Sales Tax Refund Opportunities for Manufacturers

by: Smith and Howard

April 28, 2016

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Manufacturing Exemptions – Items Used and Consumed in Manufacturing

Most manufacturers understand that they are exempt from paying sales tax on items that become incorporated into the product that is eventually sold to a customer. However, what about the sales tax paid on the purchase of machinery and equipment that is used within a facility – directly or indirectly on a product for resale – and necessary to their manufacturing process? Changes to sales tax exemptions over the past several years have left some murky interpretations and guidance as to exactly what activities and materials are exempt in the manufacturing process.

Sales tax refund opportunities for manufacturers are one of the best ways for both small and large businesses to reduce up-front costs on business purchases and maintain a healthy product inventory. Many types of machinery and equipment are exempt from both state and local sales taxes. Together, the exemptions can amount to a 5-8%savings on purchases in some jurisdictions.

Yet, one of the greatest opportunities for manufacturers to save money is often underutilized.  Are you sure your business is taking full advantage of your manufacturing sales tax exemptions?

Changing Regulations – What is Exempt?

Part of the problem regarding the application of these exemptions is that the rules are constantly changing. That makes it challenging for busy manufacturers to know what’s covered, what might have been included with a recent law change or interpretation or what types of exemptions might have expired. Most businesses know they shouldn’t pay taxes on large capital manufacturing purchases like plant machinery and equipment, but they may not know they are exempt from paying for materials used in repairs of this equipment, or potentially consumable supplies like towels, safety equipment, lubricants and even boots. Yet all of these things are considered by some jurisdictions to be “necessary and integral” to the manufacturing process.

Here’s a quick snapshot of five exemptions that have changed significantly in Georgia during the past 24 months: 

  1. Raw Materials and Packaging: While this has been in place for a few years now, the exemption has been modified. Manufacturers can exempt certain packaging material, cellophane, dunnage and even pallets used in the packaging process for shipping product to customers.
  2. Consumable Items: In 2014, consumable items language was added to the definition of “equipment” as an exemption recognized by the Department of Revenue for manufacturers. Consumable supplies, or tangible personal property consumed or expended during manufacturing, is now included in the manufacturing exemption.
  3. Utility Exemption: Phased-in exemption initiated in 2013 (25%), then 50% in 2014, 75% in 2015 and 100% exemption of sales tax on energy used or consumed in the manufacturing process.
  4. Safety Equipment and Uniforms: Items that provide safety to an employee or protect the quality and integrity of the product could be exempt from sales tax.

Getting Your “House in Order” Before Filing a Claim

While all of these exemptions may sound very enticing and straightforward, we do not recommend that every manufacturer rush to file a sales tax refund. When you file a refund claim, you need to know that your sales tax process is clear from any outstanding issues that may arise from the Department of Revenue reviewing your account. If this refund claim potentially triggers an audit, which it can, you must to be prepared to defend an inquiry adequately and accurately. 

A professional advisor can help you determine why you overpaid in the first place. You’ll also want to be sure you are charging and collecting tax where appropriate and collecting, remitting and filing returns when necessary.

If everything checks out, it’s fairly straightforward to file a claim for a line item refund. If you bought something that should have been exempt under a manufacturing exemption statute, professionals, such as the team at Smith and Howard, can assist your business in filing a claim for your refund in a number of jurisdictions. Most jurisdictions allow for a multiple period lookback for refund analysis and claims with regards to sales tax procedures.

Tim Howe, CPA, author of this article, leads the firm’s Sales and Use Tax practice. If you have questions about manufacturing sales tax exemptions, you may reach Tim at 404-879-3320 or by filling out the contact form below.

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If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.