Detailed Arkansas Development
Recently, the Arkansas Supreme Court concluded that steel grit used in manufacturing was exempt. The taxpayer at issue manufactured heavy-duty pipes for use by the oil and gas industry. All the pipes were made-to-order based on customer specifications. For manufacturing epoxy-coated pipe, the taxpayer used steel grit to abrade the pipe surface to make the epoxy adhere to the pipe. Upon audit, the taxpayer was assessed use tax on its purchase of the grit; the assessment was upheld following an administrative hearing. A circuit court reversed the decision, and the Department of Finance and Administration (DFA) sought review before the Supreme Court.
Under Arkansas law, a sales and use tax exemption applies to the sale of machinery and equipment used directly in manufacturing articles of commerce if such equipment is purchased for a new facility or to expand an existing facility. The DFA argued that the grit purchases (1) did not result in the creation of a new manufacturing plant or facility or the expansion of an existing manufacturing plant or facility as required by the exemption statute; (2) that the taxpayer, by its own admission, manufactured no items for sale at retail to the general public, and was therefore not manufacturing “article[s] of commerce” at its facility; and (3) the grit had no continuing utility and was therefore not equipment. The taxpayer responded that during the audit period, an expansion of the coating facility began, the number of employees at the facility increased from 253 to 388, and that it increased its coating ability from 600 to 1,000 square meters of pipe surface per hour. Based on this evidence, the appellate court found that the purchases did meet the expansion standard. Regarding the DFA’s assertion that certain case law supported its argument that an article of commerce does not include the production of custom items prepared for specific customers in response to special orders, the court disagreed. In one cited case, the items at issue were hazardous waste materials and clearly not articles of commerce, and in the other, a forty-year old case, a legal standard of the time no longer applied. Finally, regarding the continuing utility of the grit, the court found that during the grit-blasting process, the grit was recycled through the blasting equipment multiple times and would impact multiple pipes without being consumed. Disagreeing with the DFA on all points, the court affirmed the trial court’s decision, finding the grit purchases to be exempt. Please contact Michael Andruchek with questions on Walther v. Welspun Tubular, LLC.
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