“Consumable supplies” generally refers to tangible personal property that is consumed or used up during the manufacturing process. Whether or not this property is exempt from sales and use tax depends on the specific rules in each state.
Several states are strict in exempting these items and only will exempt consumable supplies if they meet very specific requirements. Many states have much broader exemptions for these supplies, while other states don’t have an exemption at all for consumable supplies.
States with Stricter Requirements
In the stricter states, very specific requirements must be met in order for consumable supplies to be exempt from tax. For example, in Arizona a consumable supply will be exempt from tax if it comes into direct contact with the manufactured product and causes a chemical or physical change. The Arizona law specifically states that chemicals used in manufacturing will be exempt if the chemical “involves direct contact with the materials from which the product is produced for the purpose of causing or permitting a chemical or physical change to occur in the materials as part of the production process.”
Another state that has very specific requirements is Tennessee. The Tennessee regulation states that “materials and supplies coming in direct contact with, and which are consumed within twenty-five (25) consecutive days, in the processing of manufactured products, are not subject to the Sales or Use Tax.”
States with Broader Exemptions
There are many states that now have a broad exemption for consumable supplies. For example, in Georgia the regulation was expanded in July 2014 to include anything “necessary and integral” to the manufacturing process.
Michigan is another state that has a broad exemption for consumable supplies. The Michigan rule states that property “which is consumed, destroyed or loses its identity in a manufacturing process” is not taxable. In these states, an argument can be made for nearly anything that is used on or near the machinery and even for some supplies that are used offline.
There are also several states that do not have any exemptions for consumable supplies. A couple of these states are California and Florida.
On the Horizon
Luckily, many states are moving towards a necessary and essential method for exempting consumable supplies in order to make their laws more favorable to manufacturers. It’s important to know how your state treats consumable supplies so that you can take full advantage of the exemption.
Questions or Comments?
1) Share with me other states that you think have either very strict requirements or more lenient guidelines for the exemption of consumable supplies.
2) Have you ever challenged a state over its taxability decision concerning your consumable supplies?
Other recent “Manufacturing & Distribution” posts by Lauren Stinson, CMI:
- Direct Pay Permits for Manufacturers - Good Idea?
- Manufacturing Purchases: 5 Sales-Use Tax Basics for Purchasers and A/P
- Manufacturing Exemption Misconception: Everything is Tax Exempt!
- Manufacturers’ Utility Studies: 5 Approaches to Utility Exemptions
- Manufacturing Sales & Use Exemptions: Open to Interpretation