006.05.06 Ark. Code R. 005-GR-55.1

Current through Register Vol. 49, No. 10, October, 2024

Rule 006.05.06-005-GR-55.1 - EXEMPTIONS FROM TAX - CHEMICALS USED IN MANUFACTURING

A. Chemicals used in manufacturing may be exempt from gross receipts or use tax if the following occur:

1. The chemicals become a recognizable, integral part of the manufactured goods (see GR-53(C));

2. The chemicals are "equipment" (see GR-55.1(D)); or,

3. The provisions of this rule are met.

B. DEFINITIONS.

1. "Catalyst" means a substance that initiates or provokes a chemical reaction allowing such reaction to proceed under milder conditions, such as lower temperatures or with less resistance to reaction.

2. "Chemical" means an element, combination of elements, or a compound obtained by a chemical process.

3. "Reagent" means any substance which by reason of its capacity for taking part in certain reactions is used for various purposes, including detecting, examining, or measuring other substances or in preparing materials. A reagent is also a substance used to convert one substance into another by means of the reaction that it causes. To be a reagent for purposes of this exemption, a substance must be primarily used as a reagent.

4. "Solution" means a chemical in a liquid form that contains a dissolved substance.

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. § 26-52-402(b) and GR-55.

2. 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.

Example: Mold release chemicals; nitrogen used to prevent oxidation in an annealing process; cutting/cooling oil applied to metalwork in process during milling; and sanitization chemicals used to meet USDA standards for machinery and equipment used in processing meat and poultry for human consumption.

b. Substances used in testing the quality of the finished article of commerce are exempt.

c. Substances used to fuel, cool, heat, lubricate, clean, protect, maintain, operate, repair, or otherwise affect machinery or equipment used in a manufacturing or processing facility, or the facility itself, are not exempt.

Examples:

(1) Substances used to polish, paint, refinish, clean, or sanitize machinery, equipment, structures, floors, ceilings, and walls of a manufacturing facility are not exempt.

(2) Gas, diesel, oil, natural gas, or other materials used to power machinery and equipment are not exempt.

d. Substances used before the manufacturing process begins or after the manufacturing process concludes are not exempt.

e. Water used during the manufacturing process is not exempt.

3. In order to be exempt, substances must be used by a manufacturer during a manufacturing process.

a. A business which processes photographic film or negatives, and prints photographs, plates, slides, or other similar items from the film or negatives is not a manufacturer.

b. A business which produces printed material is a manufacturer. Substances used in processing film, negatives or other similar items are not exempt unless such processing is incidental to the printing.

D. The Arkansas Supreme Court has determined that in certain circumstances, chemicals can be considered "equipment" for purposes of this exemption if the chemicals are used directly in manufacturing, serve as instruments or tools with some degree of complexity, possess continuing utility, and are not fully integrated into some other object. The initial purchase of chemicals which meet these tests is exempt from sales and use tax. Purchases of replacement chemicals will be exempt if the provisions of GR-55(D)(2) are met. See Weiss v. Chem-Fab Corporation, 336 Ark. 21 (1999). The following are examples:

1. Annealing chemicals which physically alter the grain structure in metal in order to bend and form parts are exempt;

2. Salts which mill away metal through direct chemical action are exempt; and

3. Chemicals which are sprayed onto metal parts to detect cracks are exempt.

006.05.06 Ark. Code R. 005-GR-55.1

Ark. Code Ann. § 26-52-401(35)