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Sales and Use Taxes: The Machinery and Equipment Exemption (Portfolio 1330)

Product Code: TPOR44
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Sales and Use Taxes: The Machinery and Equipment Exemption discusses sales and use tax incentives for machinery and equipment used in manufacturing operations. In general, most states offer some form of sales and use tax exemption for machinery and equipment that is used directly in manufacturing tangible personal property that is ultimately sold at retail. General rules aside, however, there are significant differences among the states in what operations qualify as “manufacturing” or “machinery and equipment” or whether machinery and equipment are “used directly” in a taxpayer's operations. 

Written by a team of experts from the Chicago law firm Horwood, Marcus & Berk, Chartered, including Jordan M. Goodman, Esq., Fred O. Marcus, Esq., and David A. Hughes, Esq., this Portfolio examines the general features of machinery and equipment exemptions and explores their contours in various states. In so doing, the Portfolio examines basic approaches, reprocessing approaches, and other approaches to identify what kinds of operations qualify as “manufacturing” and uses both the Integrated Plant Theory and the Ohio Rule or Physical Transformation Theory to determine when machinery and equipment are “used directly” in manufacturing.  

Sales and Use Taxes: The Machinery and Equipment Exemption also examines how the various states define the phrase “machinery and equipment” based on the following criteria: 

  • Components and replacement parts,
  • Safety and protective equipment,
  • Environmental and climate control devices,
  • Machine shop equipment,
  • Computers,
  • Equipment in select industries, and
  • New and expanded plants.

Finally, this Portfolio considers special sales and use tax considerations for manufacturers and provides a state-by-state analysis of each state's machinery and equipment exemptions, with reference to appropriate statutes and regulations.

Sales and Use Taxes: The Machinery and Equipment Exemption allows you to benefit from: 

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
  • Invaluable practice documents including tables, charts and lists.
  • Plain-English guidance from world-class experts.
  • Real-world and in-depth analysis that lets you explore various options.
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
  • Alternative approaches to both common and unique tax scenarios.

This Portfolio is part of the Premier State Tax Library, a comprehensive series, which covers major state tax transactions and issues with expert, in-depth analysis, and offers commentary on a wide range of multi-state and state-specific taxation topics, including Sales and Use, Corporate Income, Individual Income, Property, Gross Receipts, Limitations on States' Authorities to Tax, Credits and Incentives, Electronic Commerce, Mergers and Acquisitions, Procedure and Administration, Special Industries, and more.

 

Detailed Analysis

1330.01. INTRODUCTION

1330.02. WHAT IS “MANUFACTURING?”

Introductory Material

A. The Basic Approach

B. Other Approaches

C. Non–Manufacturing Exemptions

D. Reprocessing

E. Services

1330.03. WHAT PROPERTY QUALIFIES AS “MACHINERY AND EQUIPMENT”?

Introductory Material

A. Components and Replacement Parts

B. Safety and Protective Equipment

C. Environmental and Climate Control Devices

D. Machine Shop Equipment

E. Computers

F. Equipment in Select Industries

G. New and Expanded Plants

1330.04. WHEN IS MACHINERY AND EQUIPMENT “USED DIRECTLY” IN MANUFACTURING?

Introductory Material

A. Integrated Plant Theory

1. Storage Equipment

2. Intra–Plant Transport Machinery

3. Packaging Equipment

4. Safety and Protective Equipment

B. Ohio Rule or Physical Transformation Theory

1. Storage Equipment

2. Intra–plant Transport Equipment

3. Packaging Equipment

4. Safety and Protective Equipment

1330.05. ADDITIONAL SALES AND USE TAX CONSIDERATIONS

1330.06. STATE–BY–STATE SUMMARY

A. In General

B. Specific States

1. Alabama

2. Alaska

3. Arizona

4. Arkansas

5. California

6. Colorado

7. Connecticut

8. Delaware

9. District of Columbia

10. Florida

11. Georgia

12. Hawaii

13. Idaho

14. Illinois

15. Indiana

16. Iowa

17. Kansas

18. Kentucky

19. Louisiana

20. Maine

21. Maryland

22. Massachusetts

23. Michigan

24. Minnesota

25. Mississippi

26. Missouri

27. Montana

28. Nebraska

29. Nevada

30. New Hampshire

31. New Jersey

32. New Mexico

33. New York

34. North Carolina

35. North Dakota

36. Ohio

37. Oklahoma

38. Oregon

39. Pennsylvania

40. Rhode Island

41. South Carolina

42. South Dakota

43. Tennessee

44. Texas

45. Utah

46. Vermont

47. Virginia

48. Washington

49. West Virginia

50. Wisconsin

51. Wyoming

1330.07. CONCLUSION

Working Papers

Item Description Sheet

Worksheet 1 States That Exempt Pollution Control Equipment, Machinery, and Facilities

Worksheet 2 [Reserved]

Worksheet 3 States Specifically Following Integrated Plant Theory or Ohio Rule/Physical Change Theory

Worksheet 4 Integrated Plant Theory - Sample Regulation: Virginia Regulation 10–210–920

Worksheet 5 Ohio Rule/Physical Change Theory - Sample Regulation: Ohio Regulation Section 5703–9–21

Worksheet 6 Exemptions for Farm Equipment, Machinery and Related Items

Bibliography

Bibliography

Jordan Goodman
Mr. Goodman is a partner in the Chicago law firm of Horwood, Marcus & Berk, Chartered, where he concentrates his practice on state and local tax planning and the resolution of state and local tax disputes for multistate and multinational corporations. He advises businesses in various industries on the tax ramifications and benefits of organizational structures and has lectured on state and local taxation before business and professional associations. Mr. Goodman is co–author of the chapter entitled Illinois Income Tax Considerationsfor the Illinois Institute of Continuing Legal Education publication Organizing and Advising Illinois Businesses and the chapter entitled Illinois Sales and Use Tax in the American Bar Association's Sales and Use Tax Handbook. He received his B.S. in accounting with high honors from Indiana University and his J.D. from the University of Illinois. Mr. Goodman is also a Certified Public Accountant.
David Hughes
David Hughes is an associate at Horwood, Marcus & Berk, Chartered, where he practices state and local tax with special emphasis on income and sales/use tax matters. His work focuses primarily on the resolution of state and local tax disputes and tax planning for multistate and multinational corporations. Mr. Hughes is co–author of the chapter entitled Illinois Sales and Use Tax in the American Bar Association's Sales and Use Tax Handbook. He graduated magna cum laude with a degree in English from the University of Notre Dame and received his law degree from Columbia University.
Fred O. Marcus
Mr. Marcus is a partner in Horwood, Marcus & Berk, Chartered, where as chairman of the firm's state and local tax practice group, he concentrates on state tax planning and the resolution of state and local tax disputes on a nationwide basis for multistate and multinational corporations. He received his B.S. in accounting in 1970 from the University of Illinois and his J.D. in 1974 from the DePaul University College of Law. Mr. Marcus has served as a faculty member for programs sponsored by the Tax Executive Institute, the Committee On State Taxation, and the National Institute on State and Local Taxation. He has also written numerous articles on state taxation. He is currently a member of the Illinois Department of Revenue's Practitioner Liaison Group; the American Bar Association's Section of Taxation's State and Local Tax Committee, and the Advisory Council of the National Institute on State and Local Taxation.