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Department of Revenue ex rel. Luckett v. Allied Drum Service, Inc., 561 S.W.2d 323

Facts

Allied Drum Service, Inc. purchased new machinery to process used metal drums that were damaged and contained residues from previous uses. The process involved cutting off the tops of the drums, incinerating remaining contents, removing incombustibles, reshaping the drums, and sealing them for reuse. The Kentucky Board of Tax Appeals initially ruled that this process did not constitute manufacturing, but the trial court reversed this decision, leading to the appeal.

Allied purchased and installed new machinery to be used in a type of operation not previously performed by Allied. Allied purchased or acquired by trade-in used metal drums which were damaged by reason of puncture, crushed condition, or containing residue of materials and chemicals from the prior use. From the record, the following is a brief description of the process performed on the drums by the new machinery. The top of the drum is sliced and cut off, all paint and any contents remaining from the previous use of the drum are removed by incineration. Incombustibles are removed by a shot-blast operation, the drum is then beveled on a flanging machine and new plugs and gaskets are added. After the drum is reshaped by rolling, it is then made into a liquid-type container by sealing a new head on the drum or a solid-type container by attaching a removable lid. The final operation consists of painting the drum.

Issue

Whether the machinery used by Allied Drum Service, Inc. to process and reconstitute used drums qualifies as machinery used directly in a manufacturing process, thus exempt from sales and use tax.

The sole question presented on this appeal is whether the machinery used by Allied Drum Service, Inc., to process and reconstitute used drums is machinery used directly in a manufacturing process and, thus, exempt from sales and use tax.

Rule

Machinery used directly in the manufacturing process is exempt from sales and use tax under KRS 139.480(8), defined as machinery incorporated for the first time into plant facilities established in the state, which does not replace existing machinery.

Machinery used in newly expanded industry is exempt from sales and use tax under KRS 139.480(8). Such machinery is defined in KRS 139.170 1 as: “. . . that machinery used directly in the manufacturing process, which is incorporated for the first time into plant facilities established in this state, and which does not replace machinery in such plants.”

Analysis

The court analyzed the definition of manufacturing and determined that the process employed by Allied transformed unusable and non-marketable damaged drums into serviceable and marketable commodities. This transformation indicated that the machinery was indeed used in a manufacturing process, contrary to the Department of Revenue's position that the end product remained a used drum.

We are of the opinion that limiting the definition of manufacturing to a process that transforms the article into a new and different article having a distinctive name, character or use is too restrictive. We regard the basis of the case for the Department of Revenue as an oversimplification.

Conclusion

The Supreme Court affirmed the Court of Appeals' decision, ruling that the machinery used by Allied Drum Service, Inc. was exempt from sales and use tax as it was involved in a manufacturing process.

The judgment of the Court of Appeals is affirmed.

Who won?

Allied Drum Service, Inc. prevailed in the case because the court found that their machinery was used in a manufacturing process that created a marketable product from previously unusable materials.

Allied Drum Service, Inc. prevailed in the case because the court found that their machinery was used in a manufacturing process that created a marketable product from previously unusable materials.

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