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 available 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:
- Serial number
- Purchased or leased?
- Power source
- % used in production
- Taxable or exempt?
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
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.