Assemble Your Toolkit for Manufacturing Sales Tax Exemptions
The harsh reality is that sales tax affects just about every single business in the United States, but it is like solving a puzzle to find resources about it. Your responsibility can vary across all 50 states, even if you don’t have physical presence in the state. Wouldn’t it be a relief to lessen the burden of sales tax on your company? Here are answers you’ve been looking for…
Calling all manufacturing-related businesses! This includes not just manufacturing companies but also those that sell to manufacturers. Let’s assemble your sales tax exemption toolkit to set you up for money-saving success.
Understand the Basics: Definitions & Processes
Did you know that you could be saving a lot of money for your company by claiming all the sales tax exemptions to which you are entitled? 38 states have sales tax exemptions for manufacturers, and an additional 4 have reduced sales tax rates! Purchases of qualifying machinery, equipment, and supplies may qualify for a sales tax exemption based on the manufacturing exemptions of various states which come with varying degrees of requirements to qualify for the exemption.
The first step in assembling your toolkit for manufacturing sales tax exemptions is understanding how manufacturing is defined. While the definitions vary across states (typical!), manufacturing is often considered the act that changes or transforms tangible personal property in form, composition, or character, into something different from that in which it was acquired. It is vital to determine the state’s definition of manufacturing as well as related details on what may qualify in the manufacturing process (machinery, equipment, consumable supplies, raw materials, etc.). States often extend additional manufacturing-related functions such as research & development, pollution control, testing, and by-product processing into their definition of manufacturing. Not every state restricts the manufacturing exemption to businesses commonly thought of as a manufacturer. Texas has a very broad definition and allows an ice maker in a restaurant to qualify!
Manufacturing itself has many blurred lines. Where does the manufacturing process really start and end? This is an important detail for determining sales tax exemptions. This varies across the states, but most states consider the beginning of the manufacturing process to be where the first material change occurs to the raw materials. The ending point of the process is generally when the item is complete and ready for sale.
Build on Your Knowledge: How Different Uses Affect Exemptions
Sales tax and manufacturing have something in common – the details are crucial. That’s why it won’t come as a shock that the precise use of every item contributes to determining whether it is exempt. There are a few distinct factors to examine: direct vs. indirect use, predominantly vs. exclusively vs. partially used, and mixed-use.
Direct use generally means that the machinery or equipment touches or comes into direct physical contact with the item being produced. Why does it matter? Most of the states that offer a manufacturing exemption typically require direct use for the exemption to apply.
Predominant use generally means used the majority of the time, which would imply 51% or more. Exclusive use implies the machine or equipment is solely used for the manufacturing process and not for other non-manufacturing purposes. States that use an exclusive test will not allow the exemption if there is any non-qualifying use of the equipment. Some states provide a partial exemption for the percentage of use in an exempt manner.
Mixed-use applies when equipment is used in both a taxable and exempt manner. In this case, it is key to provide documentation to support the exempt portion of the use if the exemption allows for the predominant use test. Examples of mixed-use equipment may include forklifts, packaging equipment, and conveyors, to name a few.
Now that you have the tools to determine the details of your situation, you can get to the fun part.
How Can I Uncover More State Manufacturing Exemptions?
As a tax professional, how can you make sure you are doing everything you can to take advantage of manufacturing exemptions? This looks a little different depending on if you are the purchaser or the seller. As a purchaser, you can educate buyers and requesters on the potential benefits of the manufacturing exemption for sales and use tax. As a seller, be aware of all the ways your products can be used and whether any of the uses can be classified under different types of exemptions.
To be on top of your game, seek out state-specific exemptions that may pertain to your business and research what the state defines as taxable, or exempt, and how to claim the exemption. Give careful consideration to new concepts in the constantly changing technology and products and services areas that may qualify as exempt under a manufacturing exemption or another related exemption.
Whether you are a traditional manufacturer or not, it’s worth taking a look to see if you qualify for any related exemptions in a state. Here are a few examples of manufacturing exemptions making headlines:
- Tennessee Updates Definition of Industrial Machinery for Sales Tax Exemption
- Washington Issues Guidance on Taxability of Items Manufactured for Own Commercial or Industrial Use
- Specific Items used by Auto Parts Manufacturer Qualify for Indiana Manufacturing Exemption
- Tennessee Appeals Court Supports Chancery Court in Overturning Revocation of Manufacturing Exemption
Learning about sales tax for manufacturing is so valuable because of all the available exemption opportunities. It literally pays to learn more about these opportunities and to delve further into the nuances of how the exemptions apply so you can get the most out of the exemptions that are available to your business.
To learn about all things sales tax for manufacturers, dig into our Sales Tax Issues and Exciting Exemptions for Manufacturers On-Demand Webinar! In this on-demand webinar, learn the key components and terms to look for in each state’s manufacturing definition so you can determine if you qualify for certain cost-saving exemptions.