As a manufacturer or producer of goods, you know that state and local New York sales tax usually applies every time a customer buys your product. What’s more complicated is the sales and use tax application of the purchases you make in furtherance of your business’s production. Understanding New York’s sales tax regulations for manufacturing purchases can help your business to defend itself in the event of an audit and to take advantage of available sales tax exemptions for your business operations.
When Sales Tax Applies to Items Used in the Manufacturing Process
New York distinguishes the sales tax application of the items you purchase as part of your manufacturing business depending on what phase of the operation you use the item. The three possible phases are the administration phase, production phase, and distribution phase. You will usually pay sales tax for the purchase of items that you use in the administration phase (e.g., marketing, accounting, sales, testing of raw materials, etc.) or distribution phase (e.g., storing, displaying, shipping, etc.) of your business. However, New York generally exempts sales tax on the products you purchase for use in the production phase, which we explain in more detail below.
New York Exempts Sales and Use Tax for Items Used in the Production Phase
You can then receive a sale or use tax exemption for purchases that you use in the production phase of your manufacturing business. This rule applies so long as your use of the purchased item is directly and predominately tied to the production phase (usually based on hours of operation). The following categories of items often qualify for the exemption:
- Machinery and equipment (along with purchases for parts and related maintenance or repair services)
- Tools and supplies
- Raw materials (the resources that you modify or otherwise manufacture to create a finished product)
For raw materials, you will complete and submit a resale certificate to the seller at the time of purchase. All other equipment and tools you purchase that don’t become a part of the finished product will require submission of an exempt use certificate. Keep detailed copies of your resale or exempt use certificates given to the sellers from whom you buy equipment or raw materials. Logs that reflect the hours of operation for machinery may also be necessary in cases where its use is not solely for production.
You may be reading this and realize that you’ve overpaid New York sales tax for some of the purchases in your manufacturing business! Not all hope is lost, however. You may be able to apply for a refund or credit to reduce future sales tax liability. You generally have from the later date of within three years that tax was due or two years from when you paid the tax to timely apply for a refund.
Do You Pay Sales Tax on Charges for Subcontractors or Related Production Services Like Repairs?
New York also allows you to take an exemption from sales tax when you pay for subcontractors to contribute to the finished work product. Likewise, exemptions apply to service charges for your machinery or equipment that are necessary for its continued use (e.g., services for installing, repairing, maintaining, etc.). This includes any service that keeps your production equipment in an efficient and safe working condition. New York’s exempt use certificate is the proper form to document such production costs.
Final Thoughts on New York Sales Tax for Your Manufacturing Purchases
Paying close attention to sales and use tax compliance as a manufacturer in New York is essential for avoiding complicated audits and the imposition of additional taxes or penalties, including criminal sanctions. For manufacturers, issues can easily arise in purchasing an item with an exemption certificate but failing to meet the exemption requirements in its later use (i.e., for purposes not directly or predominately tied to the production phase). If you recently received an audit notice for your manufacturing business, you may have questions about what’s next. Our sales tax professionals are always available to answer questions and take the lead in your audit – freeing you up to focus on future production.
Call Sales Tax Helper for a consultation about New York’s sales and use tax rules for manufacturers.