SUT for Manufacturers - October 2019 FINAL wo Review · 2019-10-01 · 43 Metal lathe 44 Turn‐key line machine 45 Food processing equipment 46 47 Meat slicer 47 Key duplicating

9/30/2019

Sales and Use Tax for Manufacturers

October 2019Minnesota Business Tax Education

Disclaimer

This presentation is for educational purposes only. It is meant to accompany an oral presentation and not to be used as a standalone document.

This presentation is based on the facts and circumstances being discussed, and on the laws in effect when it is presented. It does not supersede or alter any provisions of Minnesota laws, administrative rules, court cases, or revenue notices.

If you have any questions, contact us at [email protected] , 651‐296‐6181, or 1‐800‐657‐3777 (toll‐free).

Minnesota Business Tax Education ProgramProviding education opportunities about Minnesota tax laws.

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Introduction

This class is intended for businesses that make products intended to be sold ultimately at retail.

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Tell us about yourself …

Your name

Business and/or industry

What you do at your business relating to sales/use tax

Business location (city)

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Course Objectives

After completing this class you will:

Recognize when you owe sales or use tax

Recognize the differences between the “industrial production process” and the “integrated production process”

Identify the exemptions available to manufacturers

Distinguish how the use of an item determines if it qualifies for an exemption

Identify how to use and accept exemption certificates

Identify when you have paid tax in error and how to get a refund

List the resources available to help answer sales and use tax questions 5

Part 1

Sales and Use

Tax Basics

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Sales and Use Tax Basics

Tax charged by the seller

Applies to retail sales of

Most tangible personal property

Some services and

Some digital products

Made in (or sourced to) Minnesota

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What is sales tax?


Complement to sales tax

Self‐assessed

Paid directly to the state

Applies to taxable purchases when sales tax was not charged

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What is use tax?


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Sales and Use Tax is a Transaction Tax

6.875%


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What is the tax rate?


Sourcing determines where the sale takes place and which taxes are imposed on the sale.

.

Minnesota Statutes 297A.668 and 297A.669 11

1. Seller’s Address If the purchaser receives the product at the seller’s location

2. Delivery Address If the purchaser receives the product or service at a location other than the seller’s location

3. Billing Addressbased on the address that the seller has in their records for the customer)

How do I determine what taxes apply to the sale? Sourcing rules for leases or rentals of TPP


1st PaymentGeneral Sourcing Rules

(where transfer of property occurs)

Subsequent Payments

Primary Property Location

(address provided to

lessor by lessee)

How do I determine what taxes apply to the sale?

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Operating Lease vs. Capital Lease

CharacteristicsOperating Lease (Rental Agreement)

Capital Lease (Financing Agreement)

What is being transferred? Transfer of possession only; not title

Transfer of title upon possession or at the end of the lease agreement

Who owns property at the end of the lease?

Lessor owns property but lessee generally has a nominal buy‐out option

The customer is required to buy the item at the end of the lease agreement

When is tax charged? Applied to each lease payment

Due up front

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What is a lease?

Type of Labor Examples Is it taxable?

Repair labor Car repair Equipment repair Calibrating equipment Sharpening tools

Construction labor Build an office building Kitchen remodel

Fabrication labor Custom sawing Bending sheet metal

Installation labor Computer equipment Modular furniture


No (if separately stated)

Yes

Yes

No

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When is labor taxed?


When are repair and maintenance contracts taxed?

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Type of Contract Is the contract taxable?

Optional maintenance contracts

(bundled – one nonitemized price)

Yes. Tax is due when the contracted

maintenance is sold.

Optional maintenance contracts

(unbundled – separate itemized prices)

No. The service provider charges sales

tax to the customer on the taxable

items when the repair is performed.

Extended warranty contracts No. The service provider owes tax on

the parts provided under the contract.

Part 2

Overview of

Sales and Use Tax

for Manufacturers

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Manufacturing Overview

Who are manufacturers?

Anyone who creates a tangible product to be sold ultimately at retail is considered a manufacturer. Examples include:

Crafters

Fabricators

Miners

Paper mills

Refiners

Note: Making prepared food does not qualify.

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Our primary focus is to explain:

The Industrial Production Process

‐ What qualifies for the Industrial Production Exemption

The Integrated Production Process

‐ What qualifies for the Capital Equipment Exemption

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Overview of Sales and Use Tax for Manufacturers

Industrial Production is the process of taking raw materials out of inventory and creating a product intended to be sold ultimately at retail.

The Integrated Production Process involves a series of activities that result in making a product intended to be sold ultimately at retail.

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Production Flow

Raw Materials


Distribution

Industrial Production Process

Integrated Production Process

Production

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Part 3

Pre‐Production

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Pre‐Production

Items used or consumed in R & D activities

Purchases of prototypes or materials used to make prototypes

Machinery, equipment and tools used primarily in R & D activities

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Research & Development (R & D)

3D CAD Design Engineering Software 23

Consumable materials (which would also include electricity) used to create your prototype on a 3D printer.

