STATE OF ARKANSAS DEPARTMENT OF FINANCE & ADMINISTRATION OFFICE OF HEARINGS & APPEALS ADMINISTRATIVE DECISION

Transcription

1 STATE OF ARKANSAS DEPARTMENT OF FINANCE & ADMINISTRATION OFFICE OF HEARINGS & APPEALS ADMINISTRATIVE DECISION IN THE MATTER OF GROSS RECEIPTS (SALES) & COMPENSATING (USE) (ACCT. NO.: ) TAX ASSESSMENT AUDIT NO. AUDIT PERIOD: 7/2010 TO 6/2016 DOCKET NOS.: SALES TAX ( ) USE TAX ( ) 2 TODD EVANS, ADMINISTRATIVE LAW JUDGE APPEARANCES This case is before the Office of Hearings and Appeals upon written protest dated October 14, 2016, signed by, Attorney at Law, on behalf of, the Taxpayer. The Taxpayer protested an assessment issued by the Department of Finance and Administration ( Department ). The Taxpayer requested that a hearing occur in this matter after a prehearing briefing schedule. The Taxpayer filed its Opening Brief on March 9, The Department filed its Response Brief on March 22, A hearing was held in this matter on April 20, 2017, at 10:00 a.m. in Little Rock, Arkansas. The Department was represented by Jeffrey Weber, Attorney at Law, Office of Revenue Legal Counsel ( Department s Representative ). Also present for the Department was Latonya Allen, Tax Auditor., Attorney at Law, ( Taxpayer s Representative ) 1 This amount does not include any concessions agreed to by the Department. 2 This amount does not include any concessions agreed to by the Department. 1

2 appeared at the hearing and represented the Taxpayer. Also present for the Taxpayer was ( President ) and ( Controller ). The record remained open after the hearing for the submission of posthearing filings to allow the Taxpayer to further research the function and location of certain protested items. Though the Taxpayer was instructed to file its Initial Brief on April 27, 2017, no filing or other timely contact occurred. On May 9, 2017, the Taxpayer s Representative contacted this Office and stated that no additional information was found with respect to the open items at that time. The Taxpayer was offered additional time by to prepare and file its Initial Brief if desired; however, the Taxpayer s Representative did not reply to that communication. Since the Taxpayer did not file a post-hearing brief, the Department s Reply Brief was deemed unnecessary and the parties were informed that the record would be closed and the matter would be submitted for a decision on May 26, 2017 unless an objection was raised by a party to the proceeding. No objection was raised and the record was closed. ISSUE Whether the Department s assessment in this matter, after concessions, is correct under Arkansas law. Yes, in part. FINDINGS OF FACT/CONTENTIONS OF THE PARTIES The Taxpayer s Representative provided the following initial summary of the relevant facts and protested transactions in her prehearing brief: The Arkansas Department of Finance and Administration's (the "Department" or "DFA") assessment of tax on the transactions described herein is incorrect for the following reasons: (1) Taxes were assessed on non-taxable interest and carrying charges; 2

3 (2) Taxes were assessed on purchases of exempt machinery and equipment used directly in the manufacturing process and used to create a new quarrying plant; (3) Taxes were assessed on purchases of blasting materials that qualify as exempt equipment used in the manufacturing process; (4) Taxes were assessed on purchases that are exempt under the isolated sales exemption; and (5) Taxes were assessed on purchases for which tax has already been paid. For the reasons further explained herein, the Department's proposed assessment is incorrect and should be denied.... is an Arkansas corporation engaged in mining and quarrying operations. is operated by its president,. In carrying on its quarry operations, purchases tangible personal property used in manufacturing and processing products such as to be sold to its customers. mining and quarrying production begins when rock is blasted from the quarry pit. To perform the blasting, holes are drilled into the quarry face. The holes are packed with explosives, which are then detonated. 3 The blasted rock is loaded onto a front loader and transported to a primary crusher (jaw crusher). 4 If some of the blasted rock is too large for the crusher, hydraulic hammers mounted to excavators are used to break up the rock into smaller sizes. After passing through the primary crusher, the product is conveyed to secondary crushers, then to a screen house which screens out smaller sized crushed rock. The larger rock passes on and is then fed through a cone crusher. Finally, the rock is conveyed to a screen house where multiple deck screens sort and separate the crushed rock into various sizes for sale to customers. has conducted mining and quarrying operations since. Beginning in, started the process of expanding its 3 This sentence contained a footnote that explained that the Taxpayer performed the blasting from and the the blasting from forward. 4 This sentence contained a footnote that explained that the jaw crusher consists of a heavy moving metal plate that moves backwards and forwards against a stationary metal plate and crushes rock that is inserted in the top and leaves through the bottom. 3

