THE FUNDAMENTALS REALLY DO MATTER – AN ALABAMA APPELLATE RULING
Background of the Case
In late October 2025, the Alabama Tax Tribunal (“Tribunal”) issued a ruling in favor of the Alabama Department of Revenue (“Department”) denying a sales tax refund to a manufacturer on a certain category of its purchases.[1] What really stands out in this ruling is that the taxpayer and its representatives just didn’t deliver basic proof to the Tribunal that likely would have made approving that portion of the refund claim a slam dunk.
The Equipment and the Wet Yard Process
The issue presented by the taxpayer during the appeal related to its purchases of various heavy machinery (e.g., log cranes, excavators, etc.). Taxpayer operates sawmills and lumber yards and the equipment in question was used to move logs through the manufacturing process once they entered the “wet yard” processing area.”
According to the taxpayer, the logs are brought to the wet yard where they receive continuous treatment using a chemical to ensure the integrity of the product. After the wet yard, cranes move the logs to a debarking drum and then they go via conveyor system to a chipper where the wood chips are produced and later sold to paper mills.
The Core Question: Is the Wet Yard Part of Manufacturing?
The primary issue in this appeal is the wet yard and whether it, and by extension the heavy machinery therein, qualifies as part of the manufacturing process. Alabama is one of the few states that does not have a full manufacturing exemption. Instead, it has a reduced 1.5% state rate that is levied on sales/purchases of “machines used in mining, quarrying, compounding, processing, and manufacturing of tangible personal property.”[2]
However, like most states with a manufacturing exemption, Alabama law provides that the mere receiving of raw materials at a manufacturing location is not in and of itself considered part of manufacturing. That brings us to the million-dollar question in this appeal – what actually happens to the logs in the wet yard?
Missing Proof: Where the Taxpayer’s Argument Fell Apart
When questioned on that very topic and specifically the type of chemical used to treat the logs, the taxpayer’s representatives stated it was “a type of water…not the type of water…to drink though.” Though the representatives and the taxpayer steadfastly maintained that the wet yard was not mere raw material storage, but instead an area where raw timber is treated continuously to maintain the integrity of the raw materials. Consequently, they believed the wet yard is the first stage of the manufacturing process, which would then allow the heavy machinery used in the wet yard to qualify for the reduced 1.5% state rate.
The Tribunal ultimately disagreed with the taxpayer. And the reason they disagreed was because the taxpayer nor its representatives provided any evidence as to what chemical was used or how the treatment process maintains the correct moisture level to preserve the integrity of the wood fibers to “ensure efficient debarking and chipping.” The burden of proof on claiming an exemption is on the taxpayer, not the state. There was literally nothing provided by the taxpayer or its representatives that met their burden of proof. Why go through the appeals process and not have actual evidence to support your position? It seems as though any sort of analysis of the wetting agent, its composition, and/or how it makes the debarking process, which is the next stage of the manufacturing operation, more efficient would have been more than enough to satisfy the Tribunal that the taxpayer did meet its burden of proof in claiming the partial Alabama manufacturing exemption. As it was, nothing was provided and not surprisingly, the taxpayer lost.
A Cautionary Tale for Manufacturers
This is a cautionary tale of what could happen when you don’t have qualified sales and use tax experts on your side. Though we can’t represent a client/taxpayer in a legal setting, we can absolutely work with a taxpayer leading up to the original trial and/or appeal to ensure that we gather the necessary information and evidence to support the position and work with your in-house or external counsel to layout the argument(s), if needed.
Brian Hollingsworth
Partner with Clarus Partners, A Richey May Company
[1] Alabama Chips, Inc. v. State of Alabama Department of Revenue, Docket No. S. 24-0251-JP (October 23, 2025).
Related Resources
Understanding Sales Tax Non-Compliance
Learn the risks, penalties, and real-world triggers that lead to costly state tax exposure.
https://www.claruspartners.com/sales-tax-non-compliance/
Sales and Use Tax Compliance Support
See how Clarus helps companies stay compliant with filings, documentation, and exemption management.
https://www.claruspartners.com/sales-use-tax-compliance-solution/