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Turning water into water is not manufacturing

 It's no manufacturing miracle to turn water into water.

Turn water into wine and you might get a manufacturing exemption. But turn dirty water into clean water? Not so much.

The Arkansas Supreme Court recently ruled that the City Corporation of the City of Russellville does not merit a manufacturing sales tax exemption for transforming non-potable water into potable water. City Corporation cleans the waters of the Illinois Bayou and the Huckleberry Creek Reservoir in a three-phase process: pretreatment, clarification, and final filtration.


A construction company undertook an expansion of the City Corporation facility beginning in 1998, for which it purchased tangible personal property from out-of-state vendors. During a 2004 audit, the Arkansas Department of Finance and Administration (DFA) determined that those purchases were in fact subject to Arkansas state and local use taxes, plus interest (some of which were eventually barred by the statute of limitations). The company paid a portion of the taxes due but also protested the assessments and then filed a complaint against the director of the DFA.

The company argued it was entitled to a refund of use taxes paid and an abatement of “any portion of the disputed assessment by DFA attributable to items of tangible personal property not utilized in Arkansas or double included in the auditor’s determinations.” Then, on July 1, 2014, it filed a motion for summary judgment asserting that it qualified for the Arkansas manufacturing exemption. In response, the DFA contended that the water treatment facility “was not a manufacturer of water, but instead merely cleaned the water for human consumption.”

The circuit court found in favor of the company, and the DFA appealed. The Supreme Court agreed to hear the case “because it involves a substantial question of law concerning the construction of a statute.”

Water in the beginning and water in the end

After deliberation, the Supreme Court found, “Russellville’s water-treatment plant did not manufacture or process a new product. … It was water in the beginning, and it was water in the end. … Thus, [the company] is not entitled to the manufacturing exemption pursuant to section 26-52-402.” The decision of the circuit court is reversed, and the company owes the tax. Read the full opinion here.

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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.