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Manufacturing Exemptions: Understand State Production Points

Stop-Dominoes_TS-469752653_BW_MDThe first step to understanding manufacturing exemptions is to know how the state defines the beginning and ending points of production.

Most states give manufacturers tax exemptions for machinery and equipment; however, these exemptions rarely encompass everything between the plant’s four walls. Not knowing where the exemptions start and end often results in missed opportunities for tax savings or hidden liabilities.

Which Theory Does Your State Follow?

States generally follow one of two theories – the Integrated Plant Theory or the Direct Use Standard.

Integrated Plant Theory: Machinery and equipment that is necessary and essential to the manufacturing process can be exempt from tax.

Direct Use Standard: Only the machinery and equipment directly used (i.e., directly making a change to the physical product) falls within the exemption.

Why do manufacturers need to know which category their state supports? The philosophy of the exemption impacts the hidden areas that most often trip up companies. Take, for example, material handling equipment. States have different standards of when the production process begins and ends. Understanding these guidelines is critical to managing  taxability. Are forklifts taxable or exempt if they are used to unload raw materials and take them to the production line? What if they are used to take finished goods into storage?

Knowing how broad or how limited the machinery & equipment exemption is can also impact other significant areas such as: packaging equipment, plant lighting, maintenance equipment, foundations/catwalks and safety equipment.

Although statutes rarely give a definitive answer, the nuances can be found by looking at regulations, DOR technical advisements and court rulings. Providing sales tax training on these topics to key employees can save your company thousands of dollars.

Advice for Training Employees

Updating key employees about current state sales tax regulations and teaching how these laws apply to your operations can save time and money. Different types of training are available from state revenue departments, accounting firms and independent consultants. Get Cherry Bekaert’s free cheat sheet to learn how to compare courses and select the best training for your company.

Sales Tax Training for Manufacturers CHEAT SHEET (shhh!)

The best approach is to train purchasing and plant personnel on the basics of sales and use taxes so they know what information is needed to make proper tax decisions. The gold standard is for these employees to understand the sales and use tax rules and use this knowledge when making purchases. The silver standard is for purchasing and plant personnel to be aware of sales and use tax basics so they can provide the necessary information to A/P, allowing them to make correct determinations. By working together, purchasing and accounts payable employees can efficiently make good decisions and save the company significant tax dollars.

For more information about sales and use tax training offered by Cherry Bekaert, visit our website.

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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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