Ice Cold: DFA Tells Manufacturer That It Is Not Engaged in "Actual Manufacturing"

The Arkansas Department of Finance and Administration has published a ruling that narrowly interpreted eligibility for the reduced rate of tax on sales of electricity for use by a manufacturer in the actual manufacturing process.  Opinion no. 20151008 (Feb. 9, 2016).  

The taxpayer operated a cold storage and blast freezing facility that appears to have frozen poultry that had been prepared elsewhere. The flash freezing process required substantial electricity use.

The taxpayer was seeking the low 0.625% rate of tax for sales of electricity or natural gas to manufacturers for use directly in the manufacturing process provided by Arkansas Code Annotated section 26-52-319(a)(1).  To be eligible for this low rate, a manufacturer must have a NAICS code in sectors 31 through 33, or else sector 115111.

The Department's analysis was unusual in that it neither challenged nor agreed with the taxpayer's assertion that it was classified as a manufacturer under NAICS codes 311411 (flash freezing) or 311615 (poultry processing).  Instead, the opinion jumped to the question of what was the "actual manufacturing process."  The letter advised that blast freezing services did not constitute "actual manufacturing" and were simply to preserve and prevent spoilage of finished food products.  

The reasoning of this opinion is troubling.  By reading "actual manufacturing process" to mean more than the process considered to be manufacturing under the relevant NAICS codes, the Department is arguably adding an extrastatutory requirement.  Additionally, the opinion did not address Gross Receipts Tax Rule GR-64(D)(2), which specifically provides that "quick freeze" processing is considered to be an exempt poultry processing activity eligible for the manufacturing machinery and equipment exemption of Arkansas Code Annotated section 26-52-402.  Query whether the taxpayer could have qualified for that exemption on its purchase of flash freezing equipment.  Perhaps the Department would deny the exemption in both situations on the basis that flash freezing alone does not constitute manufacturing.

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