Paul L. Caron

Monday, August 5, 2013

Johnston: Manufacturing Tax Break Gone Wild

Tax Analysys Logo (2013)David Cay Johnston (Syracuse), Manufacturing Tax Break Gone Wild, 140 Tax Notes 621 (Aug. 5, 2013):

A federal judge [United States v. Dean, No. 11-01977 (C.D. Cal. May 7, 2013).] has held that putting wrapped candy bars and wine bottles into gift baskets qualifies for a 2004 tax break for manufacturing. Johnston argues that the decision is too broad an interpretation of manufacturing for the purposes of the section 199 deduction.

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From the point of view of an economist, a potato in the field is a different good than a harvested and washed potato, different from a potato in a sack with others, different from a potato on a shelf at a store, etc. So a manufacturing plant that recieves truckloads of potatos from farms, then washes them and places them in boxes for shipping is in fact manufacturing "washed boxed potatoes". In this case the company was manufacturing gift baskets. Prior to their manufacturing operations the gift baskets did not exist. Pretty clear cut if you ask me. Judge James V. Selna is correct when he wrote that there operation "creates a new product with
a different demand’’. Farming is also a form of manufacturing. So growing the potatoes in the first place was manufacturing them. A "pick your own" potatoe farm would be providing a different good than one with a farmstand with bags of harvested potatoes.

Posted by: Brian Macker | Aug 7, 2013 10:00:31 AM

This is probably an isolated case, but it does highlight tax base issues associated with manufacturing exceptions.

Posted by: HTA | Aug 5, 2013 8:24:18 AM

Is auto assembly any different?

The assembly plants don't actually shape any new parts, do they?

Posted by: Eric Rasmusen | Aug 5, 2013 8:06:34 AM