Nebraska - State Supreme Court expands manufacturing exemption 

March 19:  The Nebraska Supreme Court held that the Department of Revenue could not impose a 50% usage requirement on machinery and equipment purchased exempt from tax for use in manufacturing. Kerford Limestone Co. v. Neb. Dep’t of Revenue, __ N.W. ___, S-13-035 (Neb. March 14, 2014)

In the high court’s view, as long as the machinery and equipment was used at least part of the time in manufacturing, it qualified for the state’s broad exemption.

Read text of the decision [PDF 162 KB].


The taxpayer was engaged in limestone mining and manufacturing, and purchased a motor grader that was used both to maintain haul roads inside and outside of its mines and to maintain the integrity of inventory stockpiles at the mine.

The taxpayer did not pay sales tax on its purchase of the motor grader because it believed the grader was exempt manufacturing equipment. Under Nebraska law, “machinery or equipment purchased, leased, or rented by a person engaged in the business of manufacturing for use in manufacturing” is exempt from sales and use tax.

In guidance (Revenue Ruling 1-05-1) later incorporated into a departmental regulation, the Department of Revenue interpreted the exemption statute to apply only to machinery and equipment used more than 50% of the time in manufacturing. Specifically, Revenue Ruling 1-05-1 provides:

…if machinery and equipment has uses in addition to its manufacturing use, the manufacturing use must be greater than 50 percent of total use to qualify for the exemption.

The Department subsequently assessed use tax on the basis that the motor grader was not exempt manufacturing equipment.

Legislative history

The taxpayer protested the assessment to the Tax Commissioner, who rejected the argument that the Department’s 50% requirement was contrary to the legislative intent to provide a broad manufacturing exemption.

Because the taxpayer could not prove what percentage of the motor grader’s total use was devoted to maintaining inventory stockpiles, the assessment was upheld. The Commissioner did not specifically address whether maintaining inventory stockpile areas was manufacturing, but did conclude that using the motor grader to maintain haul roads was not a use in manufacturing.

The taxpayer appealed the Commissioner’s determination to district court. The district court reversed the Commissioner, holding that the 50% usage requirement conflicted with the statute. However, the district court agreed with the Commissioner that maintaining haul roads was not manufacturing under the terms of the statute. The district court did not address the motor grader’s use to maintain inventory stockpile areas or whether that qualified as manufacturing, but remanded that issue back to the Commissioner. Subsequently, both parties cross-appealed to the Nebraska Supreme Court.

Supreme Court

The Nebraska Supreme Court upheld the district court’s decision that requiring machinery and equipment to be used in manufacturing more than 50% of the time impermissibly added language to the exemption statute.

In the high court’s view, if the legislature had intended to impose temporal qualifications—as it had for other exemptions— it would have simply included those conditions in the statute.

Next, the Nebraska Supreme Court determined that using the grader to maintain a stockpile area helped “maintain the integrity of the product” and as such fell within the definition of manufacturing. The fact that the motor grader was also used to maintain haul roads, which the high court agreed was not a manufacturing activity, was irrelevant. The use of the motor grader to manage the stockpiles was sufficient to qualify for the manufacturing exemption.

KPMG observation

The Nebraska Supreme Court’s invalidation of the 50% requirement will likely result in refunds for taxpayers that purchased machinery and equipment that was used more than 50% of the time for a non-exempt purpose. Pursuant to this decision, as long as the equipment is used at least part of the time in an exempt manner, it would qualify for the exemption.

For more information, contact a KPMG State and Local Tax professional:

Doug Ewald

(402) 661-5301

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