Our friends at Insight Accounting (a northern Indiana-based accounting firm) recently wrote a clear, concise rendering of the two key rules that will help manufacturers determine when and how their equipment, materials and supplies are tax exempt. We’re pilfering much of the article for your benefit today, with all due credit to Insight Accounting and in particular to the article’s author, Insight Director Christine A. Lauber, CPA,
In brief, “manufacturing operations change tangible personal property from one form to another resulting in a product that is distinctive in character and use,” writes Lauber. To determine sales tax exemption status then, two rules must be followed:
- Determine when manufacturing begins and ends. It is only the items in between that are tax exempt.
- Determine if the machine, tools and equipment “have an immediate effect on the article being produced and are an essential and integral part of an integrated process.”
For example, take a lift truck. Lauber cites these examples: If it takes raw material off a truck and stacks it up, it’s taxable. Once that material moves into production and the material needs to be moved from one operation to another, the lift truck is non-taxable. When the truck takes the items off the end of the production line and stores them, it is taxable again.
Clothing, tools and supplies for workers used for their comfort and convenience when they can do the job without them is taxable; whereas “safety clothing or equipment that is required to allow a worker to participate in the production process without injury or to prevent the contamination of the product is exempt.”
Other exemptions include storage equipment used for storing WIP not yet completely produced and testing/inspection items that take place within the integrated production process. Materials physically incorporated into the final product also qualify for exemption, as do materials consumed in the manufacturing process. Packaging materials are exempt if the product is placed in the materials and the packaging is sold with the contents (returnable packaging on the other hand is taxable).
Following the logic of these examples illustrating the two rules should help manufacturers distinguish between taxable and exempt items (which can be purchased with your exemption certificate). If these two basic rules don’t clarify your options, then of course it’s time to consult your accountant.
Or, consider contacting Christine or our friends at Insight at any of the links herein.