4 quarrying operations and creating a production plant. Construction of the new quarrying plant was largely performed in three phases, and has been an ongoing project spanning the last several years. See 2011 quarry plant drawings, attached hereto as Exhibit 1. was audited for the period July 2010 through June After conducting its audit, the Department issued a proposed assessment against for gross receipts tax in the amount of and compensating use tax in the amount of. The DFA incorrectly assessed tax on each of the transactions discussed further herein. At the beginning of the administrative hearing, the Department s Representative conceded two objections raised by the Taxpayer in its opening brief: Issue No. 1 (tax assessed on nontaxable interest and carrying charges) and Issue No. 5 (tax assessed on purchases where tax was already paid). The Department s Representative argued that the Taxpayer s activities were not part of a manufacturing operation. The Department s Representative additionally argued that the separate blending, crushing, and sorting of rock is not manufacturing by itself because the Taxpayer s process begins and ends with rock. He additionally noted that dump trucks are specifically excluded by regulation. Though the Taxpayer provided an opinion that appeared to allow certain dump trucks used in a mining operation, he stated that opinion was not issued to the Taxpayer, is not binding on the Department with respect to the Taxpayer, and was wrongly decided. 4

5 Taxpayer s Representative noted that mining and quarrying is specifically included as manufacturing under Ark. Code Ann (Supp. 2015). She further argued the Taxpayer s process is continuous with the quarrying activities because the Taxpayer immediately acts on the stone once it is severed.. She further noted that the Taxpayer is recognized as a mining operation by the Mine Safety and Health Administration (MSHA) and the Arkansas Department of Environmental Quality (ADEQ). The Auditor testified that, during the plant tour, the Taxpayer did not state that it performed the blasting at one time. She physically toured the quarry and the facility operated by the Taxpayer. The Department conceded that a conveyer belt. 5 The Auditor stated that the Taxpayer does not have a continuous manufacturing operation from severance of the stone to the production of its products breaking continuity of the process. She further argued that, even if the Taxpayer was a manufacturer, many of its purchases would still represent insubstantial replacements and/or be indirectly used and remain taxable. Though the Taxpayer breaks up rock in the quarry with hydraulic hammers, she explained that the 5 According to Exhibit 5, this conveyer belt, ends at the railroad tracks, and does not enter the Taxpayer s. The Auditor noted that the conveyer is utilized by the load items into its railcars and not to transport items for the Taxpayer s operation. 5

6 . If the Taxpayer, the Auditor would find a continuous operation so long as there was not a distinct gap in the process. The President testified that he was a period. The Taxpayer s quarry activities have occurred since during the audit. The 6, the Plant Site, and that property contains the Taxpayer s machinery for blending, crushing, sorting, and washing the rock. The associated severance taxes and the Taxpayer that the Taxpayer uses. Currently, the initial blasting of the stone is performed by the ;, the Taxpayer performed the blasting as well. The President confirmed the explosives could not be reused., he stated that the Taxpayer handles and begins processing its rocks on the quarry floor. Two forklifts (a ) were purchased from, who he thinks is an individual that does not regularly sell equipment. 7 The Taxpayer utilizes special heavy duty loader buckets and scales on its loaders to ensure that the customer s and the Taxpayer s trucks are loaded with the correct amount of material and for customer sales. The President then provided a general overview of the Taxpayer s process. He explained that, after initial blasting, several stones are still too large to transport and crush; so the Taxpayer utilizes hydraulic hammers that are 6 See Taxpayer s Hearing Exhibit 1 showing the quarry pit. 7 He later acknowledged that he did not know since that transaction was completed by a different person that has died. 6

