state and local tax issues facing a manufacturer

State and Local Tax Issues Facing a Manufacturer

August 10, 2016

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POLLING QUESTION #1

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• General discussion of manufacturing exemption

• Ohio manufacturing exemption

• Kentucky manufacturing exemption

• Ohio InvestOhio credit

• Kentucky credits

• State income tax consequences

• Payroll tax consequences

AGENDA

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EXEMPTIONMANUFACTURING

• A manufacturing exemption is an opportunity provided by the states to exempt purchases made for machinery utilized within the manufacturing process.

• Not all states provided an exemption for manufacturing equipment.

• Have to watch the definition that a state utilizes for defining the manufacturing process Predominate use Directly

• What is exempt under the exemption may vary by state Catalyst Supplies

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Ohio

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DEFINITIONMANUFACTURING

• “Manufacturing operation” means a process in which materials are changed, converted or transformed into a different state or form from which they previously existed and includes refining materials, assembling parts, and preparing raw materials and parts by mixing, measuring, blending or otherwise committing such materials or parts to the manufacturing process.

• The manufacturing operation begins when the raw materials or parts are committed to the manufacturing process. The point of commitment is where the materials handling from initial storage has ceased or the point where the materials or parts have been mixed, measured, blended, heated, cleaned, or otherwise treated or prepared for the manufacturing process, whichever first occurs.

• OH Administrative Code 5703-9-21(B)

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MANUFACTURING EXEMPTION• All purchases of tangible personal property are taxable, except those

in which the purpose of the consumer is to incorporate the thing transferred as a material or a part into tangible personal property to be produced for sale by manufacturing, assembling, processing or refining or to use the thing transferred primarily in a manufacturing operation to produce tangible personal property for sale. OH Administrative Code 5703-9-21(A)

• Things transferred for use in a manufacturing operation include, but are not limited to, any of the following:

Production machinery and equipment that act upon the product or machinery and equipment that treat the materials or parts in preparation for the manufacturing operation.

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Things transferred for use in a manufacturing operation include, but are not limited to, any of the following:

• Materials handling equipment that moves the product through a continuous manufacturing operation; equipment that temporarily stores the product during the manufacturing operation; or, equipment used in intraplant or interplant transfers of work in process where the plant or plants between which transfers occur are manufacturing facilities operated by the same person.

• Catalysts, solvents, water, acids, oil and similar consumables that interact with the product and that are an integral part of the manufacturing operation.

MANUFACTURING EXEMPTION

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Things transferred for use in a manufacturing operation include, but are not limited to, any of the following:

• Machinery, equipment and other tangible personal property used during the manufacturing operation that control, physically support, produce power for, lubricate, or are otherwise necessary for the functioning of production machinery and equipment and the continuation of the manufacturing operation.

• Machinery, equipment, fuel, power, material, parts and other tangible personal property used to manufacture machinery, equipment or other tangible personal property used in manufacturing a product for sale.


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Things transferred for use in a manufacturing operation include, but are not limited to, any of the following:• Machinery, equipment and other tangible personal property used by

a manufacturer to test raw materials, the product being manufactured or the completed product.

• Machinery and equipment used to handle or temporarily store scrap that is intended to be reused in the manufacturing operation at the same manufacturing facility.


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Things transferred for use in a manufacturing operation include, but are not limited to, any of the following:• Electricity, coke, gas, water, steam and similar substances used in the

manufacturing operation; machinery and equipment used for, and fuel consumed in, producing or extracting those substances; and machinery, equipment and other tangible personal property used to treat, filter, pump, alter voltage or otherwise make the substance suitable for use in the manufacturing operation.

• Machinery, equipment and other tangible personal property used to transport or transmit electricity, coke, gas, water, steam or similar substances used in the manufacturing operation from the point of generation, if produced by the manufacturer or from the point where the substance enters the manufacturing facility, if purchased by the manufacturer, to the manufacturing operation.


