Indiana Tax Court Determines Maintenance Equipment and Chemicals Qualify for the Processing Exemption

In Guardian Automotive Trim, Inc., v. Indiana Department of State Revenue, June 30, 2004, the Indiana Tax Court ("Tax Court") determined that purchases of cleaning equipment and chemicals used to clean production equipment qualify for exemption from sales and use taxes under both the equipment exemption and consumption exemption.

Guardian Automotive Trim, Inc. ("Guardian") appealed the final determination of the Indiana Department of State Revenue ("Department") denying it several exemptions from sales and use tax. The Department assessed Guardian use tax on the purchase of mask cleaning equipment and chemicals arguing that the items were used as a function of maintenance and that production halted while the masks were processed. Therefore, the Department determined that the cleaning equipment and chemicals were not essential and integral to the manufacture of automotive trim parts.

Guardian manufactured exterior automotive trim parts and components for its customers. Guardian used a shell (i.e., a mask) that covered areas of the manufactured plastic parts as they were being sprayed with a coating. The mask covered the areas that were later to be electroplated. Chemicals were used as cleaning agents within one of Guardian's mask processing systems. The masks were "processed" or cleaned periodically to prevent build-up of the coating that caused the mask lines to become irregular which, in turn, caused a variety of defects on the plastic part. These defects rendered Guardian's products unmarketable to its customers.

To sustain continuous production of its parts, Guardian processed the masks in synchronization with the manufacturing process. All mask processing occurred in an area of the plant separate from where the part coating process occurred. Production was not halted while masks were cleaned. Production only stopped momentarily as old masks were replaced with clean masks.

The Tax Court stated that "Guardian's production process as a whole must be examined; it cannot be artificially broken down into its component parts." The Department focused solely on the cleaning process as a function of maintenance. The Department also ignored the fact that proper electroplating can only be accomplished with periodic cleaning of the masks and that production did not halt in order to process the masks.

The Tax Court ruled that the mask processing equipment and chemicals were essential and integral to the overall production of Guardian's automotive trim components and are exempt under Indiana Code § 6-2.5-5-3 and Indiana Code § 6-2.5-5-5.1.