7 mounted on excavators located in the quarry pit to break up the rock. 8 After resizing of the larger stones, all of the stones are loaded into the Taxpayer s offroad dump trucks and transported to the Taxpayer s facility for crushing, screening (there are three or four phases of crushing and screening/washing depending on the product requirements), and separating. The dump trucks are large off-road trucks that are illegal to operate on public streets and may only be operated in the quarry. Screening machines are used to sort the product and includes screens, side wear plates, and fasteners. 9 Periodically, the Taxpayer will test its products to make sure the relevant product requirements are met. Testing is completed by taking samples of products to an on-site lab (also located at the Plant Site) for gradation, abrasion, and hardness testing. The President explained that the Taxpayer makes several types of products with the severed rock that must meet stringent requirements regarding the sizes and concentrations of materials. In order to monitor and control the manufacturing process, the President testified that several cameras were added to the operation at the Plant Site. He stated that the cameras broadcast to the control room monitors where the operator has a control panel that allows him to maintain the consistency of material flows to each stage of the processing of the stone, which was necessary to maintain quality of the finished product. The President explained that the machinery and equipment at issue in Taxpayer s Exhibit 4 10 were purchased as part of a physical expansion of the plant 8 See Hearing Exhibit 2 showing the hydraulic hammer s in operation. 9 The President asserted, during the hearing, that these components were purchased as part of a physical expansion that allowed the Taxpayer to produce more product. 10 Taxpayer s Exhibit 4 contains everything protested except isolated sales and blasting materials according to the testimony at the administrative hearing. 7

8 to produce additional products and all purchased items did not replace preexisting items. 11 That expansion occurred in three phases: phases 1 and 2 were completed by and phase 3 was completed by. The President proceeded through each group of protested invoices contained in Taxpayer s Exhibit 4. Those invoices have been categorized below for ease of reference as Assembly Machinery and Equipment (utilized to construct the plant), Plant Site Machinery and Equipment (located on the Plant Site and used to make rock products for customers), Dump Trucks (components to rebuild newly purchased used off-road dump trucks), Pit Machinery and Equipment (excavators, loaders, and associated components used in the quarry pit), Alleged Pollution Control Machinery and Equipment, Sales Ticket Printer Supplies, and Unknown Machinery and Equipment (items where the Taxpayer could not state where or how they are used). All associated testimony from the President for each invoice group is provided below with the invoice description based on provided testimony. A. Assembly Machinery and Equipment purchase of a new articulating boom lift and telescoping boom lift that were used by the Taxpayer s employees to construct its new plant at the Plant Site. - purchase of a rough terrain crane that was used to assemble the plant purchase of a unit to sand blast the rust off a newly purchased used plant before painting purchase of a snorkel lift (basket lift) used to assemble the machinery 11 The President explained that the Taxpayer typically purchases used machinery so several items are parts that were needed to be bought before the newly purchased machinery could be used. 8

9 purchases of parts for truck beds and tool boxes for trucks that were used to assemble the plant parts for the lift from Iron Planet B. Plant Site Machinery and Equipment -purchases of new screens and jigs (clips that hold the screens) for the sorting machinery purchases of metal and welding supplies that were used to assemble the new plant including ladders, hand rails, the structure for the machinery, etc. component parts of the new primary crusher purchase of plates that ensure the rocks slide from the crusher onto the screens cameras used to monitor the quarrying process flow in the control booth - new conveyor belts for the newly purchased used plant new lab equipment to test new products to supplement (but not replace) the old testing equipment new wear plates for chutes that funnel material onto belt - wire cable for cameras used to monitor the plant operations - parts for the control panel (i.e. push buttons, wiring, etc.) camera that can be moved to monitor the plant operations parts to get a newly purchased used powerscreen functioning aftermarket oil filtration systems that provide a second filtration for the oil used in the bearings on the crushers C. Dump Trucks - involved a purchase of an offroad dump truck that needed to be rebuilt - purchases of transmissions and breaks for the used dump truck that had to be rebuilt before use 9

