Tax Tribunal Once Again Confirms Broad Application of Reduced Machine Rate

 

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.