United States

Nebraska Supreme Court broadens manufacturing exemption

Machinery and equipment “50-percent use” restriction invalidated


On March 14, 2014, the Nebraska Supreme Court issued its ruling in Kerford Limestone Co. v. Nebraska Department of Revenue, holding that Kerford’s purchase of a motor grader was exempt from sales and use tax under the state’s manufacturing machinery and equipment exemption because Kerford used the equipment at least partially in manufacturing.  In reaching this decision, the court found that a revenue ruling and regulations issued by the Nebraska Department of Revenue (the Department) requiring machinery and equipment to be used greater than 50 percent of the time in manufacturing to qualify for the exemption were contrary to the express language of Neb. Rev Stat. section 77-2701.47 and, therefore, were invalid.  This ruling may create refund opportunities for taxpayers that had not previously claimed the exemption as well as create exemption opportunities for Nebraska manufacturers going forward.

The law at issue is relatively straightforward and reflects a distinct divide between the statutory language and the interpretive guidance provided by the Department.  Neb. Rev. Stat. section 77-2701.47 provides that machinery and equipment is exempt from sales and use tax if the item qualifies as “machinery and equipment,” is purchased by “a person engaged in the business of manufacturing,” and, subsequent to purchase, is “used in manufacturing.”  Under Revenue Ruling 1-05-1, the Department took the position that "[i]f machinery and equipment has uses in addition to its manufacturing use, the manufacturing use must be greater than 50% of total use to qualify for the exemption" (emphasis in original).  Subsequent to the issuance of this ruling, the Department amended its regulation interpreting section 77-2701.47, 316 Neb. Admin. Code, ch. 1, section 107.07, to reflect the greater-than-50-percent requirement created in Revenue Ruling 1-05-1.

Kerford, a manufacturer for Nebraska sales and use tax purposes, is in the business of mining and crushing limestone, which it sells as a finished product to third parties for use in construction, agricultural products and animal feed.  In January 2006, Kerford purchased a motor grader to maintain haul roads from its mine (a non-manufacturing use) and to maintain the separate integrity of its limestone inventory stockpiles (a manufacturing use).  Claiming that the motor grader was exempt from taxation as manufacturing machinery and equipment under section 77-2701.47, Kerford did not pay sales or use tax on the purchase.  In 2006, the Department issued a notice of deficiency to Kerford and assessed use tax on the motor grader on the grounds that it was not used greater than 50 percent of the time in manufacturing.  Kerford appealed, arguing that the Department’s greater-than-50-percent requirement was invalid because the limitation was contrary to the broad statutory language of the exemption, and that the motor grader was exempt because it was used at least partly in manufacturing.

After a brief review of the language of Neb. Rev. Stat. section 77-2701.47(1), the Nebraska Supreme Court agreed with Kerford, stating:

[T]o fall within the definition of manufacturing machinery and equipment in § 77-2701.47(1), machinery or equipment purchased by a “person” engaged in the business of manufacturing must meet only one requirement: any amount of its use is in manufacturing.  

Accordingly, as long as the current statute remains in place, Nebraska manufacturers that purchase machinery and equipment to be used at least partly in manufacturing may claim the benefit of the exemption provided under section 77-2701.47.  Further, Nebraskamanufacturers that purchased such machinery and equipment in a prior period and paid sales or use tax on that purchase because the use of that machinery or equipment was not more than 50 percent in manufacturing may be able to claim refunds of the tax paid.

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