A recent Nebraska Supreme Court case has created a potential tax refund opportunity for Nebraska’s manufacturers – but they may need to act quickly. Manufacturers, and their advisors, should be aware of this potential opportunity if they have equipment which they use partially, but not exclusively, in their manufacturing activities.
The Nebraska Supreme Court recently heard the tax appeal of a company who first mined limestone and then used that limestone to manufacture several limestone products. The Department of Revenue assessed sales tax against the company on its purchase of a motor grader, which the company used both to maintain roads within the mine and stockpiles of inventory. The company protested the Department’s assessment, on the grounds that the motor grader was eligible for Nebraska’s manufacturing machinery and equipment exemption to sales tax.
Nebraska’s manufacturing machinery and equipment exemption is available to manufacturers who purchase “manufacturing machinery and equipment.” The term “manufacturing machinery and equipment” is defined as “any machinery or equipment purchased, leased, or rented by a person engaged in the business of manufacturing for use in manufacturing.”
The Department of Revenue interpreted this statute to mean that machinery and equipment would not be eligible for the exemption unless the manufacturer could establish that the machinery or equipment was used over 50% of the time in its manufacturing activities.
The Nebraska Supreme Court overruled the Department’s interpretation of the relevant statute. The Court ruled that the phrase “any machinery or equipment … for use in manufacturing” meant that machinery and equipment which was used in any percentage in manufacturing would be eligible for the exemption. The Department’s 50% test was not supported by the relevant statute.
The Nebraska Supreme Court’s ruling gives manufacturers the opportunity to file refund claims to seek repayment of Nebraska sales taxes paid on equipment which is used a minority of the time in manufacturing. The Department has previously held that the purchase of such equipment was taxable. While the Court did not address very small, or de minimis, uses in manufacturing, manufacturers should be aware that machinery and equipment which is only used a very small percentage in manufacturing still may not be eligible.
While the Court’s decision is good news, the clock may be ticking on these potential claims. Refund claims generally need to be filed within approximately 3 years after the date the tax was paid.
Manufacturers may also be able to file refund claims if the Department issued an assessment for tax on equipment which is used a minority of the time in manufacturing and that assessment was very recently paid (within the last few months).
Refund claims have specific procedures that must be followed for the claimant to receive its full procedural rights and protections. The McGrath North Tax Group would be happy to help a manufacturer file a sales tax refund claim based upon the manufacturing machinery and equipment exemption.
Noteably, the Court did not address the Department of Revenue’s regulatory requirement that a company must derive more of its total annual revenues from the business of manufacturing than any other business to constitute a “manufacturer” who is eligible for the manufacturing machinery and equipment exemption. This is another qualification for the exemption which is not established within the relevant statutes themselves.