10 transmission components for a used off-road truck that had to be rebuilt before use purchase of a used off-road dump truck a transfer case for an off-road truck D. Pit Machinery and Equipment a. Loaders and Components purchase of loader scales to load customer s truck and Taxpayer s trucks to ensure that they are not overloaded - new transmission for a newly purchased used 980G loader - a new frame to replace a bent one on a newly purchased used loader so that a bucket could be mounted b. Excavators and Components - hydraulic hammers used to break up recently severed stone (one hammer) was new and two were purchased used and required rebuilding). - the purchase of a rock mining bucket for the Excavator E. Alleged Pollution Control Machinery and Equipment dust suppression system for new plant to comply with ADEQ permit - parts for a used water truck that wetted the quarry to prevent dust more dust suppression water lines, nozzles, valves, and pumps F. Sales Ticket Printer Supplies printers at the scale house to print customers load tickets to document time, customer, driver, product, and quantity, and destination with price G. Unknown Machinery and Equipment 10

11 The Controller testified that the Taxpayer is registered with and in compliance with the MSHA and ADEQ as an ongoing quarry operation. After a general discussion of the burdens of proof in tax proceedings, a legal analysis with associated conclusions shall follow regarding the relevant transactions. follows: CONCLUSIONS OF LAW Burdens of Proof Ark. Code Ann (c) (Supp. 2015) provides, in pertinent part, as The burden of proof applied to matters of fact and evidence, whether placed on the taxpayer or the state in controversies regarding the application of a state tax law shall be by preponderance of the evidence. A preponderance of the evidence means the greater weight of the evidence. Chandler v. Baker, 16 Ark. App. 253, 700 S.W.2d 378 (1985). In Edmisten v. Bull Shoals Landing, 2014 Ark. 89, at 12-13, 432 S.W.3d 25, 33, the Arkansas Supreme Court explained: A preponderance of the evidence is not necessarily established by the greater number of witnesses testifying to a fact but by evidence that has the most convincing force; superior evidentiary weight that, though not 11

12 sufficient to free the mind wholly from all reasonable doubt, is still sufficient to incline a fair and impartial mind to one side of the issue rather than the other. The Department bears the burden of proving that the tax law applies to an item or service sought to be taxed, and a taxpayer bears the burden of proving entitlement to a tax exemption, deduction, or credit. Ark. Code Ann (d) (Supp. 2015). Statutes imposing a tax or providing a tax exemption, deduction, or credit must be reasonably and strictly construed in limitation of their application, giving the words their plain and ordinary meaning. Ark. Code Ann (a), (b), and (e) (Supp. 2015). If a well-founded doubt exists with respect to the application of a statute imposing a tax or providing a tax exemption, deduction, or credit, the doubt must be resolved against the application of the tax, exemption, deduction, or credit. Ark. Code Ann (f)(2) (Supp. 2015). Assessed Transactions Arkansas Gross Receipts (sales) Tax generally applies to all sales of tangible personal property within the State of Arkansas. Ark. Code Ann (Repl. 2014). Arkansas Compensating (use) Tax generally applies to the storage, use, distribution, or consumption of tangible personal property within the state of tangible personal property that purchased outside the state. Ark. Code Ann (Repl. 2014). The purchases at issue are tangible personal property and, thus, are generally taxable unless the Taxpayer can demonstrate entitlement to an exemption by a preponderance of the evidence. A major issue in this matter is whether several of the transactions at issue qualify for the manufacturing machinery and equipment exemption under Ark. 12

