Without being too technical, most states provide the same basic exemptions or exclusions from the sales & use tax on certain purchases made by a manufacturer. These are typically:
On purchases, each state varies in what is considered exempt, special incentives to attract investment, taxation of services and construction of manufacturing facilities. On sales, the type of customer and inclusion of any service or labor related charges can effect tax liability.
You should consider performing an internal review every several years. Changes in accounting staff often leads to errors when a new or untrained employee is left to make decisions on their own.
If your business uses a computer based rule system to decide which purchases or sales are taxed, it is wise to use an experienced individual to review and test the rules. National services are quite effective for most transactions but do not have the manpower or knowledge to fine tune their system for your particular state or industry. System errors can produce extensive liabilities if not corrected early on and tweaked up periodically.
Interpretation of the machine exemption in SC as well as the term "used directly" has changed since 2003 because of two court cases. Attention needs to paid to the terms "significantly used in manufacturing" and "integral and necessary". One should look at the SC regulation on "machines used in manufacturing" for clarification on this point. (See SC Regulation 117-302.5) Municipalities need to examine themselves to insure opportunities to be treated as a manufacturer are not being missed.
Utilities such as electricity and gas are exempt only for amounts used to operate the production processes. Non-manufacturing uses such as general lighting, offices, break rooms and warehouse use are fully taxable. One needs to prepare a spreadsheet to compute the percentage to be reported to the state when mixed use is present on an account. One needs to record the voltage and amperage of either the taxable usage items or the non-taxable usage items. Using the formula: Amps x Volts = Watts and adjusting the amount to kilowatts by multiplying by .001 and tracking hourly usage within a billing cycle, one can arrive at an accurate percentage to use for reporting purposes. Natural gas percentages are prepared similarly using cubic feet or therms. A comparison between the total average billing usage and taxable usage will provide a usable percentage for reporting purposes. Usage of utilities prior to and after production are not subject to exemption in South Carolina. Packaging operations can be exempted if contiguous with manufacturing operations.
North Carolina has changed the liability for sales tax on purchases made by manufacturers. Liability for the sales or use tax is strictly on the manufacturer. The manufacturer must accrue and report the tax using the correct rate. Vendors are supplied a NC form E595 E by manufacturers in order to purchase items tax free. Manufacturing machinery is taxed at 1% with a cap of $80 per item. The tax is reported to the state on a special manufacturer's sales tax return. Electricity used by manufacturers is now exempt from the tax. A unique point in NC is that current NC law states all electricity purchased by a manufacturer is exempt, not just that which is "used in" manufacturing, as long as the use occurs in the same compound as the manufacturing facility. The same is true for natural gas. This is an incentive for manufacturers to locate within the state and to be competitive with South Carolina. (Please see NC Technical Bulletin 57 and NC Technical Bulletin 58 for overall guidance.)
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