Manufacturing – An Overlooked Sales and Use Tax Exemption
Many states offer unique and specific manufacturing exemptions that can provide great savings to those who are aware of them. Sometimes these exemptions come about by the state alone, which is interested in enticing big businesses to move into the state to provide jobs to its residents. Other times, businesses already located within the state may lobby for an exemption to provide tax relief to their industry or to mirror exemptions in other states which are putting them at a disadvantage locally. Manufacturing businesses require expensive equipment to operate, so there is a great interest in passing these exemptions depending on what types of manufacturing is most prominent within the state.
As the needs and desires of states vary, so do their manufacturing exemptions. This article provides a brief and broad overview of the manufacturing exemptions in the five big states: California, Florida, Illinois, New York, and Texas. These overviews show how states can take substantially different positions on the taxability of items used in manufacturing. Taxpayers unaware of the many intricacies of the manufacturing sales tax laws within the states in which they do business could be missing out a large sales tax refund!
California exempts purchases of property incorporated into a manufactured article. For example, if you purchase plastic to be molded into piggy banks, that plastic is exempt. Probably because California is home to Napa, the wine capital of the country, there is a specific exemption for oak wine and brandy barrels as well. They do say that the barrel impacts the flavor, so perhaps it is property “incorporated” into manufactured articles after all, but California has left no ambiguity with their exemption.
Until June 30, 2030, California also partially exempts qualified purchases by qualified persons for qualified purposes. If you are purchasing or repairing items, such as machinery, that are used primarily for the purposes of manufacturing or production, those purchases should be evaluated for a California tax exemption. However, there are limitations on the partial exemption that involve price and the length of time the item must stay in California, among others. The laws are so technical, taxpayers will want to consult a sales tax professional to make sure they qualifyon all fronts for the exemption.
The largest exemptions for manufacturing in Florida are known as the “new or expanding business” exemption. In short, if industrial machinery or equipment is purchased for the exclusive use by a new business, or an expanding business, that manufactures, processes, compounds, or produces for sale items of tangible personal property at fixed locations in the state, then the purchase of that machinery is exempt from tax.
Between the new or expanding business exemption, virtually all equipment being purchased by manufacturers of tangible personal property should be exempt. However, the exemptions don’t stop there. Florida also has narrow exemptions specific to particular industries to capture other equipment and materials used by manufacturers in the state. For example, Florida offers broad exemptions for aquaculture, defense of space technology, and electrical or steam energy production.
The purchase of equipment is not all that manufacturers are concerned with, however. As a result, Florida offers exemptions for boiler fuels used in manufacturing, manufactured advertising materials, research and development, and even repair and maintenance of production machinery and equipment.
Purchases of machinery and equipment are exempt from sales and use tax in Illinois when the machinery and equipment are used primarily in the process of manufacturing or assembling tangible personal property for wholesale, retail sale or lease.
The manufacturing and assembling machinery and equipment exemption includes machinery and equipment that replaces machinery and equipment in an existing manufacturing facility as well as machinery and equipment that are for use in an expanded or new manufacturing facility. This contrasts to Florida’s exemption which is for new and expanding businesses, but not necessarily replacement machinery in an existing business.
Machinery and equipment used in the general maintenance or repair of exempt machinery and equipment or for in-house manufacture of exempt machinery and equipment is also exempt from sales and use tax in Illinois.
In New York, machinery and equipment used or consumed directly and predominantly in the production of tangible personal property for sale by manufacturing, processing, generating, assembling, refining, mining or extracting is exempt. In other words, the items purchased by the manufacturer must be immediately involved in the manufacturing process, the result of which must be the production of tangible items for sale. In addition, parts, tools and supplies can be purchased exempt from tax if they are used directly and predominantly in production.
Like other states, New York places an emphasis on when production begins, determining that it depends on the procedures used in the plant. For example, if raw materials are inspected or tested prior to placement into storage, then production begins with the items placed into the storage. Meanwhile, if the materials are unloaded into storage without those activities, then the unloading is the beginning of production. These odd delineations seem arbitrary but can result in substantial tax savings depending on what side of the line your purchases fall on.
As one of the largest manufacturing states in the nation, Texas broadly exempts manufacturing equipment. Manufacturing is defined by Texas law to include operations beginning from the first stage of production through completion, including packaging. Manufacturers buying equipment in Texas very well be making an exempt purchase and should consult a sales tax professional to confirm so.
Meanwhile, tangible personal property directly used or consumed in or during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale is exempt if the use or consumption of the property (1) is necessary or essential to the manufacturing, processing, or fabrication operation and (2) directly makes or causes a chemical or physical change to the product being manufactured, processed, or fabricated for ultimate sale or to any intermediate or preliminary product that will become an ingredient or component part of the product being manufactured, processed, or fabricated for ultimate sale. Therefore, most tangible personal property purchased by Texas manufacturers should be evaluated for a tax exemption.
States across the country are highly motivated to encourage manufacturers to choose their state as a business location. They do this by adopting manufacturing exemptions, to tempt manufacturers with tax savings. While exemptions do exist across states for equipment, repairs, and even some tangible personal property, the technicalities surrounding these exemptions are endlessly diverse between states. The difference between these technicalities can be substantial tax savings. Manufacturers who make their purchases the same way in every state should consult a sales and use tax attorney, who can identify possible refund opportunities lying within these technicalities buried in each state’s statutes.
Jeanette Moffa is an attorney who concentrates on state and local taxes at Moffa, Sutton, & Donnini, P.A. She is an executive council member of the American Bar Association Tax Section State and Local Tax Committee and the Florida Bar Tax Section. Ms. Moffa is an author of both the CCH’s Expert Treatise Library: Sales and Use Tax as well the ABA’s Sales and Use Tax Deskbook. In addition, her regular columns on state and local tax issues can be found in State Tax Notes and Actionline, a publication from the Florida Bar’s Real Property, Probate, and Trust Law Section. She also serves as assistant editor to the Sales and Use Tax Deskbook and Actionline. Ms. Moffa is a regular speaker at the American Bar Association Tax Section conferences, the Institute of Professionals in Taxation, the Florida Bar Tax Section, the Florida Bar Real Property, Probate, and Trust Law Section, and the FICPA. In her free time, she teaches as an adjunct professor at Broward College.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
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