13 Code Ann (Repl. 2014) and (Repl. 2014). Mining and quarrying are included in the definition of manufacturing under Ark. Code Ann (b)(1) and (2) (Supp. 2015). Ark. Code Ann (Repl. 2014) is largely mirrored in the use tax exemption for manufacturing machinery and equipment codified at Ark. Code Ann (a) (Repl. 2014). Sales tax exemptions are applied uniformly with use tax exemptions. Ark. Code Ann (Repl. 2014). The Arkansas Gross Receipts Tax Rules governing the manufacturing exemption control the application of the manufacturing use tax exemption as well. Arkansas Use Tax Rule UT Boiled down to its simplest terms, the provisions of Ark. Code Ann (Repl. 2014) provide an exemption from tax on purchases of machinery and equipment purchased by a manufacturer for direct use in manufacturing an article of commerce. The statute creates three separate exemptions. The provisions of Ark. Code Ann (a)(1) (Supp. 2015) provide an exemption for the purchase of machinery and equipment necessary to create a new manufacturing facility or to expand an existing facility. The provisions of Ark. Code Ann (a)(2) (Supp. 2015) provide an exemption for the purchase of machinery and equipment that replace substantially all of an existing unit of machinery and equipment that is necessary to perform an essential function in the manufacturing process. The provisions of Ark. Code Ann (a)(3) (Supp. 2015) provide an exemption for the purchase of machinery and equipment used to prevent or reduce pollution or contamination that might 12 For the remainder of this decision, the manufacturing machinery and equipment exemption shall be referenced by solely citing the sales tax exemption located at Ark. Code Ann (Repl. 2014). 13

14 otherwise result from manufacturing operations. In Weiss v. The Bryce Co., LLC, 2009 Ark. 412, 330 S.W.3d 756, the Arkansas Supreme Court held that items of tangible personal property must meet certain requirements to be exempt manufacturing machinery and equipment, specifically the items must (1) possess some degree of complexity, (2) possess continuing utility, and (3) be directly used in the manufacturing process by causing a recognizable and measurable mechanical, chemical, electrical, or electronic action to take place as a necessary and integral part of manufacturing, the absence of which would cause the manufacturing operation to cease. Id. Initially, the Taxpayer has protested several transactions that have been categorized above. Many of these items will remain taxable regardless of whether the Machinery and Equipment at the Plant Site are deemed to function with a manufacturing process. Consequently, certain categories of items will first be discussed before the extent of the manufacturing process is determined. A. Unknown Machinery and Equipment Regarding the Unknown Machinery and Equipment, the Taxpayer protested several items and alleged that the items were exempt as machinery and equipment utilized in a quarrying operation. During the administrative hearing, however, the Taxpayer was unable to state where and how certain machinery and equipment was used in the quarrying operation. These items are listed in Unknown Machinery and Equipment category above. The Taxpayer requested and received additional time after the administrative hearing to research and submit additional evidence regarding these items; however, as stated above, no 14

15 additional information was provided by the Taxpayer. Since the use of these items is unknown, the assessment of these items must be upheld because the items represent purchases of tangible personal property and no exemption has been proven by the Taxpayer. B. Forklifts Purchased from Regarding the forklifts purchased from asserted that two forklifts purchased from, the Taxpayer should be exempt as isolated sales. While a sales tax exemption does exist for isolated sales not made by an established business 13, the President conceded that he did not complete the deal with and does not know or his business activities. The Taxpayer requested and received additional time after the administrative hearing to research and submit additional evidence regarding these items; however, as stated above, no additional information was provided by the Taxpayer. Since it is uncertain whether sold the machinery as an established business, the assessment of these items must be upheld because the items represent purchases of tangible personal property and no exemption has been proven by the Taxpayer. C. Assembly Machinery and Equipment Regarding the Assembly Machinery and Equipment Category, the Taxpayer asserted that these items are not used to process the stone but to assemble the new plant at the Plant Site. As stated above, manufacturing machinery and equipment must be used directly in the manufacturing process to qualify for the relevant exemption. Thus, the items in this category do not qualify 13 Ark. Code Ann (17) (Supp. 2015). 15

