with certain details redacted:

Company requests the Department to issue a Ruling regarding the application of sales and use tax for the purchases of 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).

In general, all purchases of tangible personal property are subject to Indiana sales tax unless an enumerated exemption from sales and/or use tax is available. 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.

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:

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:

Finally, 45 IAC 2.2-5-8(k) provides the following:

"Assembly," as the word is used in IAC 2.2-5-8(k), suggests that the manufacturing process has not yet been completed. Company manufactures food processing, packaging, and conveyor equipment, part of which is manufactured on its premise and then the remainder will be assembled and finished at a customer's place of business. Company's rented scissor lifts or forklifts will place "tangible personal property in a [different] form, composition, or character . . . ." The various parts, before this assembly process occurs, do not constitute a finished product. The parts only become a finished product through the use of scissor lifts or forklifts which help assemble the parts.

The manufacturing exemption test requires two steps: direct use and direct production of other tangible personal property. Taxpayer will directly use the scissor lifts or forklifts that it rents to directly build and assemble the final product. The department has found in the past that cranes, aerial lifts, and booms were exempt when directly used in the direct assembly of tangible personal property. See Letter of Findings 04-20170019 (20171025-IR-045170462NRA). The scissor lifts and forklifts will be used in the same exempt manner as in those prior decisions.

Assembly cannot always be clearly distinguished from installation, which is not a listed process in IC 6-2.5-5-3. If Company were only installing a finished product, with no assembly involved, then the rental of the equipment would not be exempt. However, even though Company will be installing food processing, packaging, and conveyor equipment, the rented scissor lift or forklifts will also be directly used for direct assembly. Without the rented scissor lift or forklift, the taxpayer could not hold the pieces of the equipment into place in order to assemble the finished product. This also means that the rented equipment has an immediate effect on the finished product as well.

Company's rental of forklifts and scissor lifts would be exempt from Indiana sales tax pursuant to IC 6-2.5-5-3 to the extent that the machinery is directly used for the direct assembly of a distinct piece of food processing, packaging, and conveyor equipment. However, usage of the machinery purely for the installation of various component pieces of any of the aforementioned equipment would not be exempt.

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.