Can a pallet-sorting company claim Georgia's manufacturing machinery exemption on the sortation machine it buys?

Plain-English summary

A company removes used pallets from retailers, sorts them by color, type, and condition, and sells them to pallet recyclers. It does not alter the pallets. It bought a pallet sortation machine to automate the sorting and asked whether that machine qualifies for Georgia's manufacturing machinery and equipment exemption under O.C.G.A. § 48-8-3.2.

The Department said no, because the company is not a "manufacturer." Georgia's manufacturing exemptions are available only to entities that qualify as manufacturers, and there are two ways to qualify: (1) be classified under specific manufacturing NAICS codes (Sectors 21, 31, 32, 33; or 22111 or 511110), or (2) be "generally regarded as a manufacturer." The company failed both:

• Its NAICS code is 541614 (process, distribution, and logistics consulting) — not one of the qualifying manufacturing codes.
• It is not generally regarded as a manufacturer because manufacturing means changing, processing, transforming, or converting industrial materials into something with a different form, configuration, utility, composition, or character. Merely sorting pallets by color, type, and condition does none of that — the pallets come out the same as they went in.

The Department noted a nuance: machinery used to sort materials for further manufacturing can sometimes qualify for the manufacturing exemption — but that does not turn the sorter itself into a manufacturer. Because this company is not a manufacturer, its sortation machine purchase is taxable.

What this means for you

Recyclers, sorters, and logistics companies

Being upstream of, or essential to, someone else's manufacturing does not make you a manufacturer for Georgia's exemption. If your operation sorts, moves, stores, or distributes materials without physically or chemically changing them into a different product, you likely don't qualify, and your equipment purchases are taxable.

Businesses evaluating the manufacturing exemption

Two gates control eligibility: your NAICS classification and whether you actually "manufacture" (transform materials into a different form). Sorting, grading, cleaning, or handling that leaves the item essentially unchanged generally fails the second gate even if the first is arguable.

Accountants and tax professionals

The ruling turns on the "manufacturer" definition in O.C.G.A. § 48-8-3.2(a)(10) and the "manufacture" definition in (a)(9). A non-qualifying NAICS code (here 541614) plus activity that does not change the industrial material's form, configuration, utility, composition, or character defeats the exemption. The observation that sorting machinery can qualify when integral to a manufacturer's own process is worth remembering for a differently postured taxpayer.

Common questions

Q: Is the pallet sortation machine exempt from Georgia sales and use tax?
A: No. Because the company is not a manufacturer, the machine does not qualify for the manufacturing machinery and equipment exemption, and the purchase is taxable.

Q: Why isn't the company a manufacturer?
A: Its NAICS code (541614) is not among the qualifying manufacturing codes, and sorting pallets by color, type, and condition does not change, process, transform, or convert them into anything with a different form — so it is not "generally regarded as a manufacturer" either.

Q: Doesn't the sorting help someone else manufacture?
A: Being integral to another company's process does not make the sorter a manufacturer. The exemption depends on the purchaser's own status and activity, not on its usefulness to a downstream manufacturer.

Q: Could sorting equipment ever be exempt?
A: The Department acknowledged that machinery used to sort materials for further manufacturing might qualify — but only for a taxpayer that is itself a manufacturer using it in its own manufacturing process.

Q: Can another company rely on this ruling?
A: No. It is binding on the Department only for the taxpayer and facts presented, and no other taxpayer may rely on it.

Citations and references

Statutes and rules:

• O.C.G.A. §§ 48-8-1, 48-8-30(a), 48-8-2(31)(A) (imposition of sales and use tax)
• O.C.G.A. § 48-8-3.2 (manufacturing machinery and equipment exemption)
• O.C.G.A. § 48-8-3.2(a)(9) (definition of manufacture of tangible personal property)
• O.C.G.A. § 48-8-3.2(a)(10) (definition of manufacturer)
• Ga. Comp. R. & Regs. r. 560-12-2-.62(2)(i), (j) (manufacturing and manufacturer definitions)

Source

• Landing page: Georgia Sales & Use Tax Letter Rulings
• Original PDF: LR SUT-2015-16

Original ruling text

Date Issued: November 3, 2015
Georgia Letter Ruling: LR SUT-2015-16
Topic: Manufacturing

