Court decision: When it comes to use tax exemptions, state DOR isn’t always right

Imagine getting a Notice of Final Determination from a state revenue department that said it wasn’t going to recognize a use tax exemption that your organization was claiming, and that you owed $74,000 more than what you thought you were liable for.

That’s what happened to a construction company with operations in North Carolina. The state’s department of revenue (DOR) declared that the company owed use tax on certain materials, tools, parts and equipment shipped in from out of state which were used to create hot mix asphalt for construction projects. The company often sold the leftover hot mix asphalt to third parties.

However, instead of paying up, the business fought the tax assessment and insisted it was entitled to the Tar Heel State’s mill machinery/mill machinery parts or accessories manufacturing exemption.

The DOR countered that although raw materials were being converted into a new product, the construction contractor isn’t a manufacturer based on its NAICS code and that selling the leftover hot mix asphalt isn’t part of its primary business.

The dispute over whether the construction company qualifies as a manufacturer went before an administrative law judge. When the judge ruled in favor of the company, the state appealed.

A superior court judge upheld the decision that the business didn’t owe the amount of use tax that the state claimed it did.

Although the judge felt the state tax code was fuzzy in its definition of what a manufacturer is, the tangible personal property purchased by the company qualified for the use tax exemption because of what it was being used for.

Leverage use tax exemptions carefully

It’s Finance’s job to collect, assess and remit sales & use tax, but you shouldn’t have to pay more taxes on goods and services than necessary.

Use tax exemptions, such as the ones for manufacturers, are great ways to save money. But before claiming an exemption, double-check what the applicable tax code specifically says is taxable and nontaxable.

If a purchase is indeed tax-exempt, an exemption certificate or statement must be kept on file by your finance team in case of an audit or legal challenge.

This case is a memorable reminder that it’s possible to successfully challenge a taxing government and that a tax assessment isn’t necessarily the final word.