New York State’s sales tax law provides manufacturers with the Production Exemption. This exemption applies when products are produced for sale by the following methods: manufacturing, processing, generating, assembling, refining, mining, and extracting. So if you produce tangible personal property, gas, electricity, or steam for sale, the exemption applies to you.
Covered by the exemption are the following items utilized in the production process:
- Machinery and equipment
- Raw materials
What is the production process?
The production process is the means by which products are created. Items that are used or consumed in production qualify for the exemption. A manufacturer should identify when production begins and when it ends. Why? Machinery and equipment used before production begins or after production ends are not exempt, e.g. a forklift that moves finished product from assembly to the warehouse or shipping, but never used during assembly, is not exempt from NYS sales tax.
Many items of machinery, equipment, and tools are used partially in production and partially in other functions. The exemption applies to these items if they are used directly and predominately (more than 50 percent of the time) in production.
What other purchases are covered by the exemption?
Here are some items that may qualify for the exemption, but are often overlooked by manufacturers:
- Installing, repairing, maintaining or servicing production machinery, equipment, parts and tools
- Energy used in production
- Research and development costs
- Cartons, containers and other packaging materials
- Labels and tags
- Machinery and equipment used in QC
- Waste treatment equipment
- Pollution control equipment
- Safety apparel and safety supplies
- Storage charges
- Food processing equipment
- Process piping
When do I apply for a refund?
If you have paid too much sales tax because you did not take full advantage of the exemption, you can apply for a refund or a credit from New York State within three years from the date the tax was payable.
The most common refund for manufacturers is from sales tax paid on electrical power used in production. This can be done with an analysis of the kWh consumed by production machinery versus the company’s total consumption.
Will applying for refunds and credits trigger an audit?
I have assisted many taxpayers in refund claims, and I’ve seen very few audits as a direct result of the claim. With that said, you are never safe from an audit. If you have a legitimate refund claim, however, and your sales tax procedures are sound, then the fear of an audit should not keep you from claiming what is rightfully yours.
Finally, too often the goal in sales and use tax compliance is focused on making sure that enough tax has been paid. An analysis of sales and use tax procedures may reveal that the company is paying too much tax.
Please work with a qualified tax consultant for an analysis of your sales and use tax procedures.
John Fontanella is a principal based out of our Syracuse, NY office.