In a recent letter ruling, the Arizona Department of Revenue concluded that lubricants used in a taxpayer’s manufacturing process were subject to use tax. The taxpayer, an Arizona manufacturer, purchased gear oils that were used in the main gear box of equipment used to bend, shape, and cut metal bars as part of a manufacturing process. The gear oil also improved the reliability and productivity of the machines and without it, they would not function properly.
Under Arizona law, machinery and equipment purchased for use directly in manufacturing, processing, and fabricating is exempt from transaction privilege tax and corresponding use tax. Specifically excluded from the exemption are “expendable materials.” In 1999, the exemption statute was amended to clarify that expendable materials does not include tangible personal property used directly in the manufacturing process regardless of cost or useful life.
The Department observed that the purpose of the amendment was to exempt items, such as drill bits and repair parts, that were directly used in manufacturing, but that had to be replaced frequently. Although the lubricants were necessary to operate the equipment, the Department determined that they were not directly used in manufacturing and therefore constituted expendable materials subject to use tax.
Letter Ruling 13-008
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