Recent Rulings in Michigan and North Carolina Highlight Different Scope of Manufacturing Exemption
Most states provide manufacturers with beneficial treatment for sales and use tax purposes, but states differ vastly on what does and does not qualify as manufacturing.
By Jeff Glickman, SALT partner
For sales tax purposes, most states provide manufacturers or industrial processors with beneficial treatment for sales and use tax purposes on equipment and machinery purchased and use in the manufacturing process. However, in order to take advantage of those benefits, a business must meet the definition of manufacturer or industrial processor. Unfortunately, states have different views on what does and what does not qualify as manufacturing, and this is highlighted in recent rulings from Michigan and North Carolina.
In Michigan Letter Ruling 2017-3, released on Sept. 18, 2017, the state addressed the issue of whether or not a countertop fabricator and installer was exempt on its purchase of tangible personal property used in the fabrication of countertops. The taxpayer is a countertop fabricator and has an arrangement with a retailer to fabricate countertops for retailer’s customers. Under Michigan law, sales of tangible personal property to an industrial processor for use or consumption in industrial processing are exempt from the sales tax and the use tax.  “Industrial processing” is defined as “the activity of converting or conditioning tangible personal property by changing the form, composition, quality, combination, or character of the property for ultimate sale at retail.”  Based on that definition and the activity of the taxpayer, the state ruled that the taxpayer’s purchases of tangible personal property used to make countertops qualified for the industrial processing exemption.
Contrast that with North Carolina Sales and Use Tax Private Letter Ruling 2017-0004 issued on Aug. 9, 2017. In that ruling, the taxpayer takes rough cut slabs and blocks of natural stone and cuts, shapes, polishes and finishes them to the specifications of a customer’s project needs. This activity includes the following: (i) spaces for sinks, faucets and other fixtures are cut and finished; (ii) modifications are made to the natural material for purposes of additional support and reinforcement; (iii) the edges and surfaces of stones are polished or textured according to the customer’s desires, and (iv) thinner materials are mitered together to make thicker pieces for walls, tubs and countertops.
The taxpayer requested to be classified as engaging in the “manufacturing industry” in order to get a reduced rate (1 percent) on purchases of mill machinery and mill machinery parts and accessories.  Otherwise, the taxpayer would be subject to the higher state and local sales and use tax rate.
The ruling notes that North Carolina’s statutes don’t provide a definition of the term “manufacture” and so the state looked to North Carolina state cases for guidance. In Duke Power Co. v. Clayton, the North Carolina Supreme Court stated that manufacturing “is not susceptible of an accurate definition that is all-embracing or all-exclusive, but is susceptible of many applications and many meanings. . . . In its generic sense, ‘manufacturing’ has been defined as the producing of a new article of use or ornament by the application of skill and labor to the raw materials of which it is composed.”  The court then quoted an old United States Supreme Court case stating that “[m]anufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor, and manipulation. But something more is necessary. . . . There must be a transformation; a new and different article must emerge, having a distinctive name, character, or use.” 
Based on these definitions, the state ruled that taxpayer did not qualify for the reduced rate applicable to the manufacturing industry. Specifically, the ruling stated that “Taxpayer does not transform natural stone into a new and different product which is no longer natural stone. Although a made-to-order granite countertop is the end result purchased by taxpayer’s customer, the granite slab used to make the countertop remains a granite slab. The character of the granite remains unchanged.”
Note that the Michigan definition of industrial processing referred to changing the “form, composition, quality, combination, or character of the property,” whereas the definition of manufacturing relied on by North Carolina required that the property have “a distinctive name, character, or use.” Perhaps Michigan’s language encompasses a broader level of qualifying activity; however, even under the definitions in the North Carolina ruling, couldn’t it be argued that the cut granite has a “distinctive use?” Rough granite can’t be used for countertops until spaces are cut for sinks, etc., and until it is smoothed out and shaped to the specification of the customer. Unlike Michigan, North Carolina did not think that the cutting and smoothing process was enough.
As a manufacturer, it is important to understand how your business will be treated for sales and use tax purposes since, as is illustrated by these two rulings, similar industries may not be treated similarly among the states.
Aprio’s SALT team has expertise in recognizing these issues and assisting businesses with understanding their sales and use tax obligations in all of the states. We will make sure that your business is in compliance with all sales and use tax rules and does not generate unexpected tax exposure or risk. We constantly monitor these and other important state tax issues in order to assist you with your specific tax situation, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the October 2017 SALT Newsletter.
 MCL 205.54t(1)(a).
 MCL 205.54t(7)(a).
 See N.C. Gen. Stat. § 105-187.51.
 274 N.C. 505; 164 S.E. 2d 289 at 295 (1968).
 Anheuser-Busch Brewers Ass’n v. United States, 207 U.S. 556 at 562; 28 S. Ct. 204 at 206-07 (1908).
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