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Manufacturing Exemptions: Understanding the Boundaries

author photo of Lauren Stinson

One common misconception I often hear from manufacturers is “We are a manufacturer so everything is exempt.” Don’t you wish that was true!

While most states give manufacturers tax exemptions for machinery and equipment, these exemptions rarely encompass everything between the plant’s four walls. Not knowing where the exemptions start and end often results in missed opportunities for tax savings or hidden liabilities.

States generally fall into two categories – the Integrated Plant Theory and the Direct Use Standard. Under the Integrated Plant Theory, machinery and equipment that is necessary and essential to the manufacturing process can be exempt from tax. Compare that to the Direct Use Standard where only the machinery and equipment directly used (i.e. directly making a change to the physical product) falls within the exemption.

What’s the big deal? The philosophy of the exemption impacts the hidden areas that most often trip up companies. Take, for example, material handling equipment. States have different standards of when the production process begins and ends. Understanding these guidelines is critical to managing your taxability. Are forklifts taxable or exempt if they are used to unload raw materials and take them to the production line? What if they are used to take finished goods into storage? Knowing how broad or limited the machinery & equipment exemption is can also impact other significant areas such as: packaging equipment, plant lighting, maintenance equipment, foundations/catwalks and safety equipment.

Although statutes rarely give a definitive answer, the nuances can be found by looking at regulations, DOR technical advisements and court rulings. Taking time to understand the details can save your company thousands of dollars.

The best approach is to train Purchasing and Plant Personnel on the basics of sales and use taxes so they know what information is needed to make proper tax decisions. The gold standard is for these employees to understand the sales and use tax rules and use this knowledge when making purchases. The silver standard is for Purchasing and Plant Personnel to be aware of s/u tax basics so they can give good information (what something is, how used) to A/P, allowing them to make correct determinations. By working together, purchasing and accounts payable employees can efficiently make good decisions and save the company significant tax dollars.

Any questions or comments about manufacturing exemptions ? Feel free to submit below…

About the Author: Lauren Stinson, CMI, is Owner and President of Windward Tax, a sales and use tax consulting firm. She has more than 20 years of experience working with manufacturers on sales and use tax issues. Lauren is pleased to share her expertise with SalesTaxSupport readers. She is the Manufacturing contributor for SalesTaxSupport’s Industry blog and she is the Georgia Sales Tax contributor for SalesTaxSupport’s State blog.

Comments or questions may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page. More specific questions or requests may be sent to Lauren directly using the orange "REQUEST" link on Lauren's Firm Profile page.

Other recent “Manufacturing & Distribution” posts by Lauren Stinson, CMI:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

2 Responses to Manufacturing Exemptions: Understanding the Boundaries

  • Posted by Author photo of Lauren StinsonLauren Stinson on September 10, 2014 1:45am:

    Hi Julie,
    Nexus is created when your company goes to your customer's site to install your product. You should register for each of these states that you install in. If you have been installing for a while, you may have a significant past liability and you might want to consider doing a Voluntary Disclosure Agreement before you register.
    If you only ship a part to the state, that activity doesn't create nexus on it's own.
    For all states in which you are registered, you should be collecting tax from your customers, unless they provide you with a valid exemption certificate.

  • Posted by Julie on August 31, 2014 9:05pm:

    We are a water treatment manufactuerer. We build, ship and install units to customers in other states. We have a resale certificate for our home state of Ohio. Does that mean we have tempory Nexus in those states? Do we need to register in each state for sales tax exemptin? What if we just ship a part to the state can we use our ohio certificate in that case?

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