Food Manufacturers: Look at Exemptions for Sanitization Chemicals
Manufacturers of food products may be missing out on significant tax savings by not taking advantage of sales tax exemptions for sanitization chemicals used during the production process.
But wait! Chemicals and supplies used to clean and sanitize machinery are not tax exempt in your state. Right?
With the correct positioning and supporting evidence, cleaning and sanitization supplies may qualify for sales tax exemptions for manufacturers.
On numerous occasions, we have recovered thousands of dollars by arguing that the entire cleaning/sanitization process is a direct and necessary step in the production of food products, going beyond ordinary “cleaning” that a non-food manufacturer would do.
Tax Laws Vary From State to State
To successfully defend this point, you should begin by gaining a complete understanding of the exemption regulations in your state. Here’s a look at the sales tax exemption laws in a few states to show various suggestions for positioning your argument:
Summary of Arkansas Regulation GR-55.1.C.2.a.: A chemical, catalyst, reagent, or solution is exempt from tax if it is consumed or used in manufacturing or processing if it is used to produce or prevent a chemical or physical effect during the manufacturing process and the chemical/physical effect or prevention is a direct and necessary step in the production of the article.
Position: In this case, an argument can be made that sanitization chemicals would meet that definition as the sanitization process prevents a chemical or physical effect during the manufacturing process.
Tennessee and Ohio
Tennessee Regulation, Rule 1320-5-1-.40: An exemption is available for materials or products that come in direct contact with the product being manufactured and are consumed in 25 days.
Ohio Regulation, Rule 5703-9-21(C)(2): Catalysts and consumables that interact with the product and that are an integral part of the manufacturing operation are exempt.
Position: Comparatively, it would be a difficult battle to win showing that sanitization chemicals come in direct contact or interact with the product in most manufacturing processes.
Massachusetts Code Section 6(r): An exemption applies to materials, tools, and supplies consumed and used directly and exclusively in the actual manufacturing.
Position: Could an argument be made that sanitization chemicals are “used directly and exclusively” in the manufacturing process? Perhaps.
California Regulation 1525(a): Tax applies to sales of all tangible personal property used in manufacturing, unless it is physically incorporated into the manufactured article. Chemicals are specifically listed as a taxable example.
Position: Again, like Tennessee, the only opening for exemption would be if the sanitization chemicals become a part of the manufactured product. But to what degree? What if a trace amount, even one-millionth of a particle, remains with the product? Is that enough? In some states, the answer is yes.
Three Tips to Start Positioning Your Argument
- Dig deep into precedents set by letter rulings, hearings, and court cases to get a sense of how the DOR in your state interprets the laws.
- If your state doesn’t provide any concrete answers or examples, look at other states that have similar laws to see how they have ruled.
- Recruit an outside sales tax expert who has worked in your industry and your state. They may have already tackled this same issue, saving you countless hours of research and analysis.
Having the state grant sales tax exemptions for your sanitization supplies may seem like a long shot but it’s not impossible. And for many food manufacturers, these exemptions could save thousands of dollars. This is one example of when the ambiguity of sales and use tax laws may help you qualify for a very legitimate exemption.
Find out if your company can save more money by taking advantage of sales tax exemptions for manufacturers. Click on the link below and review these 20 Signs It's Time for a Sales & Use Tax Tune Up.