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Four Tips (and Tricks) to Qualify for Manufacturing Sales Tax Exemptions

Taking advantage of sales tax exemptions is one of the perks to being a manufacturer. The key is staying on top of Factory-Line from Gettyavailable exemptions and successfully applying them to your operations. Start by answering this simple question…

Where does production begin and end at your facility, according to your state?

Almost every state answers the question differently, especially as it applies to material handling equipment, testing equipment, utilities and storage. Understanding your state’s definition can help reduce your sales and use tax expenditures significantly.

Here are tips from sales tax experts to identify exemption opportunities. 

Tip 1: Forklifts, cranes and other material handling equipment may be exempt from sales tax

Example 1: If your state maintains that production begins when raw materials enter the plant, material handling equipment may qualify for a tax exemption, even if the equipment is not used exclusively in the production area.

Example 2: If your state contends that production begins when materials are taken out of inventory to be placed into production, the equipment used to move these materials may qualify for a tax exemption.

Example 3: Equipment used to move products during the manufacturing process often qualifies for tax exemptions, depending on the state.

Trick 1: Keep a forklift matrix
To prove that forklifts qualify for partial or full exemptions, keep a forklift matrix. Some states treat leased forklifts differently than ones your company owns. The matrix should include the following information:

  1. Serial number
  2. Supplier
  3. Purchased or leased?
  4. Power source
  5. % used in production
  6. Taxable or exempt?

Case Study  

Cherry Bekaert recently completed a forklift study for a client who failed to provide a vendor with an exemption certificate and consequently was paying tax on all forklifts as well as the fuel used to operate the forklifts.
 
First, we identified how and where each forklift was used. Then we analyzed the state sales tax laws to determine if each forklift was taxable or exempt. We calculated the taxable percentage. We also determined that the state offered an exemption for fuel used to run the forklifts so we incorporated this tax savings into our calculations.
 
After reviewing the forklift study and implementing our recommendations, the client reduced the taxability of their forklift purchases and forklift fuel purchases by 75%. The client requested a significant tax refund from the state for the overpayments made during a three-year look-back period, and they will continue to save money for all future payments and purchases of forklifts and fuel.


Tip 2: Testing equipment may qualify for exemptions
States with broader production parameters may offer exemptions for testing equipment. Here are some examples:

Kansas: The manufacturing exemption includes machinery and equipment used to test or measure raw materials when received at the plant, prior to the production process.

South Carolina: The manufacturing exemption extends to machinery used in a lab at a manufacturing facility for quality control to test sample products that are being manufactured for sale.

Tip 3: Take advantage of special tax guidelines for utilities

Electricity, natural gas, boiler fuel, propane and other fuel sources used in the manufacturing process may qualify for special tax rates or exemptions. Research your state’s tax laws, paying attention to the small print. Here are examples of very specific regulations that could be big money savers.

Tennessee: A special user privilege tax rate is applied to water, gas, electricity, fuel oil, coal and other energy used by manufacturers in production. However, if electricity or other fuels come into direct contact with the product and are expended during the manufacturing process, this fuel is 100% tax exempt.

Arkansas: Electricity used to operate a blast-freezing facility that turns fresh foods into frozen food products qualifies for a reduced sales tax rate.

Trick 2: Use Separate Meters
If your state offers exemptions for electricity used in production, ask your utility provider to set up separate meters for your manufacturing facility to more easily monitor use.

Tip 4: Check on tax breaks for storage
Many states contend that storage tanks are subject to tax because they hold raw materials before production begins. Before walking away from this potential exemption, find out what is happening in those storage tanks. If materials are being blended together, your state may recognize that as part of production. If the tanks must maintain a specific temperature or churn the materials to avoid solidification, a state may agree this is part of the manufacturing process.
 
While knowing how your state defines the beginning and ending points of production is the first step to tax savings, the process is complex, especially if your company operates facilities in multiple states. Consider offering sales tax training to key employees to help them more easily take advantage of the exemptions available to manufacturers. Review this cheat sheet to find the best sales tax training for your company. 
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Are you faced with any of these common sales or use tax problems? The solutions may be easier than expected. Visit the Cherry Bekaert Sales Tax website for more helpful information.
 

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Lauren Stinson, CMI
Written by Lauren Stinson, CMI

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