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Things transferred for use in a manufacturing operation include, but are not limited to, any of the following:• Machinery, equipment and other tangible personal property that

treats, filters, cools, refines, or otherwise renders water, steam, acid, oil, solvents or similar substances used in the manufacturing operation reusable.

• Parts, components, and repair and installation services for items used in the manufacturing operation.

• OH Administrative Code 5703-9-21(C)


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IN MANUFACTURINGTAXABLE ITEMS USED

Things transferred for use in a manufacturing operation do not include:

• Tangible personal property used in administrative, personnel, security, inventory control, record keeping, ordering, billing or similar functions.

• Tangible personal property used in storing raw materials or parts prior to the commencement of the manufacturing operation or used to handle or store a completed product, including storage that actively maintains a completed product in a marketable state or form.

• Tangible personal property used to handle or store scrap or waste intended for disposal, sale or other disposition, other than reuse in the manufacturing operation at the same manufacturing facility.

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• Tangible personal property used to store fuel, water, solvents, acid, oil, or similar items consumed in the manufacturing operation. All types of storage, be it of raw materials or parts, product (except in-process product), completed product, consumables, fuel, waste, scrap, equipment, tools, supplies, repair parts, etc., is taxable.

• Tangible personal property that is or is to be incorporated into realty.

• Machinery, equipment and other tangible personal property used for ventilation, dust or gas collection, humidity or temperature regulation or similar environmental control.


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Things transferred for use in a manufacturing operation do not include:• Tangible personal property used for the protection and safety of

workers, unless the property is attached to or incorporated into machinery and equipment used in a continuous manufacturing operation.

• Machinery, equipment, and other tangible personal property used for research and development.

• Machinery, equipment, and other tangible personal property used to clean, repair, or maintain real or personal property in the manufacturing facility.


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• Motor vehicles registered for operation on the public highways.

• OH Administrative Code 5703-9-21(D)


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POLLING QUESTION #2

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• Sales where the purpose of the purchaser is to do any of the following: To use or consume the thing transferred in the production and preparation in suitable condition for market and sale of printed, imprinted, overprinted, lithographic, multilithic, blueprinted, photostatic, or other productions or reproductions of written or graphic matter.

• The printing exemption is much broader than the manufacturing exemption in Ohio.

• OH Revised Code (ORC) 5739.02(B)(42)(f)

PRINTING EXEMPTION

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• Ohio Supreme Court Case Dayton Press, Inc. v. Lindley (1986), 22 Ohio St. 3d 112.

• The court ruled that “…the unloading and storing of raw materials, transportation thereof and the printing of the paper along with the binding and shipping of the final product constitute continuous activities necessary for the preparation for market and sale. To hold that the purchase of tangible personal property used or consumed during the aforementioned process should be subject to sales tax would simply repeal a clear-cut legislative mandate.”

• Virtually all items used in printing were exempted, including all types of storage (raw material and finished goods), cleaning equipment and supplies, waste handling equipment and storage.

PRINTING EXEMPTION

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• Sales where the purpose of the consumer is to use or consume the things transferred in making retail sales and consisting of newspaper inserts, catalogues, coupons, flyers, gift certificates or other advertising material that prices and describes tangible personal property offered for retail sale.

• ORC 5739.02(B)(35)(a)

• To qualify for the exemption, the printed materials must price and describe.

• Printed materials that only offer a percentage discount, or only describe the item sold, do not qualify for the exemption.

PRINTING EXEMPTION

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EXEMPTIONPACKAGING

• Sales to persons…engaged in making retail sales, or to persons who purchase for sale from a manufacturer tangible personal property that was produced by the manufacturer in accordance with specific designs provided by the purchaser, of packages, including material, labels and parts for packages, and of machinery, equipment, and material for use primarily in packaging tangible personal property produced for sale, including any machinery, equipment, and supplies used to make labels or packages, to prepare packages or products for labeling, or to label packages or products, by or on the order of the person doing the packaging, or sold at retail.

