New applications of the integrated plant doctrine to sales and use tax manufacturing exemptions.

• Author: Evans, Marianne

State & Local Taxes

Most states provide sales and use tax exemptions for machinery and equipment used in manufacturing. Although state departments of taxation often interpret these exemptions narrowly, several recent court decisions have rejected these narrow interpretations. In general, these courts have embraced an "integrated plant" approach in determining whether machinery and equipment are used in manufacturing. Traditionally, this doctrine provides that all machinery and equipment used in a manufacturing facility qualify for exemption. These cases have expanded this doctrine, allowing an exemption for equipment used anywhere in a continuous manufacturing process without limiting the process to a single manufacturing plant.

For example, in Zenith Electronic Corp. v. Illinois Dep't of Revenue (Cook County Cir. Ct., 12/27/95), an Illinois district court held that manufacturing activities that took place in two plants could be part of an integrated manufacturing process. The taxpayer's manufacturing facility in Rauland, Ill., produced cathode ray tubes (CRTs) that were assembled into television sets in a facility in Springfield, Ill. The court found that the integrated manufacturing and assembly process that began in Rauland did not end until the CRTs were assembled into the final product in Springfield. The court noted that the Springfield plant was specially designed to handle the production from the Rauland plant on a 'just in time" basis, so that neither plant had to store the CRTs. Accordingly, plastic trays used to protect the CRTs during transportation between the plants qualified for an exemption for equipment used in the manufacturing process.

The Missouri Supreme Court, in Concord Publishing House, Inc. v. Director of Revenue (2/20/96), has concluded that the doctrine is not limited to procedures performed by a single entity, provided the two companies work together to produce a single product Generally, wholly related corporations are treated as separate and distinct entities for sales and...