16 for the exemption. Consequently, the assessment of these items must be upheld because the items represent purchases of tangible personal property and no exemption has been proven by the Taxpayer. D. Dump Trucks Regarding the Dump Trucks Category, the Taxpayer argued that the dump trucks are large pieces of machinery that are utilized in the quarrying process to transport materials during the manufacturing process and should qualify as exempt manufacturing machinery and equipment. 14 Arkansas Gross Receipts Tax Rule GR-59, however, expressly provides that Dump trucks or other transportation vehicles are not exempt from the tax. Consequently, dump trucks do not qualify for the manufacturing and machinery exemption under the binding regulation. The assessment of these items must be upheld because the items represent purchases of tangible personal property and no exemption has been proven by the Taxpayer. E. Alleged Pollution Control Machinery and Equipment Regarding the Alleged Pollution Control Machinery and Equipment, the Taxpayer argued that these items are required to be utilized for dust suppression as required by the Arkansas Department of Environmental Quality under its air permit. 15 It is uncertain whether these items operate in the quarry floor, the plant site, or both based on the provided testimony. Generally, pollution control machinery and equipment is not used in the manufacturing process but prevents 14 Though the Taxpayer cited a legal opinion for the proposition that some dump trucks in a quarry may qualify as being used in manufacturing, the Department s Representative correctly stated that legal opinion may only be relied upon by the taxpayer that receives the opinion, citing Arkansas Gross Receipts Tax Rule GR-75(a). 15 The referenced permit was not provided by the Taxpayer during this proceeding 16

17 or reduces the pollutants that result from the manufacturing process. As stated above, an exemption does exist for machinery and equipment required by federal or state law or regulations to be installed by manufacturers for the control or reduction of air or water pollution. 16 The requirements to prove entitlement to this exemption are presented in Arkansas Gross Receipts Tax Rule GR-66(A), which provides as follows, in pertinent part: The gross receipts or gross proceeds derived from the sale of pollution control machinery and equipment are exempt from the tax if: 1. The machinery and equipment is utilized, either directly or indirectly, by manufacturing or processing plants or facilities, or cities or towns in Arkansas to prevent or reduce air or water pollution or contamination which might otherwise result from the operation of the plant or facility; and, 2. The machinery and equipment is required by Arkansas or federal law or regulations to be installed and utilized to control pollution or contamination as evidenced by written documentation from the Arkansas Department of Environmental Quality or the United States Environmental Protection Agency. Here, the Taxpayer has not presented written evidence that the items contained in this category are required by state or federal law to be installed for control of pollution or contamination from a manufacturing plant or facility. Consequently, the items in this category are taxable regardless of whether they function in the quarry floor or Plant Site. The assessment of these items must be upheld because the items represent purchases of tangible personal property and no exemption has been proven by the Taxpayer. F. Plant Site Machinery and Equipment 16 See Ark. Code Ann (a)(3) (Supp. 2015). 17

18 The President explained that these items are at the Plant Site. The Taxpayer s Representative noted that mining and quarrying is included in the definition of manufacturing under Ark. Code Ann (b)(1) and (2) (Supp. 2015). The Department has promulgated a regulation that specifically addresses the taxation of machinery and equipment utilized in a quarrying operation and that rule provides as follows: Machinery and equipment purchased and used by mining or quarrying operations are exempt from the tax if the requirements of GR-55 are satisfied. The exemption may be claimed only for machinery and equipment utilized for the actual mining or quarrying operation itself which may include machinery and equipment used to wash, grade and separate the mined or quarried articles of commerce if such operation is carried on at the same site and as part of the continuous mining operation. 17 Dump trucks or other transportation vehicles are not exempt from the tax. Arkansas Gross Receipts Tax Rule GR-59. Here, the President stated that the Taxpayer s excavators with mounted buckets and hammers immediately begin acting on the stone once it is severed. The stone is then loaded into dump trucks by the loaders with buckets and scales for transport. The Department s Representative argued that, though the, the Plant Site is. He asserted that both factors mean that the Plant Site is not on the same site for purposes of the GR-59. He also asserted that the transport of the materials to the Plant Site creates a break 17 This portion of the rule appears to incorporate Arkansas Supreme Court case law that interpreted the manufacturing machinery and equipment exemption to include those items that are part of a continuous, integrated, and synchronous manufacturing operation. Cf. Arkansas Beverage Company v. Heath, 257 Ark. 991, 1005, 521 S.W.2d 835, 843 (1975). 18

