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. The manufacturing exemptions do not provide a broad sales tax exemption, similar to what is provided for non-profit tax-exempt organizations, but instead typically focus on three areas: manufacturing equipment, materials that become a component part or ingredient of the product being manufactured or materials consumed and destroyed during the manufacturing process.
Manufacturing equipment often includes not only the equipment, but also the repair parts. Typically states require that the equipment be dedicated for use either principally (usually greater than 50 percent) or exclusively (usually greater than 90-95 percent) in the company’s direct step-by-step manufacturing process. The manufacturing process often starts when raw materials are removed from storage to the first step in the manufacturing process and ends when the manufactured product is placed in finished goods storage. Exempt manufacturing equipment may or may not include waste reduction and recycling, research and development and packaging equipment.
Inventory that will become a component or ingredient part of the product being manufactured is arguably already exempt pursuant to the various states resale exemptions, but many states leave no doubt providing specific exemption for materials that become a part of the product being sold.
The exemption for materials consumed or destroyed in the manufacturing process has not been adopted by all states that exempt manufacturing equipment. For states which do not provide this exemption, the main issue is whether or not any of the materials either somehow become a part or ingredient of the product as it is consumed, destroyed or if the materials actually cause some direct change or effect on the product being manufactured. In essence the attempt is to see if the consumed materials can qualify for exemption either under the state’s exemption for manufacturing equipment or for the component part or ingredient exemption mentioned above.
Washington – Developing Software Now Qualified Manufacturing Activity
Effective August 1, 2015, Washington expanded its sales tax exemption for manufacturing equipment to software developing companies that deliver the pre-written software they produce electronically. Such companies now qualify under the definition of a “manufacturer” for Washington sales tax purposes.
Florida Manufacturing Equipment Exemption from May 1, 2014 through April 30, 2017
It is not surprising that Florida has only provided a limited sales tax exemption, since the state does not impose a personal income tax. However, that has recently changed. Beginning on May 1, 2014 and ending April 30, 2017, the purchase and use of industrial machinery and equipment to be used at a fixed location for manufacturing purposes is exempt from Florida sales and use taxation.
Georgia has recently expanded its sales and use tax exemption for consumables. For 2015, energy used that is necessary and integral in the manufacturing process is currently in a phase-in period where 75 percent is exempt. Effective January 1, 2016, the exemption for energy consumed in the manufacturing process is fully phased-in. In addition, effective back to July 1, 2014 purchases of consumable supplies (not including energy) used in the manufacturing process are exempt as well. Previously the supplies had to become a part or component of the product at least during some part of the manufacturing process.