The Ohio sales and use tax exemption for manufacturers allows businesses to purchase tangible personal property to be used or consumed in the manufacturing process, free from the Ohio sales and use tax. However, problems can arise when taxpayers apply the exemption with broad strokes, using it for items that don’t qualify. It’s important to understand when the Ohio manufacturers’ sales and use tax exemption applies and when it doesn’t.
While the Ohio manufacturing sales and use tax exemption is a fairly static rule, the Department of Taxation has become more aggressive in the auditing of manufacturers for use tax, and these audits have exposed issues with the manufacturing exemption. In order to avoid audit problems, make sure you understand the proper use of this exemption.
Double-check your use of the exemption
In October 2011, the Ohio Department of Taxation began a consumers’ use tax amnesty program. This expired on May 1, 2013, and any organization that doesn’t have an active Consumers’ Use Tax account may be subject to a state audit.
If an audit is possible, you must review your use of this exemption to uncover any errors in its application. A common problem is that organizations rely heavily on the use of a blanket exemption certificate when dealing with vendors, when some of the purchases should instead be taxable. Those taxable purchases should be reported under the Consumers’ Use Tax.
To properly use the exemption, you must address certain elements, including:
- Qualification – Who is qualified to use the manufacturers’ exemption? A manufacturer is a person engaged in manufacturing, processing, assembling or refining a product for sale. A manufacturing operation is a process where materials are changed or converted from one form to another and includes refining materials, assembling parts and preparing raw materials and parts to commit to the manufacturing process.
- Inclusion – The exemption applies to all materials that are incorporated as a component or constituent of a product to be produced for sale by manufacturing, assembly, processing or refining. The manufacturing operation begins when raw materials or parts are committed to the manufacturing process and ends when you have a completed product in the form and condition to be sold. All production machinery and equipment used in the manufacturing process also qualifies for the exemption, as well as the maintenance and repair of the machinery and equipment.
- Use of exemption – To use the manufacturers’ exemption, complete either an Ohio Form STEC-B (Blanket Exemption) or Form STEC-U (Unit Exemption) and provide it to your vendor. You will need to state a reason for the exemption, which would be that the item is being purchased to be used in the manufacturing of tangible personal property for sale. The blanket certificate exempts all purchases from sales tax for that vendor, so use this form carefully if you purchase taxable items from the same vendor.
Perform your due diligence
You can implement some business operations to help apply the exemption correctly. For example, shop supply vendors often sell janitorial supplies, safety gear, small tools and similar goods that are taxable. To simplify matters, consider creating separate purchase orders for these items, or comb over your invoices to identify non-exempt purchases and self-assess the use tax.
By properly applying the exemption, you can help avoid an audit. If you haven’t been notified of an audit yet, consider participating in a voluntary disclosure program to avoid this process. Penalties are generally waived and the look-back period is limited when you come forward voluntarily.
Consult your tax advisor to be sure you are properly applying the exemption
It can be challenging to separate exempt from non-exempt purchases. Closely review all purchases related to your manufacturing process, and work with your tax advisor to ensure that the exemption is applied properly. CSH advisors have hands-on experience working with manufacturing firms, and offer tax, consulting and audit services with an in-depth knowledge of Ohio tax rules and regulations.