Posted on August 12, 2019
Across the United States, sales tax regulations and exemptions are determined by each individual state. Exemptions can range from a single item being considered non-taxable to an entire transaction exemption because of how the purchase is used by a business.
States look to manufacturers as a means of boosting their economy by bringing business and jobs to the area. Manufacturing is the process of converting raw materials into finished products to sell. As this is a highly sought-after industry, states create incentives for these types of businesses. Therefore, the manufacturing industry benefits from state sales tax exemptions.
These exemptions look at the taxability of sales and/or purchases of machinery used directly in manufacturing. Manufacturing exemptions are very complex, as each state has a different interpretation of how equipment, machinery, or supplies are used in the manufacturing process. For instance, taxability of materials that eventually become ingredients or component parts is one example of what is considered when reviewing these exemptions.
The state of Pennsylvania currently offers a sales tax exemption on equipment, machinery, parts, and supplies used directly in manufacturing. In addition, when a single piece of property is used in two different capacities (one used directly in manufacturing and the other is not) Pennsylvania determines the predominant use of the property. If the property in question is used in manufacturing or processing more than 50% of the time, it will be considered tax exempt. Maryland uses a similar process when reviewing manufacturing exemptions.
Additionally, there can be instances where a state offers a manufacturing exemption of sales tax but can impose an alternative tax that does not make the sale or purchase fully exempt. A prime example of an alternative tax can be seen in North Carolina. Prior to July 1, 2018, machinery directly used in manufacturing or processing was exempt from sales tax. However, the state imposed a privilege tax of 1% on the purchase or sale of the same machinery. As of July 1, 2018, North Carolina repealed the privilege tax and these items are now fully exempt.
Researching available manufacturing exemptions across the US can uncover tax savings for qualifying companies. Reviewing tax savings is an important business practice for not only manufacturers but all companies nationwide.
Tips for the Taxpayer
US business owners should review their practices to determine if their activities are defined as manufacturing. The definition of manufacturing will vary by state, as will the tax savings, due to the continuously changing exemption regulations.
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Contributor: Meghan O'Hehir
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