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Manufacturers Should Take Advantage of State Sales and Use Tax Exemptions
The tax coffers of many states are still showing the effects of the Great Recession, even though it officially ended two or three years ago. Most states have boosted revenues through increased audit activity, broadened interpretations of tax laws, and narrowed interpretations of sales and use tax exemptions.
However, some states are providing more exemptions in hopes of attracting out-of-state companies and spurring organic growth. This is a more long-term approach, and if implemented successfully, could fill state coffers for years to come.
For manufacturers, sales and use tax exemptions represent bottom-line cost reductions that are just waiting to be claimed. Most companies are aware of some or all of the applicable exemptions in their state, but changing legislation makes it difficult to take advantage of all of them, especially when the company has locations in multiple states. However, if missed benefits are identified and adequately documented, refunds and tax credits may be available.
Common exemptions for manufacturers
Sales and use tax exemptions were originally intended to help eliminate double taxation by imposing levies only on the end-consumer of a product. Double taxation has not been eliminated, but it has been greatly reduced by “sale for resale” exemptions on the purchase of most raw materials used in manufacturing. Additional exemptions and qualifications vary from state to state, but some of the most common exempted items include:
- Manufacturing machinery and equipment used in research and development, quality control, testing, wrapping and packaging, pollution control, and recycling
- Computer software, hardware, and maintenance on manufacturing equipment
- Expenses to repair and replace exempt manufacturing equipment
- Tools used in manufacturing
- Chemicals used in the production process
- Utilities used in the manufacturing process
Some states are casting a wider net
Although many states have broadened exemptions for manufacturers over the past few years, some of the more notable changes have taken place in California, Arizona, New Mexico, Indiana, Wisconsin, and Florida.
|State||Sales and Use Tax Exemption|
|California||Qualified machinery and equipment purchased by manufacturers, effective July 1, 2014, through June 30, 2022.|
|Arizona||Effective August 1, 2014, certain electricity or natural gas for manufacturing or smelting operations.|
|New Mexico||Certain consumables (including electricity) that are used in the manufacturing process. The exemption increases from an initial 20 percent exemption starting on January 1, 2013, to a 100 percent exemption starting January 1, 2017.|
|Indiana||Research and development equipment for new products, new uses of existing products, or improving or testing existing products, starting July, 1, 2013.|
|Wisconsin||Machinery, equipment, tangible personal property, and certain items used by a manufacturer exclusively and directly in qualified research, beginning on January 1, 2012.|
|Florida||From April 30, 2014, until April 30, 2017, industrial machinery and equipment integral to a manufacturing operation is exempt when purchased by a manufacturer. This exemption removed a requirement that the machinery and equipment be purchased for a new or expanding business.|
Conduct a reverse audit to find overpayments
Monitoring exemptions from state to state is extremely complex, resulting in many companies overpaying on purchases. A reverse audit can assist manufacturers in assessing whether they are taking advantage of all available sales and use tax benefits. In a normal sales tax audit, the state is looking for underpayments or assessments, but in a reverse audit, the taxpayer (or taxpayer’s representative) is looking for overpayments of sales tax that can be refunded. The taxpayer should also look for underpayments to determine if they have an unrecorded liability.
Even the most sophisticated sales tax software cannot be accurate 100 percent of the time because of the amount of human interaction necessary in making taxability decisions. The goal of a reverse audit is to help manufacturers with the difficult task of determining if they are getting the full benefit of applicable tax laws.
Taxes are a cost of manufacturing that is impossible to escape, but with careful planning and proactive examination of past transactions, they can have a reduced impact on profitability.