Sales tax exemptions are powerful tools that help manufacturers reduce costs, reinvest in operations, create jobs and boost productivity. In a competitive industry, understanding which exemptions apply and how to use them is essential.
Raw Materials and Component Parts
Many states exempt raw materials and components that become part of the final product to avoid tax pyramiding – where the same item is taxed multiple times during production.
Example: In Iowa, items directly used in manufacturing, including raw materials and components, are exempt.
Takeaway: This exemption ensures that manufacturers can acquire essential inputs without incurring additional tax costs, thereby reducing the overall cost of production. It is important to note, however, that what constitutes the “manufacturing process” (i.e. where the process starts and ends for sales tax exemption purposes) can vary by state.
Machinery and Equipment
Exemptions often apply to machinery, tools and even computers used directly in production.
Example: Some states offer full exemptions; California provides partial exemptions.
Takeaway: These incentives encourage investment in advanced technologies and help manufacturers stay competitive.
Utilities and Fuel
Manufacturers may qualify for exemptions on energy used in production, recognizing the high energy demands of manufacturing.
Example: New York exempts gas, electricity and steam used directly in production.
Takeaway: These exemptions help manage overhead and reduce operational costs.
Packaging Materials
Packaging materials used to ship finished goods are often exempt from sales tax.
Example: Illinois exempts items like pallets, crates and shrink wrap used to contain or protect products.
Takeaway: This reduces costs associated with delivering goods to customers.
Repair and Replacement Parts
States may exempt parts and services used to maintain or repair manufacturing equipment.
Example: Ohio exempts sales of parts, labor and services for machinery maintenance.
Takeaway: This helps minimize downtime and keeps equipment running efficiently.
Research and Development (R&D)
To support innovation, some states exempt purchases related to R&D activities.
Example: Massachusetts exempts lab equipment and testing devices used in R&D by manufacturers.
Takeaway: Encourages investment in new products and processes, driving long-term growth.
Pollution Control Equipment
To support environmental compliance, many states exempt pollution control equipment.
Example: Georgia exempts machinery used for pollution control in manufacturing.
Takeaway: Helps manufacturers meet environmental standards without excessive costs.
Sales tax exemptions for manufacturers are essential tools for promoting economic growth, reducing production costs and encouraging investment in new technologies.
Understanding and leveraging these exemptions can provide significant financial benefits, enabling manufacturers to reinvest in their operations, create jobs and drive innovation.
Scott Brawdy, CPA, is a principal with Honkamp. He can be reached at [email protected].
