Many states offer exemptions for material handling equipment and related repair parts and accessories. Fuel is even tax exempt in some states. While these exemptions can save manufacturers significant money, they are often difficult to navigate.
Why so complicated? States qualify these exemptions using terms such as "predominantly", "exclusively" and “substantially". For example, a piece of equipment used directly on the production line qualifies for exemption. But how do you handle a forklift that is used for a variety of jobs from unloading raw materials off of incoming trucks, to moving products during the manufacturing process, to taking finished goods to storage, and even for maintenance purposes. Does that forklift qualify for exemption?
Here are some tips for best practices:
1. Learn about the criteria for your state. Here are typical definitions of common terms. "Substantially" means over 1/3 of the time, "predominantly" means over 1/2 of the time and "exclusively" means 100% of the time. Always verify definitions with your state.
2. List all jobs performed by the forklifts and then compare it to the state’s list of exempt activities. Some states recognize moving of raw materials as an exempt function. Other states want proof of how much time the forklift is used for tax exempt jobs. Conducting a time study may be necessary to prove an exemption to the state. For one typical week, track all activities performed by the forklift. Do not count idle time. Keep documentation to substantiate your percentages. Auditors are much more likely to rule in your favor if you present good documentation. The criteria can be so complicated that even the state’s own customer service representatives are confused. Often times the best practice is to retain help from sales tax professionals to navigate through the regulations.
3. Maintain a report of forklifts by serial number and the functionality of each. Include the percentage of time that each forklift is used in a taxable manner vs. exempt manner. Pay tax accordingly. Similar reports can be used for equipment purchases, leases, repair parts, supplies and fuel. Be careful because not all states give the same expansive exemptions.
4. If some of your forklifts are used for taxable jobs and others are performing exempt functions then the repair parts you purchased for the forklifts are only partially taxable. Determine what percentage of the forklifts is taxable and pay that percentage of sales tax. For example, let’s say you have 10 forklifts and you determine 4 are taxable and 6 are exempt. If you are stocking up on repair parts for all the forklifts, consider paying tax on 40% of the total invoice.
5. Update your reports on a regular basis. Keep your AP department up to date on changes in your forklift fleet so that correct taxability can always be determined.
Keeping a watchful eye on your material handling exemptions can be a real tax savings!
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?