Tennessee Issues Letter Ruling on Fuel Meters
A Tennessee taxpayer that calibrates fuel meters at gas stations and fuel terminals, recently asked the Tennessee DOR to rule on whether or not its services were subject to State sales and use tax. Using "Rule 54" as the basis for its opinion, the DOR determined that such services are not taxable when the fuel meters are attached to real property. After classifying the calibration service as "repair" or "repair services" because the meters were restored to their original functioning condition, Tennessee tax code and Rule 54(2) were cited to explain that repairs and repair services to tangible personal property do not include ". . .fixtures attached to and a part of any real property." When the calibration service is performed on meters affixed to realty, the "repairs" are not subject to Tennessee sales and use tax; but, such services are subject to tax when meters are not affixed to real property.

Missouri DOR Issues Guidance on Utilities
Food preparation customers who operate retail locations are eligible for state sales tax exemptions on purchases of utilities according to a recent Missouri Administrative Hearing Commission decision. The Commission decided that making snack foods in convenience stores is "processing" as broadly defined in Missouri's tax code rather than accepting the notion that the stores were not eligible for tax exemptions because they are not industrial-style "plants." The Commission reversed a decision by the Director of Revenue, who warns that every retail location in Missouri that prepares coffee and snacks including book stores, snack bars, restaurants, and convenience stores will be able to claim an exemption from sales tax. Pending a decision made on appeal to the Missouri State Supreme Court, the DOR issued guidelines to utilities and retailers recommending that applicable sales tax be accrued on utility purchases.

Illinois Clarifies Tax Guidance for Information Services
In a recent General Information Letter, the Illinois DOR provided guidance on the definition and taxability of online video presentations that are not downloaded and/or transferred to tangible media. Taxes that could possibly be applied include the Illinois Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax. However, because there is no transfer of software or tangible personal property when viewing online video presentations, none of these taxes would apply in the State of Illinois.

New York Tax Appeals Tribunal Reverses Law Judge's Decision
An administrative law judge's determination was reversed by the New York Tax Appeals Tribunal in a matter concerning the tax-exempt purchase of a truck scale as a capital improvement. The truck scale was installed to weigh trucks that carried sand and gravel from the taxpayer's mine. The tax exemption was denied because it was not proven that the scale was permanently affixed in a manner that would cause damage to property or the scale itself if it were removed. A tax exemption was allowed for the taxpayer's purchase of an asphalt milling machine based on evidence that the machine was used only to extract and grind recycled asphalt pavement for sale to customers, which complied with the definition of machinery or equipment used in the production of tangible personal property.

Kansas Lengthens Previously Shortened Refund Claim Period
Beginning on June 15, 2009, Kansas shortened the period for filing sales tax refund claims or credits from three years to one year from the due date of the return for the reporting period. After July 1, 2011, the claims filing limitation was restored to three years.

Indiana Updates Guidance for Utilities Used in Manufacturing
Revisions to sales and use tax exemptions related to utilities used during manufacturing were included in a recent Information Bulletin issued by the Indiana DOR. The bulletin lists the types of manufacturing or production activities that are excluded from paying tax on electricity, gas, water, steam, or steam heat sold by public utilities or power subsidiaries. The utility must be consumed as an integral part of an integrated process that produces tangible personal property, which includes environmental controls that are essential for production to occur. Utilities consumed for testing during production are also exempt as are food heating and cooling equipment that are required for production such as fryers for chicken or freezers for making ice cream. Utilities must be consumed more than 50% of the time for the excepted uses and must be separately metered to qualify.

Indiana Issues Letter Ruling on Test Cell Exemption
While Indiana law allows exemptions for research and development equipment purchased for manufacturing, a taxpayer that operates test cells for R&D purposes is not exempt from paying sales and use taxes for most of its purchases. In its letter ruling following an audit, the Indiana DOR stated that prototype items that were tested were not "marketable goods," which is a requirement for tax exemption. Most of the testing equipment also did not qualify for sales tax exemption because it was not durable and had a useful life of less than one year as set out in an information bulletin issued in 2008.

Virginia Paints Clear Picture for Manufacturers
In a recent letter ruling, the Virginia Department of Taxation said that certain components of paint spray booths are tax exempt, but the materials used to build the booths are not exempt unless they are built with specialized materials. A taxpayer argued that the paint booths created a special environment that ensured high-quality finishes on its products and were necessary and integral to the manufacturing process. The Department's reply indicates that environment control systems that ensure proper drying or remove paint overspray are exempt because they protect product integrity. However, if the walls, ceilings, floors, and doors are built with common materials or are not built in a specialized manner, their purchase is taxable.

Illinois DOR Squeezes Out Press Packing Materials
Printers in Illinois who use paper or plastic press packing materials to build up plates and blanket cylinders in the prepress process must pay taxes on the items. According to a recent general information letter, the DOR states that although graphic arts machinery and equipment are tax-exempt, materials used or consumed in the printing process are not. One-time expendable supplies, such as printing plates and packing materials would not qualify for the exemption.

