Oil and Grease Not Part of Exempt Machinery in Arizona

Thursday, July 17th, 2014

A closeup of oil poured onto a machine.

The Arizona Tax Court recently released a ruling that oil and grease were not component parts of exempt manufacturing machinery.

At issue were purchases of oil and grease used to lubricate machinery used in mining and metallurgical operations. Without these lubricants, the machinery would be subject to frequent and catastrophic failures.

Arizona exempts sales of machinery and equipment used directly in mining and metallurgical operations. This exemption extends to component parts for the machinery or equipment. It does not extend to expendable materials. To determine whether an item is a component part or an expendable material, courts look at the nature of the item and its role in the mining or metallurgical operations. Items that are essential or necessary to completing the finished product are more likely to be exempt component parts.

The court concluded that oil and grease were expendable materials, not component parts. The primary function of the oil and grease was to lubricate the machinery. They were substances applied to a whole machine; they were not component parts of the machine. The substances did not touch, affect, or add value to raw materials or the work in progress. They therefore did not directly contribute to the mining or metallurgical process. Although the lubricants were necessary to prevent the machinery's failure, they were not necessary to the actual production process. The oil and grease were therefore taxable.


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