The New Jersey Tax Court (Court) held that mobile baking pan racks purchased by a bakery were exempt from state sales and use tax (Liscio's Italian Bakery v. Director¹).

In a detailed opinion, the Court delved into the facts related to the use of the racks in the bread production process to reach its conclusion that the purchase of the racks fit into New Jersey's exemption for machinery, apparatus, or equipment (MAE) used directly and primarily in manufacturing.

An auditor for the New Jersey Division of Taxation (the Division) determined that the racks were taxable because they were not directly used in the refining of the finished product and were not "complex devices." The Court, however, found that the racks were not used merely to store the bread dough; rather, they were used almost continuously during the bread production shift to create finished bakery products, such as kaiser rolls. The racks were also custom-made for the bakery, and their customized nature permitted active management and control of the processes that applied to the dough. Relying on these facts, the Court determined that the racks sustained the production process and were directly and primarily used in the process.²

On the complex devices issue, the Court reviewed the Division's applicable regulation,³ parsing its language to determine that the Division incorrectly required the MAE to be complex. The MAE had to be either complex, mechanical, electrical, or electronic, and the Court concluded from the evidence that the baking racks were mechanical. Having determined that the racks were directly and primarily used in manufacturing and were mechanical, the Court reversed the Division's determination that the racks were taxable.

Implications

It is not yet known whether the Division will appeal this decision. The Court's decision is important because it provides further guidance in the sometimes unclear category of exempt MEA used in manufacturing.

Although items used for storage or other purposes ancillary to manufacturing are not exempt, the decision makes clear that an item typically used for storage, such as a rack, is exempt when the taxpayer provides clear evidence that it is used throughout the production process, as the raw material progresses to become a finished product.

The decision also precludes the Division from determining that simple items are not exempt, because the decision only required that the item be either complex, mechanical, electrical, or electronic. It appears that many non-complex items may qualify under this standard as "mechanical."

Because the Division may appeal the Court's decision, taxpayers should evaluate their purchases of similar items within the statute of limitations (generally, four years) to determine whether they may be able to pursue protective refund claims based on the Court's decision.

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ENDNOTES

¹ Liscio's Italian Bakery, Inc. v. Director, Div. of Taxation, Docket No. 009658-2017 (N.J. Tax Ct. Sept. 27, 2019).

² See N.J.S.A. 54:32B-8.13.

³ N.J.A.C. 18:24-4.2.