The Ohio Department of Taxation recently released proposed revisions to Ohio Administrative Code 5703-9-21, which governs the application of sales tax to tangible personal property used in the manufacturing process. The Department of Taxation is currently seeking comments to the proposed revisions until April 28, 2017.
Ohio has long exempted tangible property used in manufacturing from sales tax. Historically, this exemption was subject to extensive litigation between manufacturers and the Department of Taxation. In an effort to reduce litigation and provide certainty for Ohio manufacturers, the Ohio legislature enacted a comprehensive statute governing the manufacturing sales tax exemption in 1989.
See Ohio Revised Code 5739.011. OAC 5703-9-21 was then drafted by the Department of Taxation, in consultation with industry representatives, to implement this statute. Importantly, OAC 5703-9-21 not only set forth detailed regulations governing the sales tax exemption, but it also provided manufacturers with numerous examples to help guide them in the appropriate application of the sales tax exemption to specific industry practices.
The Department of Taxation’s proposed changes will mark the first time since 1989 that the rule has been updated or modified. While the proposed changes do not alter the overall structure of the rule, manufacturers in multiple industries may see significant changes to their sales tax liability. Below is a short summary of the proposed revisions.
- A new exemption is proposed for equipment used to clean towels, linens, and other similar items as part of a laundry cleaning service (new division (C)(12)).
- Another new division provides an exemption for equipment used to clean processing equipment used in the manufacture of dairy products for human consumption (new division (C)(13)).
- Examples 63 and 64 were added to further explain how the exemption for laundry cleaning services and the dairy products industry will work in practice.
- The phrase “measured and moved” was added to Example 2 to further define when aggregate used in the manufacturer of concrete is committed to manufacturing process.
- The definition of “manufacturing operation” in division (B)(1) has been modified to specify that “initial storage” of raw materials may occur at multiple locations. Further, the division now specifies that the “heating or agitating” of raw materials to keep raw materials in the same state as when received does not constitute commitment to the manufacturing operation. New example 65 has been added to reflect this change with respect to the heating and agitating of raw materials. These proposed changes have the potential to move the start of the manufacturing process to a step later in time, which means that equipment used to heat and agitate raw materials would no longer be tax exempt, as the materials would not yet be committed to the manufacturing process.
- Example 66 has been added to further explain when safety equipment is tax exempt. As a general matter, safety equipment is not tax exempt if it is not incorporated directly into the machinery or equipment used in the manufacturing process, or is not part of a total environmental control system necessary for the manufacturing process. This example clarifies that ventilation, fans, and exhaust are not tax exempt equipment. While this example is new, it does not appear to make significant changes to the underlying requirements of the rule with respect to safety equipment.
The remainder of the proposed changes are simply updates to the wording and terminology that should not have a material impact on the application of the exemption. There are minor, nonmaterial revisions to update the terminology of the rule in second paragraph of division (A) and Example 9.
Similarly, division (B)(4) has been revised to reflect the definition of “manufacturer” as stated in R.C. 5703.011(A)(1), and division (D)(8) has been revised to reflect the tax exemption that applies to “qualified research and development equipment.” Example 54 has been revised to clarify that research and development equipment when capitalized constitutes “qualified research and development equipment” that is tax exempt. As these changes simply reflect existing statutory language, they should not create any substantive changes in how the rule is applied.
Manufacturers in the laundry cleaning services and dairy production industries may see new tax savings under the proposed rule. Manufacturers with raw materials that require preservation and storage prior to commitment to the manufacturing process may see their sales tax liability increase. Manufacturers in all industries should review the proposed to changes to determine whether new or revised sales tax exemptions will apply to them as a result of the proposed rule changes.
If any manufacturers are concerned that the above changes will impact their sales tax liability for equipment and materials used in the manufacturing process, please contact the attorneys at Frantz Ward as soon as possible for assistance with preparing comments to the Department of Taxation before the April 28, 2017 deadline.