Manufacturing

Manufacturing represents a key industry for TaxMatrix. Since our inception, we have worked with taxpayers ranging from small to mid-size manufacturers (over 30,000 sq. ft.) to some of the largest, multi-state manufacturers in the world. Sales & use tax recovery is a good business practice for driving dollars to your bottom and increasing cash flow. It is a worthwhile exercise designed to vet out overpaid tax on fixed assets and expense purchases to be refunded by the State and/or the vendor. Recovery gives the taxpayer peace of mind they are not leaving money on the table.

For manufacturing, and for research and development (R&D), taxability comes down to “how” and “where” those purchases are used. For states that qualify, the taxpayer must manufacture, fabricate or process tangible personal property for sale. The manufacturing equipment and other related purchases (safety gear, packaging, software, etc.) must work to fundamentally “change” TPP, otherwise it may not qualify. (Wholesalers/warehousing and some assembly or soft manufacturing may not apply depending on the state.)   

Types of Manufacturers that are good candidates for tax recovery:

• Food and Beverage
• Chemical
• Pharmaceutical
• Automotive
• Aviation & Aerospace
• Apparel
• Plastic
• Steel Foundries
• Mining & Mineral Extraction
• Restaurants (some states qualify restaurants as “manufacturers”
• Machine Shops
• Printing

Companies involved in manufacturing may have numerous sales tax exemptions availed to them depending on the State. In many cases, the tax code or law may be too ambiguous to decipher, so the company ends up not taking the exemption. In some states, the taxpayer needs to register as a particular type of company (i.e. R&D) to take the exemption. And companies that only perform R&D or manufacturing may have limitations compared to performing both under the same roof.

One important distinction that sometimes causes confusion is an R&D tax credit vs. a sales tax exemption. An R&D credit is a function of federal income tax by deducting expenses related to research and development. A sales tax exemption is based on state sales tax law exempting items for purchase.  

Exemptions for manufacturers (dependent on the state) are numerous:

• Manufacturing Equipment
• R&D Equipment
• Utilities used in Manufacturing and/or R&D
• Production Machinery Repair Parts
• Electrical Components, Screws, Nuts, Bearings, Washers, Filters, Pumps, etc.
• Production Tools and Supplies
• Pollution Control
• Kit Building Assembly
• Processing
• Material Handling Equipment, Repair Parts (if used within an Integrated Production Process)
• Forklifts, Cranes, etc. if used in manufacturing
• Abrasives, Grease, Fuel, Welding Gases, Gas Cylinders, Electricity, Natural Gas, etc.
• Cost of Goods Sold (COGS)
• Material incorporated into the final product
• Safety Clothing or Equipment
• Gloves, Coveralls, Ear Plugs, Hard Hats, Glasses, Safety Shoes, etc.
• Packaging Supplies
• Pallets, Boxes, Strapping, Wrap, etc.
• Property purchased solely for research and development
• Software used in manufacturing or R&D

Utilities are often an exempt expense, but sometimes have different implications depending on whether the company is performing manufacturing and/or R&D under the same roof. States deem these exemptions as either predominant use or apportionment.

For predominant use, if a certain amount of energy is used in manufacturing, the entire bill is exempt. For apportionment, only the amount used in manufacturing is exempt. Most states require a utility study to be performed to qualify for the exemption. Unless the manufacturing site has experienced an expansion or added equipment, a study can be used as a document of record for 3-5 years (dependent on the state) to keep taking the exemption moving forward.

R&D sometimes mirrors the same utility sales tax exemption as manufacturing, but again that depends on the state. A case in point is Indiana. If more than 50% of utilities are used in manufacturing, the whole utility bill is sales tax exempt in Indiana. However, if the company does not manufacture the product, only the portion used in R&D qualifies for the sales tax exemption.

Software is another frequent area that may not be clearly defined. If the software’s usage can be broken out for usage in manufacturing or R&D, it may be an exempt purchase. Other factors include whether it is custom or canned software, and where the software and hardware is purchased vs. where it is actually being used. The same goes for Interim Storage whereby products may have exemptions for simply being stored in a particular state but used elsewhere. Thus, it is important to note that analysis of where and how an item is being used is paramount in understanding if a sales tax exemption should be taken.

TaxMatrix services every U.S. taxing jurisdiction, but these are the states where we file the most refunds and defend the most audits for manufacturers:

STATE	STATUTE	FILING
Florida	3 Years	State
Georgia	3 Years	State
Indiana	3 Years	State
Maryland	4 Years	State
Massachusetts	3 Years	Vendor
Michigan	4 Years	State
Missouri	10 Years	State
New Jersey	4 Years	State
New York	3 Years	State
North Carolina	3 Years	Vendor
Ohio	4 Years	State
Pennsylvania	3 Years	State
Texas	4 Years	State
Virginia	3 Years	Vendor
Wisconsin	4 Years	Vendor