Culprits of Sales Tax Exemptions for Manufacturers

If you are in the manufacturing industry, there are many ways sales tax exemptions can positively impact your business, including cash flow and the overall experience of your customers.

Understanding “Manufacturing“

To properly manage manufacturing exemptions, it is important to understand how each state defines manufacturing in their statutes and regulations. While you may think that your business is not part of the broader manufacturing industry, you might be surprised at how some states include non-traditional manufacturing processes as part of manufacturing sales exemptions, which can make it tricky to create clear boundaries.

To determine boundaries, a deeper understanding into the entire value chain of your particular business processes may be required to determine the overall sales tax and compliance impact, including the subsequent risk of an adverse audit assessment.

Texas Manufacturing Exemption Case Study

For example, in Texas an entity processing food for sale is a manufacturer and may claim a tax exemption on purchases of equipment and other taxable items that qualify for exemptions under Tax Code, §151.318. Additionally, a restaurant may claim an exemption on the purchase of an oven, or a mixer directly used in the process of baking or mixing.

“…a restaurant, deli, or even a bakery might qualify for a Texas manufacturing exemption…“

What this means is that a restaurant, deli, or even a bakery might qualify for a Texas manufacturing exemption if the right circumstances are met and satisfied.

In a different scenario, caterers may also be able to take advantage of exemptions under the manufacturing umbrella per Regulation 34 TAC Sec. 3.293, which states: “A caterer may claim a manufacturing exemption on qualifying equipment, such as mixers, used to prepare the food.”.

These scenarios including other edge cases may not always be clear and can be tricky to understand and manage. For example: Texas allows manufacturers to claim an exemption when purchasing gas and electricity used in powering exempt manufacturing equipment other than equipment used in preparation or storage of prepared food (per Tax Code, §151.317). Therefore, a manufacturer such as a restaurant, deli, or bakery can potentially claim an exemption on equipment relating to the direct manufacturing process but may not necessarily claim an exemption on the energy used to power it.

Furthermore, as per Regulation 34 TAC Sec. 3.293 businesses that process food for sale may qualify for an exemption on wrapping and packaging used and may provide an exemption certificate to the supplier. However, while plastic utensils such as disposable cups, plates, or toothpicks may be claimed under a resale exemption those may not necessarily fall under the broader manufacturing exemption.

The key takeaway here is to understand the benefits, disadvantages, and potential risks when dealing with sales tax exemptions and to ensure that you are aware of regulations including potential culprits. While there is no quick shortcut, this can be done through a combination of ways, including thorough and ongoing research, teaming up with tax professionals, and employing a comprehensive exemption certificate platform such as EXEMPTAX to help your business streamline handling of resale and manufacturing sales tax exemption certificates so that you stay compliant and reduce your audit risk.

About EXEMPTAX

EXEMPTAX was founded in 2019. Shortly thereafter EXEMPTAX quickly grew its client base from small businesses to large enterprises. In 2021, EXEMPTAX began partnering with prominent CPA and tax advisory firms across the US on a white label basis. As of 2022, EXEMPTAX handles more than 1 million customer records on its platform and has helped many businesses across the US save money, lower tax exposure, and ultimately reduce their audit risk.