This letter is in response to your request for guidance on the application of Georgia sales and use tax to certain
purchases made by Taxpayer.
Facts as Presented by Taxpayer
Taxpayer provides services for retailers removing used pallets from retailers, sorting the pallets, and selling them to
pallet recyclers. Taxpayer does not alter the pallets in any way. Taxpayer recently purchased a pallet sortation machine
for its facility to automate the pallet sortation process. The cost of the sortation machine was $xx.00, resulting in a
sales tax liability of $yy.00.
Taxpayer is not considered a manufacturer in its own right under OCGA 48-8-3.2. Taxpayer’s NAICS code is 541614
indicating that it provides process, physical distribution, and logistics consulting services. Taxpayer generates a
majority of its revenue from the sale of used and/or broken unmarked pallets to pallet recycling companies. Taxpayer
believes that it is an integral part of the manufacturing process as its sortation process must be done prior to the
manufacturing and repair of the pallets. The pallet repair companies specialize in just pallet repair, and if Taxpayer
were not involved, the pallet recycling manufacturers would have to perform the sortation process themselves, and
would in turn need the pallet sortation machine. The recyclers are not able to perform the sortation on their own as
they are not equipped to be onsite at the retailers to handle the significant pallet volume.
Issue
Is Taxpayer’s purchase of the pallet sortation machine exempt from sales and use tax under O.C.G.A. § 48-8-3.2?
Analysis
Georgia levies and imposes a tax (subject to certain specific exemptions) on the retail purchase, retail sale, storage,
use, or consumption of tangible personal property, certain enumerated services, and utilities. 1 Every purchaser of
tangible personal property at retail in this state shall be liable for a tax on the purchase at the rate of 4 percent of the
sales price of the purchase.2
O.C.G.A § 48-8-3.2 provides sales and use tax exemptions for machinery and equipment necessary and integral to the
manufacture of tangible personal property in a manufacturing plant, for repair and replacement parts associated with
such machinery and equipment, and for industrial materials and packaging supplies.
A “manufacturer” is a person or business, or a location of a person or business that is engaged in the manufacture of
tangible personal property for sale or further processing. 3 To be considered a manufacturer, the person or business, or
the location of a person or business, must be classified as a manufacturer under the 2007 North American Industrial
Classification System (“NAICS”) Sectors 21, 31, 32, or 33; or NAICS industry code 22111 or specific code 511110
or generally regarded as a manufacturer. 4 Businesses that are primarily engaged in providing personal or professional
services, or in the operation of retail outlets, generally including but not limited to grocery stores, pharmacies, bakeries,
or restaurants, are not considered manufacturers. 5
"Manufacture of tangible personal property," used synonymously with the term "manufacturing," means a
1

O.C.G.A. §§ 48-8-1, -30(a).
O.C.G.A. §§ 48-8-1, -2(31)(A), -30.
3
O.C.G.A. § 48-8-3.2(a)(10); Ga. Comp. R. & Regs. r. 560-12-2-.62(2)(j).
4
Id.
5
Id.
2

Date Issued: November 3, 2015
Georgia Letter Ruling: LR SUT-2015-16
Topic: Manufacturing
Page 2 of 2

manufacturing operation, series of continuous manufacturing operations, or series of integrated manufacturing
operations engaged in at a manufacturing plant or among manufacturing plants to change, process, transform, or
convert industrial materials by physical or chemical means into articles of tangible personal property for sale, for
promotional use, or for further manufacturing that have a different form, configuration, utility, composition, or
character.6 The term includes, but is not limited to, the storage, preparation, or treatment of industrial materials;
assembly of finished units of tangible personal property to form a new unit or units of tangible personal property;
movement of industrial materials and work in process from one manufacturing operation to another; temporary storage
between two points in a continuous manufacturing operation; random and sample testing that occurs at a
manufacturing plant; and a packaging operation that occurs at a manufacturing plant.7
In the present case, Taxpayer is not a manufacturer for purposes of Georgia’s sales and use tax exemptions. Taxpayer
is not classified as a manufacturer under the 2007 North American Industrial Classification System because
Taxpayer’s NAICS code is 541614, which is not included in the listed of qualifying NAICS codes.
In addition, Taxpayer is not generally regarded as a manufacturer because manufacturing means engaging in
operations that change, process, transform, or convert industrial materials by physical or chemical means into articles
of tangible personal property that have a different form, configuration, utility, composition, or character. While
machinery or equipment used to sort materials for further manufacturing might qualify for the manufacturing
machinery and equipment exemption contained in O.C.G.A. § 48-8-3.2, merely sorting pallets by color, type, and
condition does not change, process, transform, or convert the shipping platforms into a different form, configuration,
utility, composition, or character. Thus, such sorting activity does not make Taxpayer a manufacturer as contemplated
by O.C.G.A § 48-8-3.2.
Ruling
Because Taxpayer is not a manufacturer, Taxpayer’s purchase of its pallet sortation machine is not exempt from sales
and use tax under O.C.G.A. 48-8-3.2.
The opinions expressed in this ruling are based upon the information contained in your request and limited to the
specific transactions, facts, circumstances, and taxpayer in question. Should the circumstances regarding the
transactions change, or differ materially from those represented, then this ruling may become invalid. In addition,
please be advised that subsequent statutory or administrative rule changes or judicial interpretations of the Statutes or
Rules upon which this advice is based may subject similar future transactions to a different tax treatment than that
expressed in this response.

6
7

O.C.G.A. § 48-8-3.2(a)(9); Ga. Comp. R. & Regs. r. 560-12-2-.62(2)(i).
Id.