“What's in a name? That which we call a rose by any other name would smell as sweet.”
So what does one of Shakespeare’s most famous lines have to do with a manufacturer’s sales tax policy? Sometimes the best tax policy is to name things correctly – and by correctly, I really mean in a manner understood by an auditor.
Here are examples of items used in manufacturing that can be easily coded incorrectly and consequently cost a company significant tax dollars.
Consumable Supplies vs. Repair Parts: Many states offer an exemption on repair parts for manufacturing equipment, but not for consumable supplies. When does a consumable supply become a repair part? Let’s use fuses as examples. Machinery will not run without fuses. They are an integral part to machinery. But fuses don’t last long so they are rapidly consumed. Are fuses consumable supplies or repair parts? Some states tax consumable supplies and exempt repair parts. If a company’s policy is to expense rapidly consumed items as consumable supplies, it will be an uphill battle to convince an auditor that the fuses are actually repair parts.
Forklifts: Another example is forklifts used in shipping vs. forklifts used in production. Say for example, the forklift is used to take the finished goods from the end of the production line into the warehouse and then back again to the production line and so on and so forth. Calling the forklift “used in production” could open up a number of exemptions for the forklift, the repair parts, the energy, etc. But, calling the forklift “used in shipping” . . . all of a sudden it becomes taxable. It’s all about putting the right name on things.
Storage Tanks: The name you give an item can impact its taxability. Storage tanks are good examples. Is your product blended in a storage tank? Most states consider blending to be part of the manufacturing process but storage tanks are usually red flags to taxable equipment. If the name fits, identify the item as a blending tank to take advantage of exemptions.
Other helpful tips:
• Capital Appropriation Requests - Make sure you have the correct terminology that helps your argument for exemption. Auditors always look to CARs to supply them information as to what equipment is and how it is used. Make is simple for them – give them the language they are looking for.
• Make a plan for audits - If your company uses misleading terminology, give auditors “cheat sheets” at the beginning of the audit process so they have the correct terminology upfront. It is much easier to deal with a questionable item before it even gets put on the initial workpapers.
• Train your purchasing departments - Purchasing needs to write POs in such a way that correct verbiage is used from the start. This helps AP departments know when an exemption should be taken.
Although Shakespeare’s “course of true love never did run smooth,” your company may experience smoother audits and better tax compliance by following these few words of wisdom.
Your thoughts, questions or comments (or favorite Shakespeare quotes) are welcomed!
Other recent “Manufacturing & Distribution” posts by Lauren Stinson, CMI:
- Manufacturing Exemption Misconception: Everything is Tax Exempt!
- Manufacturers’ Utility Studies: 5 Approaches to Utility Exemptions
- Manufacturing Sales & Use Exemptions: Open to Interpretation
- Use Tax Exemptions Case: Non-Traditional Manufacturer in Missouri
- Manufacturing Sales Tax Exemptions: Are Suppliers Entitled to Them?