19 in the continuity of the operations, preventing that machinery and equipment from being exempt as part of the quarrying process. The argument of the Department s Representative is persuasive. While the Taxpayer s Representative argued that the quarry was once a single piece of property and that the Taxpayer quickly acts on the rock within the quarry after blasting, these facts do not being a break in the continuity of the quarrying process. Consequently, the activities that occur at the Plant Site are not part of the quarrying operation and the activities at the Plant Site are not part of a continuous quarry operation. The Taxpayer s Representative additionally argued that, even if the Taxpayer is not engaged in manufacturing by its association with the quarrying operation, then the Taxpayer qualifies as a manufacturer by producing articles of commerce, i.e. its stone products. The Department s Representative argued that the Taxpayer s process begins and ends with stone and, thus, is not manufacturing, citing Ragland v. Arkansas Valley Coal Services, Inc., 275 Ark. 108, 627 S.W.2d 559 (1982) and Walther v. Carrothers Construction Company of Arkansas, LLC, 2016 Ark. 209, 492 S.W.3d 504. In Arkansas Valley Coal, the Arkansas Supreme Court considered whether the crushing and blending of coal was manufacturing for purposes of the manufacturing machinery and equipment exemption. The Court held that it does not, noting that Arkansas Valley Coal began and ended with the same commodity and did not change the essential identity of the coal. In Carrothers, the Arkansas Supreme Court considered whether a water treatment plant that converted 19

20 nonpotable river water to potable water should be considered manufacturing. The Court held that it does not, noting that the water treatment plant treated and cleaned water but did not manufacture it. Here, the Taxpayer likewise begins and end with a similar product. Though the stone must possess certain innate characteristics and different types of stone must have certain concentrations in particular products, the Taxpayer begins and ends with the same commodity (stone) like the processes considered and rejected by the Arkansas Supreme Court in Carrothers and Arkansas Valley Coal. The Taxpayer s Representative s arguments are not persuasive. It is not relevant to the application of this exemption that the Taxpayer is recognized as a mine under the Mine Safety and Health Administration (MSHA) and the Arkansas Department of Environmental Quality (ADEQ). The analysis must turn on the exemption s definition of manufacturing as interpreted by the Arkansas Supreme Court. Since the machinery and equipment in this category are not directly used within a manufacturing process, the Department correctly denied the Taxpayer s manufacturing machinery and equipment exemption claim. The assessment of these items must be upheld because the items represent purchases of tangible personal property and no exemption has been proven by the Taxpayer. G. Sales Ticket Printer Supplies Regarding the Sales Ticket Printer Supplies, the President explained that these items are utilized to print load tickets/receipts for customers at the Plant Site after loading. Since the activities at the Plant Site do not constitute 20

21 manufacturing, the consumable printer supplies that create the sales tickets are also not directly used in manufacturing and do not qualify for the manufacturing machinery and equipment exemption. The assessment of these items must be upheld because the items represent purchases of tangible personal property and no exemption has been proven by the Taxpayer. H. Pit Machinery and Equipment This category must be divided into two subcategories for purposes of this analysis: Excavators with Components and the Loaders with Components. Initially, the President stated that these transactions were purchases of new machinery and equipment for the Taxpayer that did not replace preexisting items. The President testified that the Excavator with Components are utilized in the quarry pit to break up the rock as soon as it is severed. The President further testified that the Loaders with Components were utilized to load the dump trucks in quarry pit for transport to the Plant Site and to load customer s trucks and the Taxpayer s trucks with completed stone products at the Plant Site. It is uncertain whether the frame, transmission for a loader, and scales are utilized on loaders that function in the quarry pit, the plant site, or both. Regarding the Excavators and Components, the record establishes that these items are utilized on excavators that immediately act upon the stone within the quarry pit after severance. Arkansas Gross Receipts Tax Rule GR-59 provides that quarrying machinery and equipment utilized as part of a continuous quarry operation at the same site of a quarry qualify as manufacturing machinery and equipment. The Taxpayer has established that the new excavators and equipment represent complex machinery that is used directly within the quarrying process and possesses continuing utility. 21

