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Court of Appeals of Georgia Exempts Repair and Replacement Parts Used Directly in Manufacturing

Tax Development May 01, 2007

The Court of Appeals of Georgia (“Court of Appeals”) reversed the trial court’s decision and ruled in favor of Owens Corning in Owens Corning v. Georgia Department of Revenue.

In Owens Corning v. Georgia Department of Revenue (April 20, 2007), the Court of Appeals determined that purchases of repair and replacement parts for manufacturing machinery were exempt pursuant to the 1997 version of OCGA § 48-8-34(A), which provided a sales tax exemption for “[m]achinery, including components thereof, which is used directly in the manufacture of tangible personal property when the machinery is bought to replace or upgrade machinery in a manufacturing plant presently existing in this state. . .”

Owens Corning filed a claim with the Georgia Department of Revenue (“Department”) seeking a refund for sales tax it paid on purchases of replacement and repair parts for manufacturing machinery during the period July 1, 1997 through December 31, 1999. After the Department failed to issue a ruling on its claim, Owens Corning filed an action for a refund of sales and use tax pursuant to OCGA § 48-2-35 against the Department in the Superior Court of Fulton County.

The trial court rejected Owens Corning’s claim and found the 1997 version of OCGA § 48-8-34(A) did not exempt from taxation components purchased to repair or replace existing machinery parts because this Court held, in Inland Paperboard & c. v. Georgia Dept. of Revenue, 274 Ga.App. 101 (616 S.E.2d 873) (2005), that repair and replacement parts were exempted for the first time in the 2000 amendment to the Exemption Statute. Further, citing the caption to the 2000 amendment, Ga. L.2000, p. 615 (caption), the trial court concluded that the exemption contained in the 1997 version of the statute “extended only to machinery components purchased to upgrade manufacturing machinery.”

The Court of Appeals’ decision addressed the Inland case by stating the following: “But the Court in Inland only compared the 1994 version of the statute with prior versions of the statute and with the 2000 version; it did not consider or address the effect of the 1997 amendment. Thus, we do not find Inland to be controlling here. It is plain to us that notwithstanding the changes made in the 2000 version of the statute, which will be considered more fully below, the 1997 version expanded the definition of machinery by including within that definition ‘components thereof.’ The language used is plain, and on its face susceptible to just one interpretation—to provide for a sales and use taxation exemption for ‘[m]achinery, including components thereof. . . when the machinery is bought to replace or upgrade machinery. . .’ ” Ga. L.1997, p. 1413, § 1.

Based on the foregoing, the Court of Appeals concluded that Owens Corning, not the Department, was entitled to summary judgment on its claim for a refund of sales tax during the applicable period. The trial court’s order granting the Department’s motion for summary judgment and denying Owens Corning’s motion for summary judgment was thus reversed.

The Department filed a Notice of Intent to file a Certiorari Petition with the Georgia Supreme Court to appeal this further. The Department’s petition is due May 10, 2007. This is a tremendous win for Owens Corning and other clients with manufacturing operations in the state. Note: this issue only applies for the period July 1, 1997 through December 31, 2000.