State ex rel. Ariz. Dep't of Revenue v. Capitol Castings, Inc., 207 Ariz. 445

Summary

The Supreme Court of Arizona interpreted the machinery-or-equipment use-tax exemption under A.R.S. § 42-5159(B)(1), including the effect of a 1999 legislative amendment concerning expendable materials. Applying functional and integrated-system tests, the court held that silica sand, chemical binders, exothermic sleeves, mold cores, mold wash, and hot topping qualified for the exemption, while cement and lime used for pollution control did not. The court remanded the exemption issue concerning refractory materials.

Holdings

1. The 1999 amendment was intended to overrule Capitol I and reinstate the broader functional approach reflected in Duval Sierrita for determining whether property qualifies as machinery or equipment under A.R.S. § 42-5159(B)(1).
2. A court must use flexible, commonly understood industry definitions and examine the item's function, necessity, integration into the manufacturing process, and nexus to converting raw materials into finished products.
3. Silica sand, chemical binders, exothermic sleeves, mold cores, mold wash, and hot topping qualify for the use-tax exemption.
4. Cement and lime used to detoxify dust from the arc furnaces do not qualify for the use-tax exemption.
5. The record was insufficient to determine whether coxy sand and cerwool blankets qualified for the exemption; the issue was remanded to the tax court.

Questions Presented

1. Whether the 1999 amendment to A.R.S. § 42-5159(C)(1) altered the interpretation of the machinery-or-equipment exemption in A.R.S. § 42-5159(B)(1).
2. What functional standards govern whether materials qualify as machinery or equipment used directly in manufacturing operations.
3. Whether silica sand, chemical binders, exothermic sleeves, mold cores, mold wash, hot topping, cement, and lime qualified for the use-tax exemption.
4. Whether coxy sand and cerwool blankets qualified for the use-tax exemption.

Disposition

reversed_and_remanded