872 P.2d 682 (Ariz.Tax 1994), TX 93-00010, Arizona Dept. of Revenue v. Sonee Heat Treating Corp.

Docket Nº:TX 93-00010.
Citation:872 P.2d 682, 178 Ariz. 278
Party Name:ARIZONA DEPARTMENT OF REVENUE v. SONEE HEAT TREATING CORPORATION.
Case Date:April 04, 1994
Court:Tax Court of Arizona
 
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872 P.2d 682 (Ariz.Tax 1994)

178 Ariz. 278

ARIZONA DEPARTMENT OF REVENUE

v.

SONEE HEAT TREATING CORPORATION.

No. TX 93-00010.

Tax Court of Arizona.

April 4, 1994

Atty. Gen. by Michael P. Worley, Phoenix, for plaintiff.

Jennings Strouss & Salmon, P.L.C. by Ann M. Dumenil, Phoenix, for defendant.

OPINION

SCHAFER, Judge.

The issue in this case is whether certain testing equipment is "machinery or equipment used directly in manufacturing" and therefore, exempt from use tax under A.R.S. § 42-1409(B)(1).

Sonee Heat Treating Corporation is a specialty metal heat treating processor. Approximately two-thirds of Sonee's heat treating business is for the aerospace or other high-end commercial industries such as Karsten Manufacturing Corporation, a golf club manufacturer. Sonee's treatments and processing results in specific metallurgical changes to the metal being treated. A majority of Sonee's customers, including all of those in the aerospace industry, require Sonee to provide certification that its treatments and processing imparted the expected properties, in accordance with customer or industry specifications, to the metal being treated. In some instances, the customer specifications require Sonee to test 100% of the treated metals; sometimes sample testing is mandated. Additionally, some of the tests require that specimens be mounted for microscopic examination. The testing is performed at various stages and intervals throughout the heat treating process. In

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[178 Ariz. 279] order to test the metals to ensure the required metallurgical changes have taken place, Sonee has purchased special equipment.

The Arizona Department of Revenue audited Sonee for the period March 1, 1987, through December 31, 1991, and assessed use tax and interest on eleven pieces of Sonee's testing equipment. 1 Sonee contends that the equipment is exempt from taxation under A.R.S. § 42-1409(B)(1) because it is machinery or equipment "used directly in manufacturing." The Department maintains the equipment is not "used directly in manufacturing" and therefore, is not exempt from the use tax. This Court agrees with Sonee.

ANALYSIS

There is no dispute that the eleven pieces of equipment at issue are tangible personal property, purchased at retail, and subject to the use tax unless an exemption applies. Sonee claims an exemption under A.R.S. § 42-1409(B)(1)...

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