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Manufacturing Exemption Misconception: Everything is Tax Exempt!

author photo of Lauren Stinson

Even though many states are generous with the sales tax exemptions that they offer to manufacturers, NOT everything that is purchased by manufacturers is exempt. This is a common misconception among many manufacturers. Making the assumption that “we are a manufacturer, everything is exempt”, will probably result in being hit with a hefty tax bill under audit.

Some common taxable purchases by manufacturers include items for the administrative and distribution areas of the facility, which are usually considered to be outside of the manufacturing process. Most exemptions for manufacturers are for items that are used during the manufacturing process.

The administrative area of the facility is where sales, accounting, purchasing, facility maintenance and plant receiving are located. Taxable items include office supplies, furniture, and maintenance materials for the building. The distribution area of the facility encompasses anything that takes place after the product is packaged. Items purchased for storage, loading and shipping areas are usually taxable. In general, only items purchased to package the product being sold will be exempt from tax in these areas of the plant.

The manufacturing process itself is where companies take advantage of the sales tax exemptions that are available to manufacturers. Where the manufacturing process begins and ends will depend on the state. Luckily most of the machinery, repair parts, and supplies purchased for the manufacturing process will be exempt from tax.

So how do you make sure you only pay sales tax on non-exempt purchases for the plant? Many manufacturers decide to obtain a direct pay permit. By providing this permit to your vendors, you instruct them not to include sales tax on their invoices. They are released from the burden of collecting and remitting sales tax for your taxable purchases. Instead, your company is responsible for making all taxability decisions and remitting required sales tax to the state.

Manufacturers with direct pay permits must make sure the plant staff who are making sales and use tax decisions are well trained on the sales and use tax exemptions available. Also, a good use tax accrual system must be in place to make sure tax is getting paid.

Regardless if you decide to obtain a direct pay permit or monitor vendor invoices for correct sales tax charges, consider offering key employees state-specific sales and use tax training focused on manufacturing. A few hours of specialized training can save you thousands of tax dollars and boost your company’s profits.

Comment? Questions?

About the Author: Lauren Stinson,CMI, is Principal and National Leader - Sales & Use Tax at Cherry Bekaert LLP; a national CPA and consulting firm ranked as one of the top 25 in the country. Previously, Lauren was Owner and President of Windward Tax, a sales and use tax consulting firm. She has more than 25 years experience working with manufacturers on sales and use tax issues. Lauren is pleased to share her expertise with SalesTaxSupport readers as the Manufacturing contributor in SalesTaxSupport’s Industry blog, as well as the Georgia Sales Tax contributor in the States 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:

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