United States

Indiana metal processor exempt for sales and use tax purposes

Taxpayer transformed valueless metal into marketable scrap for sale


On Aug. 10, 2016, the Indiana Tax Court issued an opinion on a motion for partial summary judgment in Brandenburg Industrial Service Company v. Indiana Department of Revenue, finding that certain purchases made by a producer and processor of scrap steel were exempt from Indiana’s sales and use taxes pursuant to the equipment and consumption exemptions found at Indiana code sections 6-2.5-5-3 and 6-2.5-5-5.1(b), respectively.

Brandenburg is engaged in the business of processing ferrous and nonferrous metal, after which the various metals are sold to steel manufacturers throughout the country. Brandenburg acquired the metal that it processed either by purchasing retired assets (boats, machinery, etc.) or by performing services in exchange for the metal (such as building demolition or environmental remediation). Since 1993, Brandenburg’s metal processing consistently followed the same seven-step process:

  1. Identification of the metal
  2. Removal of the metal from the asset or structure
  3. Decontamination of non-metal elements
  4. Cutting
  5. Sorting
  6. Preparation
  7. Staging of the metal for loading and transport to customers

Brandenburg submitted four separate claims to the Indiana Department of Revenue (IDR) requesting refunds of Indiana sales and use tax paid on items used in its seven-step processing of metal, arguing that it was entitled to the equipment and consumption exemptions on its purchases of items used or consumed in its metal processing operations. After granting the first two refund claims filed by Brandenburg, the IDR reversed course by denying the latter two claims and issuing proposed assessments that retroactively rescinded the previously granted claims. After losing its administrative protest, Brandenburg appealed to the Indiana Tax Court.

The Indiana Tax Court, pursuant to the IDR’s motion for partial summary judgment, addressed the question of whether Brandenburg was a ‘producer’ of scrap metal for purposes of the equipment and consumption exemptions from Indiana sales and use tax. The IDR and Brandenburg both agreed that there was no dispute with respect to when and where Brandenburg’s metal processing efforts began and ended, the fact that the metal processed by Brandenburg underwent no chemically-induced changes, or the marketability of the end-product scrap steel.

On appeal, the IDR advanced several arguments justifying its denial of the exemptions. The first argument was that the demolition in which Brandenburg engaged was not an enumerated activity in either the equipment or consumption exemptions. According to the IDR, because the demolition activities are not specifically listed in either exemption statute and because Brandenburg’s demolition work is ‘inextricable’ from its processing steps, Brandenburg could not, as a matter of law, be engaged in production entitling it to use of the exemptions.

The court quickly dismissed this argument, as it directly conflicted with both long-standing case law (see Rotation Products, 690 N.E.2d 795 (Ind. Tax Ct., 1998)) as well as the general policy of avoiding tax pyramiding. Moreover, the court cited to numerous cases in which it had previously held that the central question to whether a taxpayer is entitled to the equipment and consumption exemptions is whether the facts in each case demonstrate that the taxpayer’s integrated process transforms raw materials into new, marketable products, as opposed to focusing on whether the activity in which a taxpayer is engaging is one of the statutorily enumerated activities entitled to exemption from sales and use tax.

The IDR also unsuccessfully argued that Brandenburg’s processing operations do not ‘substantially transform’ the raw materials into ‘other tangible personal property’ as required by the exemption statutes. First, the IDR argued that Brandenburg’s process was nothing more than ‘fundamentally destructive,’ and repeatedly referred to that process as single-step demolition. The court, however, noted that the undisputed facts demonstrate that Brandenburg’s multi-step process involves more than mere demolition, and rejected the IDR’s argument.

The IDR then argued that Brandenburg’s processing operation failed to create other tangible personal property because the scrap metal being sold had the same intrinsic value and specific alloy content both before and after Brandenburg’s processing. In rejecting this argument, the court pointed to uncontested expert testimony that established that the scrap metal in question is obsolete, valueless and unmarketable unless, and until Brandenburg processed it into the end product that it markets and sells–scrap steel.

Finally, the IDR argued that Brandenburg failed to meet its burden to prove that it produces a new or distinct product on the basis that the price of the scrap steel, both pre- and post-processing by Brandenburg, is solely dictated by its weight and alloy content. The court dismissed this argument as well, noting that exclusively focusing “on weight and alloy content as the sole measure of whether raw materials are substantially transformed would ignore other evidence of transformation.” As a simple example, the court notes that “a copper wire encased within a cement block is different from a copper wire without the encumbrance of debris.”

Ultimately, the court ruled in favor of Brandenburg, finding that it is a processor of scrap metal and, thus, is entitled to benefit from the equipment and consumption exemptions from Indiana sales and use tax.


All taxpayers should note that manufacturing-related exemptions from sales and use tax vary widely across states. But with respect to Indiana, Brandenburg represents yet another win for producers and manufacturers in the constant battle over what is covered by the manufacturing exemptions.

The IDR still has time to petition the Indiana Supreme Court for transfer and subsequent review of the Indiana Tax Court’s decision. That said, granting transfer seems unlikely, especially considering the great deal of deference given to the Indiana Tax Court’s interpretation of tax statutes.

Assuming that the Indiana Tax Court’s decision remains undisturbed by the Indiana Supreme Court, it is unclear how the IDR will administer Brandenburg. While Brandenburg is consistent with a long line of case law in Indiana that expansively interprets the scope of the production-related exemptions, the IDR has historically not applied those cases as broadly as written.

Despite the uncertainty regarding the IDR’s administration of Brandenburg, the broad language employed by the court in its decision could be useful to determine whether a business is engaged in production or manufacturing for purposes of the Indiana sales and use tax. Businesses engaged in similar operations that have not previously taken advantage of the equipment and consumption exemptions may want to consider whether refund claims are appropriate. Processors and manufacturers should consult with a state and local tax professional to understand the potential impact of Brandenburg on their operations and dealings with the IDR.


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