Tennessee Expands Several Exemptions
New sales and use tax legislation allows companies that construct or expand their headquarters in Tennessee to claim tax credits for qualified purchases. At least $10 million must be invested, at least 100 new full-time jobs must be created in connection with the facilities, and the facilities must be used as a headquarters for at least 10 years from the end of the investment period. The legislation also extends exemptions for material handling and racking systems at qualified warehouse or distribution facilities that are either renovated or expanded with an investment exceeding $10 million over a period of less than three years.

Indiana DOR Goes Misty on Environmental Controls
During a recent audit, an automotive aluminum die cast parts manufacturer was assessed use tax on capital asset purchases that included a dust-hog system, mist collectors, and a lot traceablity system. The taxpayer's protest was based on evidence that the mist collectors and dust-hog were mandated by Illinois Department of Environmental Management requirements, that the equipment prevented contamination of the product during production, and that they prevent respiratory injury to production workers. The DOR was satisfied that the collectors and dust-hog met the exemption requirements for complying with an environmental quality standard. The lot traceability system, while needed to ensure that vehicles were assembled with the correct components, was considered to be a taxable convenience item and not an essential and integral part of the production process.

Texas Governor Perry Vetoes Controversial "Amazon" Law
Texas House Bill 2403, which would have mandated online retailers with a physical presence in Texas to remit state sales taxes, was vetoed by Governor Rick Perry. The controversial legislation was passed by Texas lawmakers in response to State Comptroller Susan Combs' running battle with Amazon.com over sales tax collections. In clearly defining what constitutes nexus, or a physical presence, in Texas for tax purposes, H.B. 2403 said that "substantial ownership" in a business physically located in Texas was required. Because Amazon.com uses a warehouse in Texas that is run by an "affiliate, but not a subsidiary, of the Amazon retailing entity," Amazon.com resisted attempts by the Comptroller's Office to pay $269 million in back sales taxes. In his veto message, Governor Perry said that he worried about risking unintended consequences and called for a "thorough policy discussion" with consumers, retailers, technology experts, state lawmakers in Texas and other states, and the federal government.

California Contemplates Use Tax Police on Internet
Under a controversial plan proposed by the Board of Equalization, the State of California would hire private vendors to find which Californians are not paying use taxes for online purchases that are shipped from out of state. Plan proponents say that the program could generate up to $1.1 billion in uncollected taxes for purchases exceeding $5,000. Critics of the plan have privacy concerns saying that the data collected could be misused. Retailers are concerned that California customers will stop buying from them leading to declining sales. For now, the BOE has withdrawn its idea and has asked for more time to study the idea.

Washington Allows Exemption for Fire Suppression Systems
A tax determination by the Washington Department of Revenue favored a taxpayer who protested an assessment for a fire suppression system installed in a spray/bake paint booth. When the new booth was installed at an automobile panel manufacturing plant, the fire suppression system was installed and wired through the spray/bake booth control panel in such a manner that the painting booth would not operate without the suppression system. The DOR found that the new fire suppression system was an integrated component of a tax-exempt spray/bake booth and was eligible for the state's machinery and equipment exemption.

Wisconsin Supports Exemption for Water Slide Steel
When a new fiberglass water park slide was bought for a Wisconsin hotel resort, the cost for the slide included steel support structures, engineering design services for installation, and installation services. The owner did not pay sales/use tax on the design services, steel supports, and installation, which was assessed during a subsequent audit as taxable personal property. The taxpayer appealed to the Wisconsin Tax Appeals Commission, which found that the items are nontaxable "real property construction activities." In supporting its decision, the Commission applied the three-part Harvestore test and found that the water slide was physically annexed to the real estate and that it was adapted to the use or purpose to which the realty was devoted. The third and most important factor was intent to "make a permanent accession to the freehold." Since the steel beams were very large, cost the taxpayer $8.7 million, were fastened to a concrete foundation, and were basic real property construction materials, the Commission sided with the taxpayer.

Missouri Scraps Repair Parts Exemption
A taxpayer that processes scrap metal in Missouri asked the DOR for a letter ruling on repair parts for cranes and loaders used in another state. The purchases for the parts used at the taxpayer's facility in another state are not exempt from Missouri sales and use tax because the exemption is applied to manufacturing plants only in Missouri. In addition, the DOR ruled that repair parts for excavators and front-end specialty loaders for digging blast furnace pits at the taxpayer's integrated locations are also not exempt from sales tax because the machines are not directly part of the manufacturing process.

Indiana Scraps Exemption for Baler System Purchase
An air filter frame manufacturer filed a protest after an audit assessed sales and use tax with interest on the purchase of a baler system for scrap paperboard. At the hearing, the taxpayer asserted that since a large amount of paper scrap is generated during manufacturing, a baler system is necessary and integral to the process to avoid a shutdown of the entire process from excessive clogging of the die cutters. In addition, after paper scrap is removed, it is compressed and baled before it is sold and, thus, is a product whose form changes and is packaged and sold. The DOR explained in a Letter of Findings that the baler system was not essential to the manufacturing process but was installed to make disposal of scrap material easier. Because the scrap material was handled after manufacturing production of air filter frames was complete and because the scrap paperboard was essentially repackaged without substantial change or transformation, the DOR denied the protest.

