Chemicals used in manufacturing may be
exempt from gross receipts or use tax if the following occur:
1. The chemicals become a recognizable,
integral part of the manufactured goods (see GR-53(C));
2. The chemicals are "equipment" (see
3. The provisions
of this rule are met.
1. "Catalyst" means a substance
that initiates or provokes a chemical reaction allowing such reaction to
proceed under milder conditions, such as lower temperatures or with less
resistance to reaction.
"Chemical" means an element, combination of elements, or a compound obtained by
a chemical process.
means any substance which by reason of its capacity for taking part in certain
reactions is used for various purposes, including detecting, examining, or
measuring other substances or in preparing materials. A reagent is also a
substance used to convert one substance into another by means of the reaction
that it causes. To be a reagent for purposes of this exemption, a substance
must be primarily used as a reagent.
4. "Solution" means a chemical in a liquid
form that contains a dissolved substance.
1. The gross receipts or gross proceeds
derived from the sale of catalysts, chemicals, reagents, and solutions which
are consumed or used directly in manufacturing or processing articles of
commerce at manufacturing or processing plants or facilities in the State of
Arkansas are exempt from gross receipts tax. "Manufacturing or processing" has
the same meaning as set forth in Ark. Code Ann. §
For purposes of this
section, the term "substance" means only chemicals, catalysts, reagents, or
solutions as defined in GR-55.1(B). A substance may be in the form of liquid,
solid, or gas.
A substance is consumed or
used in manufacturing or processing an article of commerce if it is used to
produce or prevent a chemical or physical effect during the manufacturing
process and the chemical or physical effect, or prevention of that effect, is a
direct and necessary step in the production of the article.
Example: Mold release chemicals; nitrogen used to prevent
oxidation in an annealing process; cutting/cooling oil applied to metalwork in
process during milling; and sanitization chemicals used to meet USDA standards
for machinery and equipment used in processing meat and poultry for human
used in testing the quality of the finished article of commerce are
Substances used to fuel,
cool, heat, lubricate, clean, protect, maintain, operate, repair, or otherwise
affect machinery or equipment used in a manufacturing or processing facility,
or the facility itself, are not exempt.
Substances used to polish, paint, refinish, clean, or sanitize machinery,
equipment, structures, floors, ceilings, and walls of a manufacturing facility
are not exempt.
(2) Gas, diesel,
oil, natural gas, or other materials used to power machinery and equipment are
Substances used before the manufacturing process begins or after the
manufacturing process concludes are not exempt.
e. Water used during the manufacturing
process is not exempt.
In order to be exempt, substances must be
used by a manufacturer during a manufacturing process.
a. A business which processes photographic
film or negatives, and prints photographs, plates, slides, or other similar
items from the film or negatives is not a manufacturer.
b. A business which produces printed material
is a manufacturer. Substances used in processing film, negatives or other
similar items are not exempt unless such processing is incidental to the
The Arkansas Supreme Court has determined that in certain circumstances,
chemicals can be considered "equipment" for purposes of this exemption if the
chemicals are used directly in manufacturing, serve as instruments or tools
with some degree of complexity, possess continuing utility, and are not fully
integrated into some other object. The initial purchase of chemicals which meet
these tests is exempt from sales and use tax. Purchases of replacement
chemicals will be exempt if the provisions of GR-55(D)(2) are met. See Weiss v.
Chem-Fab Corporation, 336 Ark. 21 (1999). The following are examples:
1. Annealing chemicals which physically alter
the grain structure in metal in order to bend and form parts are
2. Salts which mill away
metal through direct chemical action are exempt; and
3. Chemicals which are sprayed onto metal
parts to detect cracks are exempt.