Sales Tax Exemptions for Material Handling Equipment
Material handling equipment, such as forklifts, conveyors, pallet jacks, carts, cranes, hoists, and lift trucks, is a major expense for many manufacturers. The cost of purchasing, maintaining and repairing this equipment takes a significant chunk out of a company’s budget. Material handling equipment is essential to any manufacturer. It must be well maintained and running at peak efficiency. Expenses add up quickly, but significant cost savings can be realized if your employees receive sales tax training about taking advantage of sales and use tax exemptions.
At first glance, material handling equipment appears to be taxable since it is used throughout the manufacturing plant. Many states, however, are offering sales and use tax exemptions for this equipment when used in the manufacturing process. The trick is understanding each state’s qualifications for these exemptions.
Here are the two most important considerations when determining if material handling equipment will qualify for the sales tax exemption:
1) What are the beginning and ending points of your production process?
2) Where and how is this equipment being used?
As with most sales and use tax questions, the answers always depend on the state. Some states only allow an exemption if the equipment is used from the first processing machine to the last processing machine. Other states have broader definitions and will exempt the equipment if it is used from storage to storage.
For example, in states that exempt material handling equipment from the first processing machine to the last processing machine, an exemption may be available for a forklift (or other material handling equipment) that is used to move the product from machine to machine beginning with the first processing machine and ending when the finished product is complete at the last processing machine. In this case, forklifts that take raw materials to the first machine or take the finished product to storage will be taxable.
Other states exempt material handling equipment that is used from storage to storage. In this case, an exemption may be available for a forklift (or other material handling equipment) that is used for the following reasons:
1) moving raw materials from storage to the first processing machine
2) taking work-in-progress from machine to machine
3) moving the finished product to finished goods storage
Determining whether forklifts and other material handling equipment are taxable or exempt is complicated because the equipment may be used during the manufacturing process as well as before or after the manufacturing process. Many states will allow a partial exemption for dual use, while others only allow the forklift to be 100% taxable or 100% exempt.
One way to simplify the decision-making process and minimize mistakes is to train key employees about sales and use tax best practices. Training can be completed in a few hours when conducted by sales and use tax experts who specialize in manufacturing operations. Material handling equipment exemptions (as well as tips to identify when the manufacturing process begins and ends) is always addressed during Cherry Bekaert's sales tax training.
Try to answer these Six Questions Every Manufacturer Should Ask, to help make sure you are taking advantage of all sales tax savings available to manufacturers.