Webinar: SALT Update for Manufacturers

Highlights from the January 19, 2022, webinar hosted by Jim Dascenzo, CPA, Principal, National Director of HBK Manufacturing Solutions, and presented by Tim Adams, Principal, National Director of HBK State & Local Tax

Historically, states and localities have been hard-pressed to generate as much revenue as they need. SALT has become an increasingly larger part of our manufacturing clients’ tax obligations. So we have expanded our SALT advisory services.

Most states historically operate under deficits, but are currently operating with surpluses because of federal COVID relief programs and increased tax receipts during the economic recovery. Many states have tax-cut proposals in place in light of increased revenues. But despite cash surpluses, most states will ratchet up spending and seek revenues to match their spending appetites.

Manufacturing exemptions

• Raw materials and tangible personal property are always exempt when they are incorporated into the manufactured product. Make sure you account for raw materials incorporated in final product as SALT exempt.

• Property and equipment used for administrative purposes are generally taxable.

• Taxability of machinery, equipment, and supplies depends on the use of the property and the state’s specific rules for manufacturers.

• Eligible property must generally be used directly in the manufacturing process to qualify for exemption.

• Many rules are common from state to state:

• In Florida, specifically, exemptions for industrial machinery and equipment are available to businesses that produce tangible personal property for sale; have an NAICS Code of 31, 32, 33 and 423930; for parts and accessories if purchased before machinery and equipment are placed into service; repair parts and labor charges for mining, construction, and manufacturing under specified SIC codes; industrial machinery and equipment used to increase output by new or expanding business; machinery and equipment used in research and development; and pollution control equipment and machinery.
• In New Jersey, the exemption is in place for machinery or equipment for use or consumption directly and primarily in production, which begins with raw materials are committed to the manufacturing operation and ends when product is in a form sold to consumers. Direct use in production is in transforming raw materials to a finished product. Suppliers, tools, and parts with a useful life of a year or less are subject to tax.
• In Ohio, a favorable state in terms of offering manufacturer exemptions, exemption is for tangible personal property used primarily in manufacturing when producing tangible personal property for sale; manufacturing begins when raw materials are committed to the process. Exemption is broad and generally includes, when used in the manufacturing process: machinery and equipment; material handling equipment; supplies that interact with the product; utilities and fuel, parts, and repairs.
• In Pennsylvania, machinery, equipment, parts, and supplies used directly in manufacturing operations are exempt. Manufacturing operations begin with first production operation and end with packaging of product for consumer. Exemption includes property used for pollution conrtol, testing and inspection (during operation), research and development, and consumer packaging.

• Eligible property must generally be directly used in the manufacturing process to qualify for exemption.

SALT opportunities

• Audit defense. Expect to see an increase in audit activity, so need to pay appropriate attention to the audit requirement. The HBK SALT team can work in an advisory capacity or manage the audit defense process. We advise a proactive approach. We review audit workpapers and exceptions, resolving discrepancies, and administering appeals.

• Refund Review – We help you look for areas where you might have overpaid. Overpayment can be applied against the audit to reduce the tax and any penalty and interest.

• Nexus analysis, for states that required the filing of a sales, income, or gross receipts taxes for out-of-state companies doing business in that state. You are required to collect and remit taxes from your customers in that state.

• Understanding where you should be filing is most critical thing to do in terms of state and local tax obligations.
• All states that have a sales tax now have economic nexus and require sellers into the state to collect and remit taxes.
• If a customer claims exempt status, be sure to collect exemption certificates.
• The last states to impose economic nexus laws were Florida and Kansas, with effective dates of July 1, 2021, and Missouri, with an effective date of January 1, 2023.
• In 2022, expect states to increase audit activity and target unregistered remote sellers, remove registration grace periods, and aggressively pursue companies registering after the effective date of their nexus legislation. You should file based on when you started doing business in the state.
• Consider whether a voluntary disclosure agreement might be effective in mitigating risk on your behalf anonymously by getting the state to allow you to file back a limited number of years.
• Economic nexus considerations include whether your product or service is taxable in a state, if the state counts nontaxable sales against its economic nexus threshold (most do), and understanding your potential liability in a state.

Remote workers

• Approximately two of three remote workers don’t want to return to the office.

• Need to be aware of a situation where employees are living and working in different states and what that will mean in terms of state filing requirements.

• State updates:

• Florida came into the fold in terms of economic nexus effective July 1, 2021.
• Ohio employers must withhold municipal income taxes based on where their employees work, effective January 1, 2022. As a general rule, with some exemptions, such as the 20-day Occasional Entrant Exemption, Ohio employers must withhold for employees for each portion of a day worked in any taxing municipality where the employee performs services for the employer.
• Rule changes also mean there are potential refunds in some states.