Sales and Use Tax rules and regulations can be challenging for companies to decipher and apply to their operations. Often, the rules and regulations are written in broad, general terms while trying to address very specific business functions and equipment usage. To further compound the complexity, these rules and regulations are often not updated to reflect modern business practices or technological advances.
Within the construction industry, we have seen technological advancements lead to inconsistent tax treatment for purchases of certain equipment. Specifically, heavy construction equipment, such as asphalt milling machines or concrete crushers, may qualify as tax-exempt manufacturing equipment for Ohio sales and use tax based on certain uses, creating a prospective tax-saving or refund opportunity for eligible taxpayers.
Manufacturing or Construction Equipment
In the case of an asphalt milling machine, the equipment can be used to remove depleted asphalt from the road surface, cut, scrape, and crush the hardened asphalt to create Reclaimed Asphalt Pavement (RAP). The RAP can then be sold to asphalt manufacturers to make molten asphalt or be turned into molten asphalt at the job site to complete the paving project. Historically, such equipment would have been considered construction equipment and therefore subject to Ohio Sales and Use Tax.
The Ohio Sales and Use Tax regulations provide an exemption from the tax for machinery and equipment that is primarily used for the continuation of a manufacturing operation. To qualify as a manufacturing operation, one needs to perform a process in which materials are changed, converted, or transformed into a different state. The process can include refining materials by separating a desirable product from contaminated materials by a physical or mechanical process.
When considering the operations of equipment such as an asphalt milling machine or concrete crusher, the process of changing the spent asphalt into the aggregates needed to produce RAP is the physical change into a different state that is defined in the Ohio Sales and Use Tax manufacturing definition. Therefore, if a company’s primary usage of the equipment is the creation of a separate product from the spent materials being extracted, then the equipment can be considered manufacturing equipment, as opposed to construction equipment.
Tax Implications
While the Ohio Department of Taxation has not opined on the application of the exemption in the context explained above, other states with similar statutory language regarding the machinery, such as Pennsylvania, have issued rulings granting the exemption for the equipment in their states.
As with most sales and use tax issues, companies should review their specific facts and circumstances with a tax professional. Schneider Downs State and Local Tax practice can assist with evaluating the applicability of the exemption to your company.
Mark Balistrieri leads the Indirect Tax practice for Schneider Downs State and Local Tax group.
