Today is Manufacturing Day across North America. According to the website sponsored by the National Association of Manufacturers, October 6th is a celebration of modern manufacturing meant to inspire the next generation of manufacturers, educate the public about career opportunities and improve the perceptions of manufacturers. I love manufacturing, and there is no part of my job that I enjoy more than taking a plant tour and seeing how a product is manufactured from start to finish. As a sales tax practitioner, my largest client base is manufacturers; and I need to know the specific details of my clients’ production operations so I can help them take advantage of the sales tax exemptions that New York and other states provide to manufacturers.
Most states provide either full or partial sales tax exemptions for purchases of machinery, equipment, tools, supplies and services used by manufacturers. Since each state has its own specific rules about what activities are considered manufacturing, where production begins and ends and what property is actually considered exempt, I’m just going to highlight details about New York’s production exemption.
According to Reg. § 528.13: “machinery and equipment (including parts with a useful life of more than one year) used or consumed directly and predominantly in the production for sale of tangible personal property, gas, electricity, refrigeration or steam, by manufacturing, processing, generating, assembling, refining, mining or extracting” is exempt from New York state and local sales and use taxes. The exemption also includes parts with a useful life of less than one year, tools and supplies used in production, as well any installation, repair or maintenance services for exempt machinery or equipment.
In order to qualify for the exemption, the manufacturer must produce tangible personal property for sale rather than for their own use (i.e., a contractor producing asphalt they are then using to pave roads). Production starts with the handling and storage of raw materials at the plant site and continues through the production line to the point where the product is finished and packaged for sale. If the manufacturer weighs, inspects, measures or tests raw materials prior to placing them into storage, then production starts with the placement of the raw materials into storage, and any prior activities will not qualify for the exemption.
The exemption only applies to the manufacturer’s production activities. Machinery, equipment, tools, supplies and services used in administrative or distribution activities are subject to tax.
Directly means the machinery or equipment:
- act upon or effect a change in material to form the product to be sold; or
- have an active causal relationship in the production of the product to be sold; or
- be used in the handling, storage, or conveyance of materials or the product to be sold; or
- be used to place the product to be sold in the package in which it will enter the stream of commerce.
Predominantly means the machinery or equipment is directly used more than 50% of the time in a production activity.
The exemption also extends to other aspects of production and includes machinery, equipment, tools and supplies used in quality control of the product while it is still on the production line or for the treatment of industrial waste resulting from production as part of a water or air pollution control process.
Manufacturers purchasing machinery, equipment, parts, tools, supplies or services should use Form ST-121, Exempt Use Certificate to make tax-free purchases. Raw materials can be purchased tax-free as well using Form ST-120, Resale Certificate.
This post is by no means a definitive guide to New York’s production exemption. There are specific aspects to the tax law and regulations that manufacturers need to recognize before making exempt purchases. The Department of Taxation and Finance has published Tax Bulletin ST-552 and Publication 852 to provide additional information about machinery, equipment, parts, tools and services used in production.
New York manufacturers may also benefit from other sales and use tax exemptions for packaging materials, promotional materials, research and development activities and utilities. In fact, my next post later this month will cover the exemption for utilities used or consumed in production activities by manufacturers.
Manufacturing is a vital part of the U.S. economy and we should all do our part to encourage and promote the continued growth of the manufacturing industry here in New York State and across the country.
Other recent “New York (NY)” posts by Tom Mazurek, CPA:
- The Holidays - A Taxing Time for New Yorkers
- New York Manufacturers: Remember Sales Tax Break for Utilities!
- New York: Celebrate Manufacturing Day with Sales Tax Exemptions!
- New York Nexus: For Out-of-State Sellers, No News is Good News
- New York: New Law to Close Loopholes for Related Parties