Many states provide an exemption for manufacturing equipment, but storage tanks are often excluded from the exemption. Why? States often argue that storage tanks hold raw materials and ingredients before materials are used in the manufacturing process. No production is taking place so no “manufacturing” is occurring. Not so fast! Take time to understand the “small print” of these exemptions and you may save a tankful of tax dollars.
For example, are ingredients actually blended within the storage tank? That blending procedure may be considered part of the manufacturing process, allowing for the exemption to be applied to the storage tank. Are the materials kept at a certain temperature or moved around to prevent solidification? This step may be a required in the manufacturing process. Sometimes it helps to look at things from a backward perspective – is the storage tank preventing something from naturally occurring? That precaution may be the key to tax exemption.
Often times, storage tanks are used during the production process. When are your tanks being used? A tank that holds a product mid-process may qualify for exemption whereas a tank holding raw materials outside the scope of “manufacturing” may not qualify.
Another avenue for exemptions may be with items required for the storage tank’s operation and maintenance. Piping is an example. At which point does piping qualify for the machinery exemption? Another exemption opportunity is for repairs and service of the storage tank. Even if the storage tank is considered taxable, your state may provide an exemption for repair services. Make sure labor is separately stated on invoices so the repair portion of the charge is not taxed in error. Finally, is the storage tank considered real property? If so, a whole new set of exemption opportunities may be available.
As with all manufacturing exemptions, the answers vary from state to state and will probably not be addressed in the tax codes. A thorough understanding of the state regulations, rulings and court cases will give you better insight into your DOR’s perspective and a greater opportunity to reduce your sales tax bill.
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?