Press Room: Tax Release

March 25, 2014

Nebraska Supreme Court Strikes Down the Department of Revenue’s Interpretation of Manufacturing Exemption

The Nebraska Supreme Court has recently issued a ruling that will result in the expansion of the state's sales tax exemption for equipment used in manufacturing. In Kerford Limestone Co. v. Nebraska Department of Revenue (DOR), No. S-13-035, the Nebraska Supreme Court struck down the DOR’s interpretation that the exemption only applies to equipment used for manufacturing for more than 50% of its use. As such, this ruling may entitle Nebraska taxpayers to refunds of sales/use tax on similar purchases.

The equipment in question was used to maintain the road leading into the limestone quarry and to maintain inventory stock piles of limestone. The DOR’s position was that maintenance of the road was not manufacturing and therefore, did not qualify for the exemption. The company argued that the same equipment was also used to maintain stock piles of rocks the company had in its inventory that it sold. The high court agreed with the taxpayer that the equipment’s use in inventory stockpile areas was indeed a manufacturing use, saying that whether the use was labeled as cleaning or loss prevention, the equipment maintained the integrity of the product produced by the company.

Further, the court rejected the DOR’s interpretation requiring that manufacturing equipment must be used greater than 50% in manufacturing in order qualify for the exemption, indicating that the limitation was not supported by the statutory language. Generally, language such as “primarily” or “predominately” used in manufacturing must be present within the statute in order for such an interpretation to be supported. The statutory exemption provides that sales and use taxes shall not be imposed on the gross receipts from the sale, lease or rental and the storage, use, or other consumption in this state of manufacturing machinery and equipment. The statutory definition of machinery and equipment requires that it be used in manufacturing by a person in the business of manufacturing. The court declared that, since no language existed in the statute supporting any time requirement of use of equipment in manufacturing to qualify for the exemption, the DOR’s ruling limiting the exemption on that basis was invalid.

Therefore, given that no time-based qualifications are imposed upon the uses of equipment in the statutory definitions, any amount of use in manufacturing is sufficient to qualify for the exemption. As such, businesses that relied on the DOR’s 50% use rule in making sales/use tax determinations on purchases of manufacturing equipment, as a regular course of business, may be entitled to a refund. Likewise, any taxpayer who agreed to assessments of additional tax under audit for exceptions related to purchases of equipment used in manufacturing that did not meet the 50% use rule may also be entitled to a refund provided that the statute of limitations is still open on the audit periods.

WTAS professionals can assist taxpayers with reviewing sales/use tax paid on purchases of equipment used in manufacturing, quantifying potential refunds, preparing amended tax returns and/or filing claims for refund of tax with the DOR or with suppliers to obtain refunds of any overpaid Nebraska sales/use tax.