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Manufacturing is one of the most difficult areas of sales & use tax law to administer. The laws are frequently written in vague terms and, you may have a large amount of tax dollars at stake. The taxability of items used in manufacturing varies widely by state and it requires some very in depth research to determine how the laws may apply to you. Here are some key issues you need to be aware of in your research. First, the definition of manufacturing can vary by state. You must determine if your activity conforms to your state's definition of manufacturing to see if you may qualify for certain exemptions. Second, ingredients or component parts of your finished product are generally exempt from tax when you buy them. They are considered purchases for resale. Watch out though, sometimes you have to determine how much of that item actually ends up in the finished product. Third, read the statutes regarding manufacturing very carefully. For example, many states limit the exclusion for consumable items or machinery & equipment to only items that are used directly in the manufacturing process. So, certain items, such as quality control machinery may not qualify unless they are used to test every product on the production line. Lubricants used in the production machinery as it is operating may be exempt but cleaning chemicals used to clean the machinery once a week may not be since they are not used directly in the process. A trap that a number of companies fall into, in determining the taxability of their purchases, relates to when an item is necessary or essential to the production and is it exempt. In many states the true determining factor is if the item is used directly in the process.
Let's say you identify some items that, per your state's definitions, are used directly in the process. The next question is, what about items that are used both within and outside of the process. Some states say the item must be used "wholly and exclusively" in the process, meaning 100% of the time. Other states use words like "primarily or predominately", meaning that if the item is used more than 50% within the process it is still totally exempt. Yet other states provide for the "proportion" of the time the item is used in the process in which case you may have to allocate the cost of the item between it's use inside and outside the process to calculate a partial exemption. We keep using the term "in the process". What does "in the process" mean? What activities in your plant are considered "in the process"? Again this definition varies by state. In some states the items enter in the process when the materials are first received in the plant. In others, it starts when items are transferred from raw materials inventory to the first production machine. Frequently the process ends just before the item gets packaged in the container to be shipped. In other states the process may extend through packaging for shipping or even until it leaves the plant. Once again, thorough research must be done on a state by state basis to determine what the term "in the process" means to you in terms of tax exemption. Feel free to contact us to discuss your issues more thoroughly.
Feel free to call or e-mail us to discuss any tax issues you may have.
Sales Tax Advisors, Inc.
|Last modified on Sat Oct 18 2014 16:40:19 MST.|
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