IPT 2016 Sales Tax Symposium Indianapolis, Indiana September Manufacturing

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1 IPT 2016 Sales Tax Symposium Indianapolis, Indiana September Manufacturing

2 Presenters Dan Megathlin Crowe Horwath LLP Direct Line: Jim San Fillippo BDO USA, LLP jsanfillippo@bdo.com Direct Line:

3 Manufacturing in General Many states have some type of manufacturing incentive or exclusion to attract or retain business and create a positive business environment Yet, states differ on the nature, scope, and application of the exemptions provided to manufacturers.

4 Manufacturing in General What is Manufacturing? The term manufacture has different definitions: assemble, compound, convert, fabricate, manufacture, mine, process, refine, etc. One state s definition: Manufacturing is production by machinery of a new article of personal property with a different form, use and name by a process popularly regarded as manufacturing

5 Manufacturing in General Who is a Manufacturer? States differ on the types of industries and manufacturing operations that qualify. Don t assume manufacturing definitions for sales tax applies to property tax, corporate income tax, etc

6 Scope of Manufacturing varies by state Determining Where Manufacturing Begins and Ends is Key Where Does Manufacturing Process Begin? Typically begins with conveying raw materials from plant inventory to place where work is performed in the same plant.

7 Scope of Manufacturing varies by state Determining Where Manufacturing Begins and Ends is Key Where Does Manufacturing Process End? Manufacturing process typically ends with conveying finished products to the point of first storage in the same plant

8 Scope of Manufacturing Scope of Manufacturing typically includes: Conveying work-in-process directly from one manufacturing process to another in the same plant Testing or inspecting the personal property within the manufacturing process Storing work-in-process in same plant where manufacturing occurs Assembling finished units of personal property Packaging a new article of personal property, if done by manufacturer or person on manufacturer s behalf, and packaging becomes part of new article offered for sale

9 Scope of Manufacturing Scope of manufacturing typically does not include: Storing finished goods Delivery to or from the plant Repairing or maintaining plant facilities Plant heating or air conditioning

10 Scope of Manufacturing Example: Cheese Plant Manufacturing process in cheese plant where raw milk is converted to cheese may include aging and cutting and wrapping the cheese Example: Meat Processing Plant Manufacturing process may include slaughtering and dressing of animals

11 Manufacturing Exemptions What Exemptions Apply to Manufacturing? Machinery & Equipment Repair, maintenance, and service of exempt M&E Raw Materials - Ingredients or Component Parts Consumables items consumed or destroyed in mfg Property Used in Qualified Research Waste Treatment Facilities Pollution Control and Pollution Abatement Utilities Fuel, electricity, other fuels Potentially the building itself depending on the nature of the manufacturing Exemptions vary by state

12 Exemption for Manufacturing Machinery and Equipment Machinery and equipment: used exclusively, predominantly used directly in manufacturing Integrated plant test essential to production Repair parts or replacements thereof Safety attachments on exempt M&E Repair and service of exempt M&E

13 Exemption for Manufacturing Machinery and Equipment Example of Non-Exclusive Use: Forklift used on a production line but also used regularly to move products around in warehouse Quality Control Testing equipment used to test products throughout the step-by-step mfg process and also used to test incoming raw materials

14 Exemption for Manufacturing Machinery and Equipment Examples of Direct Use: Equipment used in step-by-step production process (e.g., furnace used in forge shop) Equipment to clean product Cranes used to move product along production line Work-in-process storage bins, racks, tanks Air compressor used to provide compressed air to production line and production equipment/tools On-line packaging and shipping equipment

15 Exemption for Manufacturing Machinery and Equipment Examples of Non-Direct Use: Equipment to clean manufacturing area or other equipment Cranes used to unload mfg machines and set in place and for maintenance Storage racks, storage tanks that hold raw materials General lighting Floor scrubber or sweeper Plant heating and air conditioning for ee comfort Communication, safety, fire prevention

16 Exemption for Manufacturing Machinery and Equipment Equipment That May or May Not Be Exempt: Testing/Quality Control Cleaning Equipment Equipment to clean product Equipment to clean manufacturing area or other equipment

17 Exemption for Manufacturing Machinery and Equipment Equipment That May or May Not Be Exempt: Waste Disposal Equipment to remove waste from production line (e.g. floor scraps) Equipment to remove by-product scrap Example: Vacuum used to remove foreign particles from product prior to applying a finish

18 Exemption for Manufacturing Machinery and Equipment Equipment That May or May Not Be Exempt: Plant Heating or Air Conditioning Heating or AC for comfort of employees Essential to control temperature, humidity or flow Example: static free environment for making printed circuit boards

19 Exemption for Manufacturing Machinery and Equipment Equipment That May or May Not Be Exempt: Communications Radio head sets to communicate between workers on production line

20 Exemption for Manufacturing Machinery and Equipment Equipment That May or May Not Be Exempt: Lighting General lighting Lighting that directly transforms or is essential to product (heat or drying lamps, reveal flaws in product)

21 Exemption for Manufacturing Machinery and Equipment Equipment That May or May Not Be Exempt: Safety Attachments Safety attachments for exempt manufacturing machines Examples: machine guards, shields, noise inhibitors

22 Exemption for Manufacturing Machinery and Equipment Equipment That May or May Not Be Exempt: Small Tools Tools (drills, screwdrivers, wrenches, saws, hammers, etc.) used in manufacturing the product Tools used to repair and maintain equipment

23 Exemption for Manufacturing Machinery and Equipment Equipment That May or May Not Be Exempt: Foundations, Wiring, and Piping Concrete foundations for machines and wiring to service building Wiring or piping within or between machines

