Businesses would be wise to review their operations to determine if they are missing possible tax savings by using the reduced tax rate. The Alabama Tax Tribunal confirmed, once again, that the reduced machine rate for sales and use tax should be very broadly applied.
In United Launch Alliance, LLC v. State of
Alabama Department of Revenue; Docket No. S. 18-1033-JP; Opinion and Preliminary
Order dated December 21, 2021, the Tax Tribunal's opinion reversed the Department of
Revenue’s decision to partially deny a refund request. The Taxpayer purchased helium
and nitrogen from a chemical supplier for use in Taxpayer’s rocket manufacturing
facility. The Taxpayer paid state sales tax on the gas purchases at the general
rate of 4%. The Taxpayer and the chemical supplier jointly petitioned the
Department for a sales tax refund; arguing that the helium and
nitrogen purchased qualified as machines that were used in the manufacture of
tangible personal property and thus should have been taxed at the reduced
machine rate of 1.5% under Ala. Code § 40-23-2(3).
The Tribunal discussed a slew of cases
explaining that, for example, the “definition of machinery itself is broad
enough to cover anything from a peanut-roasting outfit on Main Street to a
blast furnace in Pittsburgh.” State v. G.T. Taylor, 80 So. 2d 618,
621-22 (Ala. 1954). The Tribunal discerned the crucial elements for machinery
classification to be that the “machinery” was essential in manufacturing
tangible personal property and that the “machinery” performed integral,
distinct, and independent functions in the manufacturing process. In the
Taxpayer’s case, the helium and nitrogen were used in essential testing to
ensure that Taxpayer’s rockets were launch-worthy. These tests were required to
be performed—and completed successfully—before a rocket could be shipped to a
launch site. The Tribunal noted that the gases did not directly convert raw
materials into rockets and that the Alabama statute did not require that.
Instead, the statute requires that an item be a “machine[] used
in…manufacturing of tangible personal property” to qualify for the machine
rate. The Tribunal held that the gases qualified for the 1.5% machine rate in
this instance and reversed the Department’s denial of the refund
claim.