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Pre‐Production

What items do you use in R & D activities that may qualify for an exemption?

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Pre‐Production

Exempt purchases include:

Component parts and ingredients of a product (inventory)

Taxable purchases include items used to:

Receive raw materials

Store or preserve raw materials before the production process begins

Facilitate loading, unloading, handling, transportation or storage of products before the manufacturing process begins

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Managing Raw Materials

Pre‐Production

Examples of taxable purchases:

A forklift or industrial crane used primarily for raw materials management.27

Pre‐Production

Examples of taxable purchases:

The propane used in the forklift that is used primarily for raw materials management.

Shelving or storage bins used to store raw materials inventory.28

Pre‐Production

Do you have any items you use in raw materials inventory at your facility that may qualify for the capital equipment exemption?

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Pre‐Production

Do you have items consumed in raw materials inventory that you should verify that you are not claiming the industrial production exemption?

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Please be back in 10 minutes.

Part 4

Production

of the Product

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Production of the Product

Where does the production process BEGIN?

The production process begins with the removal of raw materials from inventory.

This is true for both the:

Integrated production process and

Industrial production process

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Start of the Production Process



Industrial production exemption (M.S. 297A.68, Subd. 2)

Items used or consumed in production

Utilities

Product packaging

Separate detachable units

Capital equipment exemption (M.S. 297A.68, Subd. 5)

Special tooling (M.S. 297A.68, Subd. 6)

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Production Activities


Propane and industrial gases used in production

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Petroleum products and lubricants used in production equipment

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Utilities used to operate equipment, machines and tools that are used directlyin the industrial production process (e.g. electricity, water, and gas.)

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Materials that directly affect the product 38

Short‐lived accessory items for qualifying capital equipment that have a direct affect on the product


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Capital Equipment Exemption

Exempt purchases include equipment and machinery that

Are essential to producing the product

Perform an indispensable phase/stage in production

Are used in Minnesota

Are used at least 50% of the time in production

Produce a product ultimately sold at retail

Regulatory Equipment ≠ Essential Equipment 40

Printing press 41 Laser cutter 42

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Plastic injection molding machine

43 Metal lathe 44

Turn‐key line machine 45

Food processing equipment

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Meat slicer

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Equipment and machinery used to move the product through the production process

Conveyor

Industrial crane

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Ready‐mixed concrete trucks


Capital Equipment does NOT include:

Motor vehicles licensed for road use

except for

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Air Purification System for the Textile IndustryReminder: Regulatory equipment that does not have a direct affect on the product is taxable.

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Capital Equipment ≠ Capital Assets

The term “capital equipment” is not the same as capitalized assets.

Items capitalized for accounting purposes do not automatically qualify as capital equipment.

Items that you expense for accounting purposes, such as leased equipment, may be considered “capital equipment."

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Special Tooling Exemption

Exempt purchases

Dies, jigs, patterns, gauges, and other special tools that have value and use only for the buyer and use for which they are made.

Note: Materials purchased to make your own special tooling are taxable because “materials” are not “special tools."

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What equipment do you have that may qualify for the special tooling exemption?

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Industrial shelving used to store work‐in‐progress 55

Storing Work‐in‐Progress Reusable items used for handling or moving materials through production

may qualify for the capital equipment exemption.

Note: Reusable items used to store raw materials along the production line do not qualify for the industrial production exemption or the capital equipment exemption.


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Storing Work‐in‐Progress


Do you have any items you use at your facility to store work‐in‐progress that may qualify for an exemption?

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Exempt purchases

Outsourced fabrication services that are essential to producing their product.

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Outside Fabrication Labor


Does your company subcontract with another business to perform fabrication labor for you?

If so, are there any items you can claim an exemption for that are used at their plant?

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Exempt purchases

Quality control and testing activities done on the product

Calipers – used to measure thickness of an item

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Quality Control and Product Testing

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Laboratory equipment and supplies

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Disposable lab testing supplies

Disposable latex and vinyl gloves

(suitable for general use)

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Dust Collector (Vacuum)

Equipment that performs a quality control function and has a direct affect on the product is exempt.

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Do you have any items used in quality control that may qualify for an exemption?