24 Exemption for Manufacturing Machinery and Equipment Equipment That May or May Not Be Exempt Computers Controls flow of material, or used to test or inspect during mfg process Controls machine and directs process of cutting, drilling, milling

25 Exemption for Manufacturing Machinery and Equipment Equipment That May or May Not Be Exempt Packaging Equipment Equipment part of manufacturing process Equipment used in warehouse to package equipment after it is stored

26 Repair to Manufacturing M&E Repair/Maintenance Equipment Equipment used to repair, maintain machines and equipment generally taxable Equipment used to make new machines or replacement parts may be exempt if manufacturing Repair Service to Manufacturing M&E generally exempt Tools Tools (drills, screwdrivers, wrenches, saws, hammers, etc.) used in manufacturing the product generally exempt though some states use useful life test) Tools used to repair or maintain equipment generally taxable

27 Exemption for Raw Materials Ingredients or Component Parts Ingredient or component part: any ingredient which is incorporated into the final product and becomes a component part of the product Example: paint and steel which becomes part of finished product.

28 Exemption for Consumables Items Consumed or Destroyed in Manufacturing Examples: Cutting and lubricating oils Chemicals Quality control testing supplies

29 Exemption for Consumables Items Consumed or Destroyed in Manufacturing Destined for sale requirement Product being manufactured must be destined for sale (i.e. sold) for ingredients and consumables to be exempt

30 Exemption for Consumables Examples: Quality Control, Testing Testing products drawn from production line, property that is consumed or destroyed Testing of raw materials prior to production, property outside scope of manufacturing

31 Exemption for Consumables Examples: Clothing and Wearing Apparel Worn for person s own safety or comfort Worn to prevent contamination of product Safety glasses: prescription

32 Exemption for Consumables Examples: Cleaning Chemicals Used for cleaning manufacturing M&E Used for cleaning walls and floors in manufacturing area

33 Exemption for Research and Development Research and Development Property consumed or destroyed in research and development Machinery and equipment, including attachments, parts and accessories, used in research and development

34 Exemption for Waste Treatment Facilities and Pollution Control or Pollution Abatement Waste Treatment and Pollution Control Property becoming part of an industrial waste treatment facility Pollution control or abatement air, water Utilities consumed

35 Exemption for Waste Treatment Facilities and Pollution Control or Pollution Abatement Waste Treatment What is an industrial waste treatment facility? A facility used exclusively and directly to remove, store or cause a physical or chemical change in industrial waste or contaminants for purpose of abating or eliminating pollution of surface waters, air or waters of WI if that property is not used to grow agricultural products for sale.

36 Exemption for Packaging and Shipping Exemption for Containers and Other Packaging, Packing, and Shipping Materials used to transfer merchandise to customers (bags, cartons, crates, pallets, shipping labels, banding, tape, shrink-wrap, etc.)

37 Examples of Exempt Containers and Packaging/Shipping Materials Cans in which canned goods, paints and other items are contained, boxes in which personal property are delivered to customers, ice cream cartons Bottles, bottle caps and cases used by breweries, dairies, or soda water manufacturers to transfer product to customers Barrels, kegs and similar containers used by breweries to transfer beer to customers. Shipping labels such as Fragile or Handle with Care, which are attached to containers used to transfer merchandise to customers Labels for envelopes used to transfer merchandise to customers Food dividers used to separate sections of containers used to transfer merchandise to customers

38 Exemption for Utilities Fuel, Electricity, Other Fuels Utilities consumed in manufacturing personal property Electricity Natural Gas Propane Welding Gases Diesel Fuel Other Fuels Energy study to determine exempt percentage

39 Exemption for Utilities Fuel, Electricity, Other Fuels Utility Study Background Many states define tangible personal property (TPP) to include utilities - electricity, natural gas, steam These utilities (TPP) are generally subject to sales and use tax when purchased for use by a company Utilities charge sales tax unless provided with an exemption certificate or a company may self-assess use tax if using a direct pay Many states provide exemptions or reduced rates for utilities if used directly in manufacturing or other qualifying areas: electricity natural gas other fuels industrial gases, welding gases, propane, diesel fuel, etc. Utilities spend can be significant

40 Exemption for Utilities Fuel, Electricity, Other Fuels Utility Study Utility study to document the percentage of fuel and electricity used in manufacturing or other qualifying area. Predominant Use States some states allow you exemption for 100% of fuel or electricity if a certain threshold is met (e.g., > than 50% usage in mfg) Actual Use States some states allow you exemption for the percentage of fuel or electricity actually used in manufacturing or other qualifying area Certified Study some states require an engineer to certify study.

41 Exemption for Utilities Fuel, Electricity, Other Fuels Various Methods for Calculating Exempt Percentage Square Footage Manufacturing Areas vs Non-manufacturing Areas Manufacturing area usage is typically higher than non-manufacturing Not Accurate Reflection Consumption Ratings Non-Manufacturing Equipment More Expedient than Below Methods but Not always accepted by states Consumption Ratings Manufacturing Equipment Requires Significant Effort First Time Prepared (minimal time thereafter) Generally Accepted by states Utility and Metering Analysis Special metering Planned shutdown holiday or shutdown

42 42 Questions?

MINNESOTA DEPARTMENT OF REVENUE

MINNESOTA DEPARTMENT OF REVENUE Modification of Revenue Notice #97-05 Revenue Notice #97-05: Sales and Use Tax - Integrated Production Process for Tangible Personal Property* *With modifications shown