Repair Service or Manufacturing? Tax Court finds that grinding and calibrating work rolls used by Mills was manufacturing supporting application of Indiana’s industrial sales and use tax exemptions.

by Faegre Baker Daniels
Contact

Did Taxpayer create a new product when it flattened slabs of raw steel, aluminum, and paper pulp?

Did Taxpayer create a new product when it flattened slabs of raw steel, aluminum, and paper pulp?

Indiana allows an exemption from sales and use tax for items directly used or consumed in the direct production of tangible personal property.  The Indiana Tax Court last month concluded that a Taxpayer’s grinding and calibrating of work rolls used by mills was manufacturing – not simply repair work.  In Hoosier Roll Shop Services, LLC v. Indiana Department of Revenue, Cause No. 49T10-1104-TA-29 (May 14, 2014), the Court analyzed four questions in reaching this decision and reversing the Department’s assessment of sales and use tax for Taxpayer’s purchases of items used in its remanufacturing process.  Slip. Op. at 11-12.

Customers demanded precision rolling.  Mills use large work rolls to flatten slabs of raw steel, aluminum, and paper pulp into sheets of finished products.  The process is high-tech and precise.  The rolls “operate like giant rolling pins to create the proper thickness, flatness, surface texture, and luster of the sheet product as it passes between them.”  Slip op. at 2-3 (footnotes omitted).  The rolling process must be accurate.  Even minuscule errors could turn the rolled product into scrap.  The surfaces of the work rolls, therefore, must be ground and calibrated to exact specifications.  On average, each work roll is ground and calibrated 40 times to produce different sheet products over its usable life.

Four questions Indiana’s industrial exemptions for sales and use tax require the production of other tangible personal property.  Slip op. at 8 (citations omitted).  The parties agreed on the issue before the Court:  whether Taxpayer produced a new good in grinding and calibrating the work rolls.  Taxpayer argued that it created entirely new tools for new uses in modifying the rolls.  The Department responded that, instead, Taxpayer merely provided a repair service designed to perpetuate the work roll’s usable life.  To analyze the issue, the Court turned to four questions first articulated in its 1998 decision, Rotation Products Corp. v. Department of State Revenue.

1.  What is the substantiality and complexity of the work done on the existing article and what are the physical changes to the existing article, including the addition of new parts?

The Court found that Taxpayer made substantial physical changes to its customers’ work rolls.  Whether new and blank or previously ground and calibrated, the work rolls “must be physically altered before [they] can be used to produce a specified sheet product.”  Slip op. at 9.  Taxpayer “convincingly explained” that it created “an entirely new tool for a different use.”  Id.  Taxpayer did not, as asserted by the Department, merely begin and end with a “giant rolling pin that is used to flatten things.”  Id.  That analysis was woefully simplistic, failing to recognize that the intended use of the remanufactured rolling pin was “very different from the use and form of the work roll when the customer first delivered it to” Taxpayer.  Id.

2.  How does the article’s value before and after the work compare?

The Court found that Taxpayer’s grinding and calibration process adds value to a work roll.  Slip op. at 9.  The Court explained:  “This is evidenced by the fact that at the time a customer brings its work rolls to [Taxpayer], it can no longer use them for their specified purposes.”  Slip op at 9-10.  Once remanufactured, each work roll is “transformed into a new tool.”  Slip op. at 10.  The Department argued that Taxpayer’s process resulted only in “use value” to customers, which failed to increase the value or marketability of the work rolls.  The Court noted, however, that it has previously “rejected the notion that the term ‘value’ does not encompass use value.”  Slip op. at 10 (citing Rotation Products Corp., 690 N.E.2d at 802).

3.  How favorably does the performance of the “remanufactured” article compare with the performance of newly manufactured articles of its kind?

It was undisputed that “each time a work roll is ground and calibrated to certain specifications, its performance as a work roll is no less favorable than its performance as a work roll with the previously ground and calibrated specifications.”  Slip op. at 10.

4.  Was the work performed contemplated as a normal part of the life cycle of the existing article?

The Court concluded that Taxpayer’s grinding and calibration process was not “contemplated as a normal part of a work rolls’ life cycle.”  Slip op. at 11.  It was not “routine maintenance.”  Id.  Taxpayer transformed the work rolls “into entirely new and different tools that are used by its customers to create entirely new and different sheet products.”  Id.

The answer to each of the four questions favored Taxpayer, which the Court held “produces other tangible personal property when it grinds and calibrates its customers’ work rolls.”  Slip op. at 12.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Faegre Baker Daniels | Attorney Advertising

Written by:

Faegre Baker Daniels
Contact
more
less

Faegre Baker Daniels on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.