Maximizing exemptions available for manufacturers

Authored by: Sarah Hopkins

As a craft beverage producer, there are a number of exemptions from sales and use tax that apply to manufacturers. Common exemptions apply to purchases of items for resale, which applies to all purchases that are incorporated into your product such as hops, flavorings, packaging, etc., as well as the exemption on paying sales tax on equipment used directly in manufacturing your product.

Another often-overlooked exemption applicable to manufacturers is the exemption for utilities consumed in the production process. Many states have an exemption for gas, water, electricity, etc. which is “consumed in manufacturing.” When you take into consideration the amount of water being used in production that either goes directly into the product or is lost in the production process, the amount of sales tax on this alone could be significant based on your level of production.

Fuel and electricity — used to provide facility heating, cooling, lighting, communications, storage space and other non-production purposes — does not qualify for the exemption as it is not being used directly in the production process. What will qualify are utilities used to directly operate the machinery and equipment necessary to manufacture your product. Many states also allow quality control and testing activities to apply to the production process.

To utilize the exemption, a utility study must be completed to help ensure the proper exemption amount is applied to account for non-production usage. In general, the production process begins at the time raw materials are removed from inventory and continues until the finished product is packaged to be sold or distributed. 

What if you haven’t taken advantage of this exemption, but it applies to your business? You may be able to file for a refund of the sales tax you have paid on utilities which qualify for the exemption. On average, you are able to claim a refund for a period of three years prior depending on the statute of limitations in the state you’ve paid the sales tax to. 

Again, each state varies in its application, as well as availability of the exemption for utilities used in the production process and the rules for your state should be reviewed.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.