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Georgia Court of Appeals Exempts Shielding Gases Used Directly in Manufacturing

Tax Development Apr 04, 2008

In a recent decision by the Georgia Court of Appeals (“Court of Appeals”) in Ethicon, Inc. v. Georgia Department of Revenue, Court of Appeals of Georgia, Nos. A07A2024 and A07A2025 (March 25, 2008), purchases of shielding gases by a medical supply manufacturer were exempt from sales and use taxes under Ga. Code Ann. § 48-3-8(35)(A)(ii). Such gases are coated upon in-process product to prevent degradation created by an oxygen rich environment. Ga. Code Ann. § 48-3-8(35)(A)(ii) provides an exemption for “industrial materials other than machinery and machinery repair parts that are coated upon or impregnated into the product at any stage of its processing, manufacture, or conversion.”

The Georgia Department of Revenue (DOR) argued the purchases of these gases were taxable because 1) the exemption is limited to “raw materials purchased to put a product together,” 2) the gases were not coated upon the product as the manufacturer failed to show the gases were applied for a specific purpose and that they “adhere” thereto as paint would, and 3) the gases are used for the production of heat. The Court of Appeals disagreed.

The Court of Appeals found it evident that the Industrial Materials Exemption was not limited to raw materials that ultimately comprise a manufacturer’s end product, as the exemption is unrestricted by any such language. Furthermore, it was undisputed that the manufacturer purchased the gases for a specific purpose in its manufacturing process. It was also determined that the exemption did not require the act of coating to include adherence. Finally, the Court of Appeals found the DOR failed to come forward with evidence showing the manufacturer used the gases as a heat source in the manufacturing process.

Based on the foregoing, the Court of Appeals found no genuine issue of material fact remained as to the manufacturer’s entitlement to the aforementioned exemption for its purchases of these gases. Accordingly, the grant of summary judgment for the manufacturer was affirmed.