7 common opportunities for sales tax exemptions for manufacturers
May 29, 2025
By Scott Brawdy, CPA
Principal and State and Local Tax (SALT) Practice Leader
Sales tax exemptions play a critical role in the manufacturing sector.
They aim to alleviate the tax burden on such companies, allowing them to reinvest in their businesses, create jobs and boost productivity.
In such a competitive industry, it is critical to understand the exemptions available, which ones you qualify for and their benefits.
Raw Materials and Component Parts
A common sales tax exemption for manufacturers relates to buying raw materials and component parts.
Taxing them could lead to tax pyramiding, where the same product is taxed multiple times during the production process. To prevent this, many states exempt raw materials and component parts from sales tax if they become an integral part of the final product.
Example: In Iowa, businesses are exempt from paying sales tax on items that are directly used or consumed in the manufacturing process, including raw materials and component parts.
Takeaway: This exemption ensures that manufacturers can acquire essential inputs without incurring additional tax costs, thereby reducing the overall cost of production. It is important to note, however, that what constitutes the “manufacturing process” (i.e. where the process starts and ends for sales tax exemption purposes) can vary by state.
Manufacturing Machinery and Equipment
Sales tax exemptions for machinery and equipment are crucial to enable manufacturers to invest in advanced technologies and maintain competitive operations.
These exemptions typically apply to machinery and equipment used directly in the manufacturing process, including machines, tools and even computers used in production.
Example: Many states offer complete exemption for such equipment, while a few states, such as California, offer partial exemptions on the purchase of manufacturing equipment.
Takeaway: The exemption is designed to encourage investment in new technologies and equipment, thereby enhancing productivity and fostering innovation.
Utilities and Fuel
Opportunities also exist related to the purchase of utilities and fuel used in the manufacturing process.
These sales tax exemptions acknowledge the substantial energy consumption involved in manufacturing and aim to lower operational costs.
Example: In New York, manufacturers are exempt from paying sales tax on the purchase of gas, electricity, refrigeration and steam used directly in production.
Takeaway: By reducing the cost of utilities, these exemptions help manufacturers manage their overhead expenses more effectively.
Packaging Materials
Packaging materials for finished goods are often exempt from sales tax.
This exemption recognizes that packaging is an essential part of delivering products to market and should not be subject to additional taxation.
Example: In Illinois, packaging materials are exempt from sales tax if they are used to contain, protect or ship the finished product. This includes items such as pallets, crates and shrink wrap.
Takeaway: By exempting these materials, states help manufacturers minimize costs associated with getting their products to customers.
Repair and Replacement Parts
Maintaining and repairing manufacturing equipment is crucial for ensuring continuous production.
Many states offer sales tax exemptions on repair and replacement parts used to maintain or repair manufacturing machinery.
Example: In Ohio, sales of parts, labor and services used in repairing or maintaining manufacturing machinery are exempt from sales tax.
Takeaway: This exemption helps manufacturers reduce the cost of keeping their equipment in optimal working condition, thereby avoiding costly production downtime.
Research and Development
Research and development (R&D) is vital for driving innovation and maintaining competitiveness in the manufacturing industry.
Recognizing this, several states offer sales tax exemptions for purchases related to R&D activities.
Example: In Massachusetts, sales of tangible personal property used in research and development by a manufacturing corporation are exempt from sales tax. This includes items such as laboratory equipment and testing devices.
Takeaway: By supporting R&D through tax exemptions, states encourage manufacturers to invest in new products and processes, driving long-term growth and technological advancement.
Pollution Control Equipment
Environmental regulations require manufacturers to invest in pollution control equipment to minimize their environmental impact.
Many states provide sales tax exemptions for the purchase of such equipment, acknowledging the additional cost burden imposed by compliance with environmental standards.
Example: In Georgia, sales of machinery and equipment used for pollution control in manufacturing are exempt from sales tax.
Takeaway: This exemption helps manufacturers comply with environmental regulations without incurring prohibitive costs, supporting sustainable industrial practices.
Conclusion
Sales tax exemptions for manufacturers are essential tools for promoting economic growth, reducing production costs and encouraging investment in new technologies.
Understanding and leveraging these exemptions can provide significant financial benefits, enabling manufacturers to reinvest in their operations, create jobs and drive innovation.