Indiana DOR Sheds Light on Curtain Emitters
An Indiana automotive parts manufacturer protested a sales/use tax audit assessment on purchases of several safety-related items. Because purchases of personal protective equipment used during manufacturing are tax-exempt, the taxpayer stated that cable pulls that allow workers to stop the manufacturing process due to an emergency fit the description. The Indiana DOR disagreed, saying that the cable pulls are not an integral part of manufacturing that allow workers to participate in the production process, such as protective gloves, eyeglasses, helmets, hoods, etc. The taxpayer also maintained that light curtain emitters, which stop machinery when a light beam is interrupted by operators who are endangered by coming into close contact with dangerous equipment, are also tax-exempt for the same reason as the cable pulls. In this case, the DOR sustained the taxpayer's protest by agreeing that without the light emitters, the production workers would not be able to run the machines without injury.

Utah Tax Commission Overhauls Repair Rules
Revised sales tax rules have been issued by the Utah State Tax Commission regarding charges for labor and repairs that are completed under service plans, extended warranties, or other prepaid arrangements. Charges that are taxable include: (1) future repairs and (2) deductibles for the customer's share of repairs. When items of tangible personal property are converted to real property, the service plan charges are not taxable. When a service plan charges for tangible personal property items that are permanently attached to real property, (1) labor charges are not taxable and (2) parts are taxable unless the parts qualify for an exemption.

Well Is Dry for Services Firm Operating in Kansas
In response to a recent inquiry from an out-of-state oil well service company, the Kansas DOR put a cap on the company's notion that occasionally sending employees to Kansas to service wells did not give rise to nexus. In its terse response, the DOR said that sales tax is imposed on labor services at gas or oil wells following well construction and that physical presence of the company's employees in Kansas constituted nexus. A 2002 ruling and complementary tax guide cited by the DOR explain taxes on labor for well maintenance and repair services as well as equipment, materials, and miscellaneous items used while providing such services.

Michigan Tax Tribunal Rejects Agricultural Exemption Argument
When audited, a Michigan taxpayer that operated an animal feed mill was assessed use tax on the purchase of truck scales, storage/processing tank, storage tank inventory monitoring equipment, a liquid storage tank, a personnel elevator, and other equipment. The taxpayer appealed the assessment by claiming that an agricultural exemption should be allowed based on the idea that the feed mill was used and consumed in raising or caring for livestock, poultry, or other horticultural products and, therefore, was an integral part of agricultural production. The Michigan Department of Treasury asserted that feed mill operations are properly classified as industrial processing and that even if the taxpayer was engaged in agricultural production, the items at issue were not used and consumed in a qualifying activity. The Tribunal ruled that because the taxpayer did not use its equipment to feed or care for animals, mixing grain for wholesale is not a direct part of raising or caring for animals. If the Michigan legislature intended such an application of its agricultural exemption, then every business that made and sold products to farmers would arguably be qualified.

Kentucky Court Affirms Legislative Legal "Fiction" in Software Case
When a data management services company purchased prewritten software in 2002, little did it know that nearly a decade later its sales and use tax refund request would inflict dismay upon the Kentucky Court of Appeals. At issue was the definition of taxable "tangible personal property." At the time of purchase, its definition was "personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses. . ." Examples included natural and artificial gases, electricity, water, and prepaid calling arrangements. The Kentucky DOR's policy at the time was that software was taxable only when it was delivered on a physical, tangible medium. In 2004, the Kentucky legislature "clarified" the law by amendment to expressly include prewritten computer software within the definition of tangible personal property. Although the taxpayer argued that its purchase was made when the old DOR understanding of the law was in effect, the Court ruled that such software was not exempt before the amendment. Stating that the legislature had chosen to create a legal "fiction," the Court conceded that whether or not an object is tangible or not, it doesn't matter when it is deemed by the legislature to be tangible for tax purposes. Since computer software at the time of purchase could have plausibly been taxable tangible property at the time of purchase, the Court reluctantly upheld the lower court decision.

Nebraska Issues Revised Manufacturing Sales/Use Tax Regulations
The Nebraska Department of Revenue has recently amended the definition of "manufacturer" in regard to manufacturing machinery and equipment exemptions. In general, the sale, lease or rental of manufacturing machinery and equipment for use in manufacturing is not taxable in Nebraska. A "manufacturer" is now defined as a person who derives more than 50% of their total annual revenues from sales of products manufactured and sold as tangible personal property or from production labor performed on products sold as tangible personal property by other manufacturers. Persons who derive more than 50% of total annual revenues for sales of annexed property, intangible property, services other than manufacturing, or any combination of those activities are not "manufacturers." Materials and parts purchased and used by a manufacturer to build its own machinery, molds, and dies are tax exempt.