• ORC 5739.02(B)(15)

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• The packaging exemption is separate from the manufacturing exemption.

• Movement of the finished product from the manufacturing process is taxable.

• The only exception to this rule is if it is a continuing packaging process where the finished product is moved by conveyor to the packaging operation.

EXEMPTIONPACKAGING

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EXEMPTIONRESEARCH AND DEVELOPMENT

• Sales where the purpose of the purchaser is to do any of the following: To use the thing transferred as qualified research and development equipment. ORC 5739.02(B)(42)(i)

• “Research and development” means designing, creating or formulating new or enhanced products, equipment or manufacturing processes, and also means conducting scientific or technological inquiry and experimentation. ORC 5739.01(GG)

• “Qualified research and development equipment” means capitalized tangible personal property, and leased personal property that would be capitalized if purchased, used by a person primarily to perform research and development. ORC 5739.01(HH)

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• Materials and supplies consumed in R & D testing are taxable.

• Examples of R & D supplies include raw materials pulled from inventory and consumed in testing.

• If not all materials are consumed during the R & D testing process and are eventually sold as a manufactured product, those materials would qualify for exemption.

• The best practice is to move the manufactured items through journal entry from the R & D account.

EXEMPTIONRESEARCH AND DEVELOPMENT

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SERVICEEMPLOYMENT

• “Employment service” means providing or supplying personnel, on a temporary or long-term basis, to perform work or labor under the supervision or control of another, when the personnel so provided or supplied receive their wages, salary, or other compensation from the provider or supplier of the employment service or from a third party that provided or supplied the personnel to the provider or supplier. ORC 5739.01(JJ)

• Employment service is taxable per ORC 5739.01(B)(3)(k)

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SERVICEEMPLOYMENT

• “Employment service” does not include: acting as a contractor or subcontractor; medical and health care services; supplying personnel pursuant to a contract of at least one year and that each employee is assigned on a permanent basis; transactions between members of an affiliated group; and transactions where the personnel so provided or supplied by a provider or supplier to a purchaser of an employment service are then provided or supplied by that purchaser to a third party as an employment service.

• There is no exemption for “temporary employees” used in manufacturing.

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JANITORIAL SERVICEBUILDING MAINTENANCE AND

• “Building maintenance and janitorial service” means cleaning the interior or exterior of a building and any tangible personal property located therein or thereon, including any services incidental to such cleaning for which no separate charge is made. However, “building maintenance and janitorial service” does not include the providing of such service by a person who has less than five thousand dollars in sales of such service during the calendar year.

• Building maintenance and janitorial service is taxable per ORC 5739.01(B)(3)(j)

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• Cleaning of manufacturing equipment is considered part of this service. Although the equipment qualifies for exemption, cleaning of the equipment is taxable.

• Ohio is aggressive in taxing this service. An example of this is when a company will come into a manufacturing plant and vacuum out a slag pit. Ohio considers this service a taxable building maintenance and janitorial service.

• One-man operations where they come in and clean offices on a daily or weekly basis is also taxable. These types of companies do not always charge sales tax on these services.

JANITORIAL SERVICEBUILDING MAINTENANCE AND

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• “Business fixture” means an item of tangible personal property that has become permanently attached or affixed to the land or to a building, structure or improvement, and that primarily benefits the business conducted by the occupant on the premises and not the realty.

• Business fixture includes, but is not limited to, machinery, equipment, signs, storage bins and tanks, whether above or below ground, and broadcasting, transportation, transmission and distribution systems… foundations and supports for machinery and equipment.

• Business Fixture is defined in ORC 5701.03(B)

BUSINESS FIXTURES

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• Business fixture does not include fixtures that are common to buildings, including heating, ventilation and air conditioning systems used to control the environment for electrical and communication lines, etc.

• The following are examples that Ohio considers business fixtures and taxable in audit situations:

Fencing around production equipment to keep employees out of harm’s way.

Fencing around storage areas (e.g., safety supplies, tools, etc.) to prevent employee theft.

