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Understanding Consumable Supplies Sales Tax Exemptions for Manufacturers

Depositphotos_9661697_s-2015.jpgConsumable supplies offer great money-saving sales tax exemptions for manufacturers.   The challenge is understanding the fine print of your state's exemption qualifications for consumable supplies.

Here's some tips, based on your state's exemption requirements, to help you take advantage of sales tax savings for your consumable supply purchases.

 

“Consumable supplies” generally refer to tangible personal property that is consumed or used up during the manufacturing process. 

Most states handle sales tax exemptions for consumable supplies in one of these three ways:webinar - audit nightmares
  1. Many states only exempt consumable supplies if they meet strict requirements.
  2. Other states have much broader exemptions for these supplies.
  3. Some states don’t have an exemption at all for consumable supplies.   

Once you determine which of these three buckets your state falls in, here are explanations to help understand how you can qualify for the exemptions.  

States with Stricter Requirements
Many states have very specific requirements that must be met for consumable supplies to be exempt from tax.
 
In Arizona a consumable supply will be exempt from tax if it comes into direct contact with the manufactured product and causes a chemical or physical change. The Arizona law specifically states that chemicals used in manufacturing will be exempt if the chemical “involves direct contact with the materials from which the product is produced for the purpose of causing or permitting a chemical or physical change to occur in the materials as part of the production process.”

Another state that has very specific requirements is Tennessee. The Tennessee regulation states that “materials and supplies coming in direct contact with, and which are consumed within twenty-five (25) consecutive days, in the processing of manufactured products, are not subject to the sales or use tax.”

States with Broader Exemptions
There are many states that now have a broad exemption for consumable supplies. For example, in Georgia the regulation was expanded in July 2014 to include anything “necessary and integral” to the manufacturing process.

Michigan is another state that has a broad exemption for consumable supplies. The Michigan rule states that property “which is consumed, destroyed or loses its identity in a manufacturing process” is not taxable. In these states, an argument can be made for nearly anything that is used on or near the machinery and even for some supplies that are used offline.

There are also several states that do not have any exemptions for consumable supplies. A couple of these states are California and Florida.

On the Horizon
Luckily, many states are moving towards a necessary and essential method for exempting consumable supplies to make their laws more favorable to manufacturers. It’s important to know how your state treats consumable supplies so that you can take full advantage of the exemptions.

For more information about how manufacturers can take advantage of sales tax exemptions, watch our on-demand webinar: A Manufacturer's Road Map to Managing Sales and Use Tax

Check out our other blogs for more tips about sales tax savings for manufacturers.  

 

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Lauren Stinson, CMI
Written by Lauren Stinson, CMI

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