California Sales Tax Exemption Developments for Manufacturing

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The manufacturing sector is often one of the most targeted industries by states to grow their economies and increase the number of good paying jobs for their residents. For years, one of the ways states have incentivized manufacturing companies to create and/or expand operations, assist in managing their operating costs or otherwise stay competitive with other states is to provide a variety of manufacturing sales tax exemptions. Minnesota is one of the states that is reducing sales tax rates that directly affect the manufacturing industry. This is how:

Minnesota – Equipment Can Be Purchased Exempt Starting July 1, 2015

Through June 30, 2015, sellers of exempt capital equipment to Minnesota manufacturers were required to collect and remit the Minnesota sales tax11. The Minnesota manufacturers would then file refund claims for the sales taxes paid to their equipment suppliers. This was a cumbersome process put in place to help reduce the benefit of the exemption (not all manufacturers will go through the effort of filing refund claims), create additional revenue through assessments (equipment sellers would be assessed interest and penalties for their failure to collect and remit taxes on otherwise exempt equipment) and of course to create additional cash flow and related interest income for the state due to receiving and holding on to cash revenues that would otherwise never have flowed into its coffers.

Thankfully, this cumbersome process has finally been eliminated. Beginning on July 1, 2015, the sale of manufacturing equipment is exempt.  Equipment that qualifies for the exemption includes machinery and equipment used to operate, control or regulate the manufacturing equipment, research and development, design quality control and testing equipment and environmental control devices.  Materials used to construct manufacturing equipment foundations and special purposes buildings for the manufacturing process are also exempt.  The manufacturer should provide the equipment supplier a completed ST3 exemption certificate.  If sales taxes were paid on exempt equipment, a refund can be requested using Form ST1112.

One thing to note: Each state often has its own unique application of these exemptions. This can create opportunities in select cases to possibly utilize exemptions which were previously thought not applicable.  Unfortunately, it also creates pitfalls where exemptions are improperly used leaving manufacturers vulnerable to significant assessment of state sales and use taxes, plus related interest and penalties. Because of these complexities, manufacturers should perform periodic reviews of their sales and use tax procedures to make sure exemptions are appropriately taken on purchases and that sales taxes are collected or exemption certificates received from customers in states where physical presence exists.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.


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