22 Consequently, the machinery and equipment listed in the Excavators and Components subcategory above qualify for the manufacturing machinery and equipment exemption and the Department incorrectly denied the Taxpayer s exemption claim. The assessment of these items is not sustained. Regarding the Loaders and Components, it is uncertain whether the protested items are components of the loaders utilized at the Plant Site or at the quarry. Based on the analysis addressing machinery located at the Plant Site, loaders utilized at the Plant Site would not be utilized in a manufacturing process and would not be exempt. Since it is uncertain where the frame, loader s transmission, and scales in this subcategory are used, the Department correctly denied the Taxpayer s exemption claim and the assessment of these items is sustained. The assessment of these items must be upheld because the items represent purchases of tangible personal property and no exemption has been proven by the Taxpayer. I. Blasting Supplies The Taxpayer s Representative asserted that explosives purchased and used by the Taxpayer to sever the rock from the quarry face 18 should be exempt as chemicals used in manufacturing under Arkansas Gross Receipts Tax Rule GR-55.1 and Ark. Code Ann (35) (Supp. 2015). All relevant purchases were attached as Exhibit 7 to the Taxpayer s Opening Brief. 18 As stated above, this activity was eventually taken over ; however, the relevant invoices (attached as Exhibit 7 to the Taxpayer s Opening Brief) predate that time. 22

23 Arkansas Gross Receipts Tax Rule GR-55.1 does exempt certain chemicals used or consumed in manufacturing, stating as follows in pertinent part: 2. "Chemical" means an element, combination of elements, or a compound obtained by a chemical process.... C. MANUFACTURING OPERATIONS. 1. The gross receipts or gross proceeds derived from the sale of catalysts, chemicals, reagents, and solutions which are consumed or used directly in manufacturing or processing articles of commerce at manufacturing or processing plants or facilities in the State of Arkansas are exempt from gross receipts tax. "Manufacturing or processing" has the same meaning as set forth in Ark. Code Ann (b) and GR For purposes of this section, the term "substance" means only chemicals, catalysts, reagents, or solutions as defined in GR-55.1(B). A substance may be in the form of liquid, solid, or gas. a. A substance is consumed or used in manufacturing or processing an article of commerce if it is used to produce or prevent a chemical or physical effect during the manufacturing process and the chemical or physical effect, or prevention of that effect, is a direct and necessary step in the production of the article.... Here, the explosive chemicals would qualify as a combination of elements obtained by a chemical process. Additionally, the explosives do create a physical effect during the quarrying process by severing the stone. Quarrying constitutes manufacturing under Ark. Code Ann (b)(1) and (2) (Supp. 2015). Generally, explosives used in quarrying would qualify for the exemption based on the arguments presented. The Taxpayer, however, has presented ten (10) invoices with multiple line items and it is uncertain which line items are the explosive chemicals and which line items are other chemicals and equipment that may or may not qualify for an exemption. It is the Taxpayer s burden to prove entitlement to its exemption claim. Consequently, at this stage in the administrative process, insufficient evidence has been presented to prove entitlement to the Taxpayer s exemption 23

24 claim on the purchased items. The assessment of these items must be upheld because the items represent purchases of tangible personal property and no exemption has been proven by the Taxpayer. J. Interest Interest must be assessed upon tax deficiencies for the use of the State s tax dollars. See Ark. Code Ann (Repl. 2012). DECISION AND ORDER The assessment, after the adjustments required by the above analysis, is sustained. The file is to be returned to the appropriate section of the Department for further proceedings in accordance with this Administrative Decision and applicable law. Pursuant to Ark. Code Ann (Supp. 2015), unless the Taxpayer requests in writing within twenty (20) days of the mailing of this decision that the Commissioner of Revenues revise the decision of the Administrative Law Judge, this decision shall be effective and become the action of the agency. The revision request may be mailed to the Assistant Commissioner of Revenues, P.O. Box 1272, Rm. 2440, Little Rock, Arkansas A revision request may also be faxed to the Assistant Commissioner of Revenues at (501) or ed to revision@dfa.arkansas.gov. The Commissioner of Revenues, within twenty (20) days of the mailing of this Administrative Decision, may revise the decision regardless of whether the Taxpayer has requested a revision. 24

25 The Taxpayer may seek relief from the final decision of the Administrative Law Judge or the Commissioner of Revenues on a final assessment by following the procedure set forth in Ark. Code Ann (Supp. 2015). DATED: June 20,