Ventilation systems installed to exhaust heat and fumes from the plant that is generated from the manufacturing machinery and process.

BUSINESS FIXTURES

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Kentucky

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DEFINITIONMANUFACTURING

• “Manufacturing” means any process through which material having little or no commercial value for its intended use before processing has appreciable commercial value for its intended use after processing by the machinery.

• The manufacturing or processing production process commences with the movement of raw materials from storage into a continuous, unbroken, integrated process and ends when the product being manufactured is packaged and ready for sale.

• KY Tax Statute 139.010(16)

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MANUFACTURING EXEMPTION• Gross receipts derived from the sale of, and the storage, use or

other consumption in this state of, tangible personal property to be used in the manufacturing or industrial processing of tangible personal property at a plant facility and which will be for sale.

• Specific items include: Materials which enter into and become an ingredient or component part

of the manufactured product

Tangible personal property which is directly used in manufacturing or industrial processing, if the property has a useful life of less than one (1) year. These items include supplies such as lubricating and compounding oils, grease, machine waste, abrasives, chemicals, solvents, fluxes, anodes, filtering materials, fire brick, catalysts, dyes, refrigerants and explosives.

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MANUFACTURING EXEMPTIONSpecific items include:• Industrial tools. This group is limited to hand tools such as jigs, dies,

drills, cutters, rolls, reamers, chucks, saws, spray guns, etc., and to tools attached to a machine such as molds, grinding balls, grinding wheels, dies, bits, cutting blades, etc. Normally, for industrial tools to be considered directly used in manufacturing, they shall come into direct contact with the product being manufactured.

• Materials and supplies that are not reusable in the same manufacturing process at the completion of a single manufacturing cycle, excluding repair, replacement or spare parts of any kind.


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MANUFACTURING EXEMPTIONSpecific items include:• Machinery for new and expanded industry, which is defined as:

Used directly in a manufacturing or processing production process.

Which is incorporated for the first time into a plant facility established in this state.

Which does not replace machinery in the plant facility unless that machinery purchased to replace existing machinery: increases the consumption of recycled materials at the plant facility by not less than ten percent (10%); performs different functions; is used to manufacture a different product; or has a greater productive capacity, as measured in units of production, than the machinery being replaced.


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INVESTOHIO TAX CREDIT• Current Opportunity for InvestOhio Credit will expire

6/30/2017

• InvestOhio credit was part of the budge bill enacted in 2011

• Enacted to help spur investment in small businesses operating in Ohio

• Credit is available against the owner’s Ohio individual income tax return

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INVESTOHIO TAX CREDIT• The credit generated is a non-refundable credit taken on

your individual income tax return. The credit can be carried forward for seven years

• The credit is for the acquisition of an ownership interest in a small business entity operating in Ohio. If one owns an entity 100%, can still qualify for the InvestOhio credit.

• The credit is equal to 10 percent of what is invested.

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INVESTOHIO TAX CREDITSmall business entity requirement

• The investor must be investing in a small business entity operating in Ohio.

• What is a Small Business Entity?

An entity with less than $10 million in sales

An entity with less than $50 million in assets

There is also an employee requirement to the credit

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INVESTOHIO TAX CREDITInvestor requirements

• Can be another pass-throughentity making the investment.

• If another pass-through entity credit will flow up to the owners of the entity.

• The investor can be a non-resident of Ohio but must opt out of the filing of a composite tax return with Ohio.

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INVESTOHIO TAX CREDITSteps for securing credit

• Both the investor and the small business entity must register and receive an InvestOhio identification number.

• Once registered, one of the parties must complete an application for the credit.

The credits will be granted on a first-come, first-serve basis.

The application will receive an InvestOhio transaction number

which will determine your order of receiving the credit.

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INVESTOHIO TAX CREDITRegistration Process• When the investor completes the registration process, the

investor must know the type of entity that they will invest in.

• The investor must also indicate where the money will be coming from for the investment.

