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How Exemption Certificates Impact the Bottom Line for Manufacturers

Tax-Business-Notes-Calculate-Update_GI-637850838_BW_MDIn order to stay competitive in this day and age, it is key that businesses focus on reducing expenses to increase the bottom line.

Manufacturers find themselves in a unique opportunity to reduce expenses by taking advantage of numerous use-based sales tax exemptions (manufacturing equipment, manufacturing equipment repair parts, production supplies, safety equipment, etc.) that are only available to the manufacturing industry. The trick is knowing how to apply these exemptions to a company’s unique operations and understanding the exemptions available in specific jurisdictions.

The Basics

Generally speaking, a sale of tangible personal property (anything that can be touched) is subject to sales tax unless a certificate of exemption is provided by the manufacturer to the vendor. In order to take advantage of an applicable exemption, a use-based exemption certificate needs to be completed by the manufacturer and provided to the vendor. If the certificate is not provided to the vendor, a manufacturer will likely be billed sales tax on the purchase of exempt items. So how is this oversight avoided?

The answer is training and communication. When making a purchase, both the purchasing and accounts payable department employees need to answer the following questions in order to take full advantage of sales tax exemptions.

Key Questions to Answer

1) Where does my manufacturing process begin and end, and is my purchase utilized within the manufacturing process?
Understand how the state in which operations take place defines the manufacturing process within your facility. The exact wording used by each state must be correctly interpreted in order to avoid paying too much or not enough sales or use tax.

For example, the state of Georgia considers the following operations exempt from sales tax:

Operations that change, process, transform or convert industrial materials by physical or chemical means, into articles of tangible personal property for sale or further manufacturing that have a different form, configuration, utility, composition, or character.

Too often, purchasing and accounts payable employees are faced with decoding and applying these definitions with limited input from operations staff. This practice results in both underpayments and overpayments of sales tax.

For helpful tips in identifying your state’s manufacturing process, read this article:

Manufacturing Exemptions: Understand State Production Points

2) Does the jurisdiction where the good is being used provide an exemption?
Each state uniquely specifies certain equipment and supplies as being exempt. For instance, while the state of Georgia exempts qualifying manufacturing equipment from sales tax, the state of Alabama will require sales tax to be paid at a reduced rate for the purchase of eligible manufacturing equipment. Given the variability between states, it can be challenging to identify purchases related to manufacturing that are exempt from sales tax.

3) What certificate do I need to provide my vendor in order to take advantage of this exemption?
Once the applicable sales tax exemption is identified, a manufacturer needs to provide the vendor with the appropriate exemption certificate in order to achieve the goal of reducing expenses and thus increasing the bottom line.

Finding the correct exemption certificate may be confusing. Many state revenue departments offer numerous certificates, including the following:

Resale – Provided by customers when purchasing goods to be resold.
Entity based – Provided by nonprofits, churches, schools or government organizations for the purchase of goods.
Use based – Provided by manufacturers, miners, farmers, etc. when purchasing goods used in an exempt process.

Three Key Takeaways

• The manufacturer has the responsibility to provide vendors with valid exemption certificates. New certificates must be issued if information is wrong. Address and name changes are common updates that require re-issuance of these documents. Certificates may expire.

• Your vendors are obligated to collect sales tax on sales of tangible property unless they have valid exemption certificates.

• Due to the Wayfair ruling that took place June 21, 2018, more vendors are registering to collect sales tax. Vendors who may have not been charging sales tax pre-Wayfair may now be charging sales tax.

Expert Advice

Exemption certificate management is one important aspect of ensuring sales or use tax is not overpaid. Improving compliance procedures and use tax accrual processes, along with proper remediation of historical exposure issues are critical to improving your company’s bottom line. For more information about addressing any of these areas, visit the Cherry Bekaert website.

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Chris Grimes, CPA
Written by Chris Grimes, CPA
Chris joined Cherry Bekaert in 2018 and brought with him a detailed understanding of sales and use tax lookback reviews, audit defense, matrices, memorandums, nexus studies and voluntary disclosures. Chris has experience in several industries, including retail, e-commerce, manufacturing, technology, banking and insurance. He holds a Bachelor of Business Administration with a designation in accounting. Additionally, Chris is a certified public accountant for the state of Georgia and is involved in several professional organizations (Institute for Professionals in Taxation, The Georgia Society of CPAs and American Institute of Certified Public Accountants).

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