Manufacturing Exemptions 101: Cut Costs, Boost Profits

Sales tax exemptions can significantly benefit manufacturing businesses by lowering operating costs through reduced cost of goods sold, encouraging investment in machinery by cutting purchase prices by thousands of dollars, and enabling manufacturers to offer more competitive product pricing.

Sales tax exemptions enable eligible individuals to buy qualified products or services without paying tax, provided they are used in a specific, approved way. While the exact criteria differs from state to state, manufacturing exemptions typically allow manufacturers to purchase machinery, equipment, and raw materials tax-free when these items are used directly in the manufacturing process. These exemptions often extend beyond production itself to cover pre-production activities like research and development, as well as post-production tasks such as quality control and packaging.

Below are a few state-specific manufacturing exemptions that highlight the diversity in regulations, with some states offering only partial exemptions.

Alabama: The state rate for manufacturing machinery is 1.5 percent. Tangible personal property used as an ingredient or component part of manufacturing, and the withdrawal, use, or consumption of a manufactured product by the manufacturer for use in quality control testing are fully exempt from tax.

California: Manufacturers purchasing machinery and equipment, operation equipment, and property used in pollution control, can do so at a reduced rate of 3.3125 percent. Consumables with a useful life of less than one year are not considered qualified property.

Mississippi: Manufacturers can purchase or rent machinery and machine parts used directly in the manufacturing process at a reduced rate of 1.5 percent. Purchases of raw materials, catalysts, processing chemicals, welding gases by a manufacturer are fully exempt.

Ohio: A manufacturer that alters the form of a material in preparation for sale is able to qualify for this exemption.

Texas: The manufacturing exemption applies to manufacturers who purchase machinery or equipment that causes a physical or chemical change in a product. However, hand tools are not included in this exemption.  

Manufacturing exemptions are granted when a manufacturer presents the seller with a properly completed manufacturing exemption certificate. While the specifics of these certificates vary by state, they typically include key details such as the purchaser’s and seller’s names and addresses, a description of the items being purchased, the type of business, sales tax account identification, and the purchaser’s signature and date.

It’s crucial for manufacturers to stay informed about current tax regulations to ensure compliance, minimize risk, and identify any changes in exemption criteria that may affect the eligibility of their purchases.

Contributor: Lauren Gordon

How Can We Help?

Allyn’s tax team is staffed with seasoned tax professionals and consultants experienced in all aspects of Federal, multi-state, and local tax compliance and consulting for large US and global corporations. We use that experience to your advantage.

Allyn manages exemption and resale certificates in every applicable state. Allyn offers web-based software that conveniently stores exemption certificates in an easy to access platform. Allyn’s Tax team reviews each certificate for validity and accuracy upon receipt and ensures certificates are maintained, renewed, and audit ready.

Contact us and we can provide a customized cost-effective solution to meet your company’s needs. For further information on Allyn Tax services, please contact: tax@allynintl.com.

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