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Sales Tax Exemptions for Consumable Supplies Vary by State

author photo of Lauren Stinson

“Consumable supplies” generally refers to tangible personal property that is consumed or used up during the manufacturing process. Whether or not this property is exempt from sales and use tax depends on the specific rules in each state.

Several states are strict in exempting these items and only will exempt consumable supplies if they meet very specific requirements. Many states have much broader exemptions for these supplies, while other states don’t have an exemption at all for consumable supplies.

States with Stricter Requirements

In the stricter states, very specific requirements must be met in order for consumable supplies to be exempt from tax. For example, in Arizona a consumable supply will be exempt from tax if it comes into direct contact with the manufactured product and causes a chemical or physical change. The Arizona law specifically states that chemicals used in manufacturing will be exempt if the chemical “involves direct contact with the materials from which the product is produced for the purpose of causing or permitting a chemical or physical change to occur in the materials as part of the production process.”

Another state that has very specific requirements is Tennessee. The Tennessee regulation states that “materials and supplies coming in direct contact with, and which are consumed within twenty-five (25) consecutive days, in the processing of manufactured products, are not subject to the Sales or Use Tax.”

States with Broader Exemptions

There are many states that now have a broad exemption for consumable supplies. For example, in Georgia the regulation was expanded in July 2014 to include anything “necessary and integral” to the manufacturing process.

Michigan is another state that has a broad exemption for consumable supplies. The Michigan rule states that property “which is consumed, destroyed or loses its identity in a manufacturing process” is not taxable. In these states, an argument can be made for nearly anything that is used on or near the machinery and even for some supplies that are used offline.

There are also several states that do not have any exemptions for consumable supplies. A couple of these states are California and Florida.

On the Horizon

Luckily, many states are moving towards a necessary and essential method for exempting consumable supplies in order to make their laws more favorable to manufacturers. It’s important to know how your state treats consumable supplies so that you can take full advantage of the exemption.

Questions or Comments?

1) Share with me other states that you think have either very strict requirements or more lenient guidelines for the exemption of consumable supplies.

2) Have you ever challenged a state over its taxability decision concerning your consumable supplies?

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 Sales Tax Exemptions for Consumable Supplies Vary by State

  • Posted by Jamie on November 24, 2015 5:06am:

    I have a Exemption Certificate and wanted to ask you if it would apply in this circumstance.
    They have checked “Machines used in manufacturing, processing, recycling etc.

    The tangible personal Property is a “battery regenerating equipment” (Description of use = batteries lose capacity and efficiency due to accumulation of hard lead sulfate crystals.
    This charging method will restore and prolong the life of these batteries)

    The company business is: Sales and repair for golf carts.

    • Posted by Author photo of Lauren Stinsonlaurenstinson on December 7, 2015 7:52am:

      Jamie,

      Typically, manufacturing exemptions only apply to those companies that are in the business of manufacturing and not in the repair service business. So, if your customer was manufacturing golf carts, that exemption certificate would seem reasonable. However, if they are a repair shop, a manufacturing exemption would not seem logical. Why does this matter to you? Because some states impose the “good faith” standard. This standard places a burden on the seller to determine whether or not an exemption certificate is appropriately used by the purchaser. As a seller you can’t be relieved from your obligation to collect the tax if you should have known that it was not reasonable. The best course of action would be to have the purchaser clarify in writing that they are using those in a manufacturing process. That way you have done your due diligence to ensure that the seller has provided you a valid exemption certificate that is reasonable for their business.

      Not every state has the “good faith” standard. Some states relieve the seller from the tax collection burden, as long as they have a completed exemption certificate on hand. So, depending on the state you are in, determines what your obligations are as the sellers. However, I always advise clients to err on the side of caution, so they don’t get penalized under audit for lack of acceptable documentation.

      I hope this helps!

      Lauren

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