The North Carolina Supreme Court affirmed a lower court ruling that a taxpayer was a manufacturer for purposes of the State’s Mill Machinery Exemption, and was therefore entitled to a sales and use tax exemption on its purchase of materials used to produce hot mixed asphalt (HMA).

North Carolina exempts manufacturing companies subject to a lower mill machinery privilege tax from higher sales and use taxes. During the years at issue, the taxpayer used between approximately 79% and 85% of the HMA it produced for various construction projects where it served as a contractor or subcontractor and sold the remaining HMA to customers. The Department of Revenue asserted that the taxpayer was a contractor, and not a manufacturer subject to the privilege tax, because it was “primarily engaged” in construction and commercial site work, and the majority of the HMA it produced was used in those projects, rather than sold to customers. The lower court found that there was no requirement under the governing statute that the taxpayer use the tangible personal property purchased to produce HMA for the “primary or principal purpose” of selling it to third parties to qualify for the exemption. Moreover, the lower court found that the taxpayer had produced “extremely large quantities” of HMA by utilizing a processes that the North Carolina Supreme Court described as manufacturing (i.e., “the producing of a new article or use or ornament by the application of skill and labor to the raw materials of which it is composed”). On appeal, the Supreme Court adopted the lower court’s reasoning and affirmed the ruling in a two-paragraph opinion.

N.C. Dep’t of Revenue v. FSC II LLC, No. 150A23, 2024 N.C. LEXIS 340 (May 23, 2024).