Many manufacturers, both small and large, have an opportunity to reduce their overall tax burdens by taking advantage of sales and use tax incentives offered by states and municipalities.

During the ordinary cycle of procurement and sales and use tax compliance, many manufacturers lack the specialized knowledge needed to identify available credits and exemptions. As a result, it’s not uncommon for a middle-market manufacturer to forgo tens of thousands of dollars in sales and use tax savings annually. In today’s competitive business environment, it’s vital that you understand the nuances of state and local tax codes and take full advantage of all incentives and exemptions to which you are entitled.

One of the difficulties in identifying tax-saving opportunities is that the scope of various exemptions and credits is not always clear. In a number of states, for example, acquisitions of machinery and equipment used primarily in the manufacturing process are exempt from sales and use taxation. Unfortunately, the meaning of "used primarily in the manufacturing process" is not always obvious. It may vary from state to state or even from court to court. Moreover, the body of law governing sales and use taxation is continually evolving through new legislation, regulations, and court decisions.

Be sure to consider all aspects of your business operation to determine whether sales and use tax exemptions apply. If you believe that your business is entitled to an exemption, by all means explore the possibilities.

Case Study

In one case involving an electronics manufacturer, the issue was whether the manufacturer was entitled to a tax exemption for special plastic corrugated trays used to protect fragile cathode ray tubes shipped from one of its manufacturing plants to another. Were these plastic trays exempt from sales and use tax as property used primarily in the manufacturing process? The court ruled in favor of the manufacturer, holding that the purchase of the trays was exempt. By presenting a compelling case that convinced the court to expand the state Department of Revenue’s interpretation of the scope of the manufacturing process, the manufacturer realized a substantial savings.

Investigate All Possibilities

Manufacturers are being courted aggressively by states and municipalities and the array of tax credits and incentives being offered to entice manufacturers into relocating (or staying at an existing location) can be impressive. Increasingly, sophisticated manufacturers are evaluating these incentives in determining operating locations. For example, many states and municipalities offer lucrative credits and exemptions such as:

• Real property tax exemptions
• Qualified investment credits
• Research and development credits
• Training expense credits
• Credits for establishing vocational programs
• Enterprise zone credits

If you’re considering a relocation, you may even be able to take advantage of incentives negotiated specifically for your company. A study of the incentives available at alternative locations is an excellent way to quantify the advantages of one site versus another. These incentives are not reserved for Fortune 500 companies. Knowledgeable small and mid-sized manufacturers are reaping millions of dollars in tax savings by taking advantage of these opportunities.