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Maintenance for Manufacturers: The Black Hole for Sales Tax

Updated March 2021 need to maintain an inventory of maintenance, repair, and operating (MRO) supplies to keep machinery and equipment running at peak efficiency. Unfortunately, this is an area where sales and use tax is frequently overpaid. Follow this advice to avoid this black hole of sales tax overpayments.

Maintenance, Repair, and Operating Supplies
Maintaining equipment in good operating condition for optimal levels of productivity requires plant personnel to complete repairs with minimal disruption to the production line. For this reason, manufacturers often maintain a storehouse of maintenance, repair, and operating supplies ("MRO") to avoid any production stoppages. Common examples of MRO items include:
Machine parts
Safety equipment
Cleaning products

All manufacturers typically purchase a high volume of MRO items on a monthly basis which can be used both in the production process (spare parts, consumables) and for general plant maintenance. These types of purchases are very often purchased from “everything under the sun" vendors who sell a variety of equipment parts and general maintenance items. The most popular vendors that fall under this category are W.W. Grainger, McMaster-Carr, Motion Industries, and MSC Industrial Supply. 

Maintenance vs. Repair
Depending on the states where manufacturing operations are located, your company could be missing out on significant tax savings if not taking advantage of sales tax exemptions for MRO items.  Ask yourself these questions:

1) How expansive is the scope of the sales tax exemption?
2) Does it include repair parts for manufacturing equipment?
3) Does it include maintenance equipment and supplies?

Based on how MRO items are used determines whether or not they qualify as tax exempt in a particular state. If the personnel responsible for MRO purchases are unaware of the specific exemptions, too often exemptions are missed or an audit results in significant liabilities because not enough tax was paid. The personnel running the plant operations should have a solid understanding of the taxability of all MRO items.

Procedures for Taxability Determination
There are three scenarios we consistently find where manufacturers overpay or underpay regarding MRO items.

1) Some companies charge repair parts and other exempt supplies to the “maintenance” general ledger account at the time of purchase. For those states where maintenance is taxable, sales tax is often paid to the vendor or use tax is self-accrued in error.

2) MRO items may be charged to a “stores” account without knowing the specific use of the items at the time of purchase. In this scenario, it is impossible to know if tax is due. Companies typically lean towards being conservative and pay sales tax to the vendor or self-accrue use tax at the time of purchase, often resulting in overpayments.

3) Finally, manufacturers with multiple locations that operate under a centralized accounting system face common problems related to tax underpayments or missing tax saving opportunities. We see this all too often where the accounts payable staff is not near the manufacturing plant, does not know where MRO items are used, and most importantly,  is not familiar with the scope of the manufacturing exemption.

For information about common problems to avoid with centralized accounting systems, read this blog:

Use Tax Pitfalls of Centralized Accounting for Manufacturers

Without a good process in place to handle the sales & use tax complexities around MRO items, it is very common for maintenance and repair items to fall into a black hole.

How to avoid the MRO Black Hole
The first step is to determine if your company has been overpaying sales tax on MRO supplies, and if so, how much? It may be worth recouping these overpayments from the state to reinvest in your company’s growth projects. Next, key employees need to be trained how to best determine the taxability of these products. Finally, processes should be set up to streamline the sales tax decision-making procedures.

These three steps can be accomplished during a reverse audit by sales tax experts. This contingent fee-based service will identify overpayments, help secure refunds and train employees to avoid future mistakes.

For more information about Cherry Bekaert’s reverse audit services, click here. Not sure if your company is overpaying sales or use tax? Check out this checklist:

20 Signs It's Time for a Sales Tax Tune Up

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Lauren Stinson, CMI
Written by Lauren Stinson, CMI
As a Principal with Cherry Bekaert, Lauren serves as the National Leader for the Sales & Use Tax practice within the Firm’s State & Local Tax group. Based in Cherry Bekaert’s Atlanta practice, Lauren is an expert on sales and use tax issues that directly impact manufacturers, technology businesses and eCommerce sellers on the state and national levels.

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