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Manufacturing Purchases: 5 Sales-Use Tax Basics for Purchasers and A/P

author photo of Lauren Stinson

Sales and use tax decisions need to be made by manufacturers when purchasing products and services, as well as when selling your products and services to customers. Making the right decisions on both sides of the fence is equally important to save your company money and minimize your audit assessments.

Purchasers and Accounts Payable staff often ask me for a simple definition of sales tax and use tax. And tips of when sales tax should be paid to a vendor or when use tax is owed to a state. Let’s begin with a basic explanation of sales tax, as it pertains to a manufacturer’s purchases.

1) What is sales tax?
When you purchase something and the vendor sends you an invoice, you’ll often see sales tax as a line item. This is the money that the seller collects and remits on the sales transaction on behalf of the jurisdiction.

2) When is a purchase not subject to tax?
The state may deem the item or service to not be part of the taxable base. Or the state may grant a sales tax exemption to the manufacturer for that purchase.
Sales tax should appear on the invoice IF you are making a taxable purchase AND the vendor has nexus in your state.

3) What is nexus?
A vendor has nexus if they have some type of physical presence in the state. This could be stores, warehouses, employees or even routine visits by sales representatives. Nexus obligates the vendor to collect and remit tax to the state on taxable sales.

4) When is use tax due?
Several circumstances exist when the vendor does not charge sales tax, but you will owe use tax to the state.

If you’re purchasing something that is taxable but you’re purchasing it from an out-of-state vendor who doesn’t have nexus – a vendor that doesn’t have the responsibility to collect sales tax -- then it is your obligation to remit the tax to the state in the form of use tax.

Another example of when a manufacturer may owe use tax is if the manufacturer gives the vendor a blanket exemption certificate, basically telling the vendor, “we take full responsibility for deciding which purchases are taxable and remitting use tax to the state.”

Other examples of when a manufacturer will owe use tax for purchases include:

  • If items are purchased for an exempt purpose but later used for taxable use
  • If the taxability of the items is unknown at the time of purchase
  • When manufactured items are pulled out of inventory and used by the manufacturer

5) When do you pay use tax?
Regardless of why use tax is owed to a state, the manufacturer pays the use tax on the company’s sales and use tax return, usually monthly. And remember, both sales and use tax are generally subject to the same state tax laws, as well as the same sales tax exemptions.

Hopefully this basic explanation provides a better understanding of both sales tax and use tax, as it pertains to a manufacturer’s purchases. To learn more sales and use tax basics, download our on-demand webinar: Sales Tax Boot Camp: Sales Tax 101 for the non-Sales Tax Professional.

 

About the Author: Lauren Stinson,CMI, is Principal and National Leader - Sales & Use Tax at Cherry Bekaert LLP; a national CPA and consulting firm ranked as one of the top 25 in the country. Previously, Lauren was Owner and President of Windward Tax, a sales and use tax consulting firm. She has more than 25 years experience working with manufacturers on sales and use tax issues. Lauren is pleased to share her expertise with SalesTaxSupport readers as the Manufacturing contributor in SalesTaxSupport’s Industry blog, as well as the Georgia Sales Tax contributor in the States blog.

Comments or questions may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page. More specific questions or requests may be sent to Lauren directly using the orange "REQUEST" link on Lauren's Firm Profile page.

Other recent “Manufacturing & Distribution” posts by Lauren Stinson, CMI:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

4 Responses to Manufacturing Purchases: 5 Sales-Use Tax Basics for Purchasers and A/P

  • Posted by Terri on August 22, 2018 2:39pm:

    We manufacture food product in Utah, Idaho and Michigan. My questions concerns cleaning/sanitation chemicals for our production vats. In Michigan my understanding is these items are exempt. In Idaho we pay use tax on all cleaning chemicals used in manufacturing EXCEPT those used in the CIP system (closed in place). Utah rules are murky. Do you have insight/information on the taxability of these items in Utah?

    • Posted by Author photo of Lauren Stinsonlaurenstinson on August 23, 2018 7:31am:

      Terri,

      I can't answer your questions without getting more details from you. You are right, taxability of cleaning chemicals is complicated. In fact, so complicated that we wrote a blog on the subject. Here's a link to the blog that you can copy and paste to open: http://www.cherrybekaertsalestax.com/news/are-sanitization-chemicals-tax-exempt-for-food-manufacturers

      Please email me directly and will be happy to talk with you about your options.

      Lauren

  • Posted by Author photo of Lauren Stinsonlaurenstinson on December 8, 2017 6:09am:

    Hi Virginia,

    In Alabama there are a number of exemptions and reduced rates applicable to manufacturers. A lot of machinery and repair parts will be subject to a reduced rate; while raw materials may qualify for exemption. As far as production supplies, taxability will depend on what it is and how it is used.

    In general, cleaning supplies and office supplies are usually taxable. Alabama tax laws are quite complex - especially for manufacturers. My company, Windward Tax, has training seminars geared specifically to all the tax laws for manufacturers. Check it out at www.windwardtax.com!

    Lauren

  • Posted by Virginia on December 7, 2017 7:27am:

    We have a Alabama Sales and Use Tax Exemption Certificate but I need to understand what is and what is not taxable for our business. Are office supplies, cleaning supplies taxable?

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