• The funds cannot come from a loan from the state of Ohio or the federal government. Some dispute if it can be a distribution – but the state has

indicated if the SBE consistently makes distributions then a distribution, can be utilized.

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INVESTOHIO TAX CREDITSmall Business Entity

• Once the cash investment has been made the SBE has six months to secure the property investment.

• Both the equity investment and the property acquired must be held for two years.

• The investment holding period begins on the date of the investment.

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INVESTOHIO TAX CREDITProperty Acquired

• Fixed assets

• Motor vehicles, as long as the vehicles will be titled in Ohio

• Intangible assets

• Wages – increase wages and new positions

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INVESTOHIO TAX CREDIT• The state has FAQs for the credit on the Department of

Development’s website.

• The state has several video tutorials on the Department of Development’s website:

Registration process

Overview of program

Application process

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KENTUCKY TAX CREDITS• Kentucky Reinvestment Credit – KRA

• Kentucky Industrial Revitalization Act – KIRA

• Kentucky Business Invest – KBI

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BUSINESS INVESTMENTKENTUCKY

• An eligible company must be engaged in one of the following activities:

Manufacturing

Agribusiness

Regional or national headquarters operations

Certain nonretail service or technology activities

• The minimum requirements for an eligible project are:

Create a minimum of 10 new, full-time jobs for Kentucky residents

Incur at least $100,000 in eligible costs

Meet a minimum level of wages and benefits

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BUSINESS INVESTMENTKENTUCKY

• The tax incentives involved with this program are available for up to 15 years for enhanced incentive counties or up to 10 years for all other counties.

• The incentive may be taken as…

Up to a 100 percent credit against the Kentucky income tax imposed on corporate income or limited liability entity tax arising from the project

A wage assessment of up to five percent of the gross wages of each employee in enhanced counties or up to four percent (including up to one percent required local participation) of the gross wages of each employee in other counties.

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REVITALIZATION ACTKENTUCKY INDUSTRIAL

• An eligible company must invest in the rehabilitation of either… Manufacturing Agribusiness operations

• …that are in imminent danger of permanently closing or that have closed temporarily;

• Eligible entities that retain or create 25 jobs • Approved costs for recovery include up to 75 percent of the costs of

the rehabilitation or construction of buildings and updated machinery and equipment.

• The incentive is available for up to 10 years and may be taken as… Up to 100 percent credit against the Kentucky income tax imposed on

corporate income or limited liability entity tax arising from the project Wage assessment of up to five percent of the gross wages of each employee

whose job is preserved or created by the approved project.

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REINVESTMENT CREDITKENTUCKY

• To be eligible, a company must be a permanent Kentucky company engaged in manufacturing.

• Requirements of the program include:

Incurring eligible equipment and related costs of at least $2,500,000;

Establishing an employment retention base of at least 85 percent of existing employment;

Not having received incentives under the Kentucky Industrial Revitalization Act (KIRA) within the previous five years;

The applicant certifying the project would not be economically feasible without the incentives.

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REINVESTMENT CREDITKENTUCKY

Approved costs for recovery• Approved costs recovery include eligible equipment and related

costs up to:

50 percent of the eligible equipment and related costs;

100 percent of the job skills upgrade training costs.

• The incentive is available for up to 10 years and may be recovered via Kentucky income tax credits of up to 100 percent of tax imposed on the corporate income or limited liability tax generated by or arising from the project.

• The maximum incentive claimed in any single year may not exceed 20 percent of the authorized incentive.

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CONSEQUENCESSTATE INCOME TAX

• Wherever you have employees – what activities are the employees conducting

• Inventory stored in a state will create nexus for state income tax nexus

• If inventory is located in a state on consignment at a customer’s location, it would create nexus

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CONSEQUENCESPAYROLL TAX

• Reciprocity issues

• Where withholding is required

• Where unemployment is required

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CONCLUSIONIf you have any questions please feel free to contact us.

Mary Jo Dolson, CPA(440) [email protected]

Mark Thomas(330) [email protected]