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Exempt purchases

A structure within the integrated production process

Serve or perform a function essential to the production process, and

Used in producing products intended to be sold ultimately at retail

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Special Purpose Buildings

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Clean room

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Paint booth

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Exempt Purchases

Product packaging

Nonreturnable internal packaging materials that shape, form, stabilize and protect the contents

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Product Packaging


Exempt Purchases

Warranty cards

Owner’s manuals

Content lists

Instruction sheets

Material safety data sheets

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Product Packaging


Exempt Purchases

Product identification labels (e.g. combination labels that identify the product and price for customers)

Expiration date labels (includes stickers or ink for labeling)

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Product Packaging


Taxable Purchases

Returnable containers such as steel drums, barrels, bottles, gas cylinders, boxes, tanks, sacks, cans (except when used to package food and beverages)

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Product Packaging


Do you have any taxable product packaging?

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Where does the production process END?

In general, the industrial production process ends with the placement of the product in finished goods inventory.

vs.

The integrated production process ends when the last process prior to loading for shipment has been completed.

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End of the Production Process Please be back in 10 minutes.

Part 5

Post‐

Production

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Post‐Production

Taxable purchases

Items used primarily to facilitate loading, unloading, handling, transportation or storage of products after the manufacturing process ends.

Fuel to operate the equipment after the industrial production process ends. 76

Finished Goods Inventory (or Warehousing)

Industrial shelving used in finished goods inventory does NOT qualify.

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Post‐Production

Exempt purchases

Equipment used to maintain conditions in finished goods (e.g. refrigerators, freezers, etc.)

Taxable purchases

Utilities used in the equipment that maintains the conditions in finished goods.

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Post‐Production

Do you have any items used in finished goods inventory that may qualify for the capital equipment exemption?

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Post‐Production

Are there items consumed in finished goods inventory that you should verify that you are not claiming the industrial production exemption on?

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Post‐Production

Disposal of scrap is outside the production process.

The equipment, machinery, and other items used to dispose of the scrap is taxable unless the scrap is:

Reused in the production process (i.e. “closed loop system”)

Used to make a different product that is ultimately sold at retail

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Disposal of Scrap

Post‐Production

Have you incorrectly claimed the capital equipment exemption on any equipment and machinery used to dispose of scrap and waste?

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Post‐Production

Are there any circumstances in your production process where equipment used to dispose of scrap qualifies for the capital equipment exemption?

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Post‐production


Nonreturnable pallets and skids

Nonreusable external packaging materials

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Shipping and Distribution

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Post‐production


Dunnage that protects, braces, pads, or cushions against damage

Stuffing materials such as straw, dry ice, shredded paper, cotton batting, “packing peanuts”, etc.

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Post‐production


Strapping machine

Wrapping materials such as paper or plastic wrap, wire, tape, staples, etc.

Taxable purchases include:

Forklifts and industrial cranes used primarily in shipping and distribution

Strapping Machine86


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Industrial cranes

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Post‐Production


Returnable containers and packaging (except for food manufacturers)

Returnable skids and pallets

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Post‐Production


Address labels, invoices, packing slips, and envelopes

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Post‐Production


Warning labels that give shipping directions

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Post‐Production

Are there items you buy from your vendors without sales tax that are used in shipping and distribution that you need to accrue use tax on?

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Part 6

Production

Support

Functions

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Production Support Functions

Exempt purchases

Equipment, machinery, and tools used to construct, maintain, and repair qualifying capital equipment

Taxable purchases

Items used or consumed in these activities do not qualify for the industrial production exemption

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Tool Room Operations

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Taxable purchases include items used for:

Internal product and production tracking

Inventory management

Production analysis

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Production Administrative Support


Taxable purchases include items used for:

Protective equipment

Clean room apparel and equipment (reusable and disposable)

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Protective and Safety Items

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Protective safety clothing 97



Sprinkler system components

Fire alarm monitoring

First aid kits and eye wash stations

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Fire Prevention, First Aid, and Hospital Stations


Taxable purchases include utilities used to:

Heat the manufacturing facility in the winter

Cool the plant in the summer

Provide overhead lighting on the production floor

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General Heating, Cooling, and Lighting


Did you include general heating, cooling, and lighting in your utility exemption percentage?

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Items that do not qualify for exemption include:

Dust collections systems

Emission control systems

Welding ventilation systems

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Pollution Control, Prevention, and Abatement


Exempt purchases

Chemicals

Materials

Supplies

Taxable purchases

Equipment and machinery

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Waste Treatment

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Are there items consumed in treating waste that you should verify that you are claiming the industrial production exemption?

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Part 7

Administrative

Support

Functions

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Administrative Support Functions

Examples of administrative activities include:

Customer service activities

General office administration

Managerial functions

Taxable items used to perform these activities include:

Furniture

Office equipment and supplies

Prewritten computer software

Training materials and supplies

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General Administrative Activities

Computer

Computer Printer

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Taxable purchases:

Chemicals and cleaning agents used to clean: Production tools and equipment (except food processing equipment)

Areas around food processing equipment

Buildings and other structures

Janitorial cleaning materials and services

Materials used to construct or remodel real property

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Building Cleaning and Maintenance

Pressure Washer 108

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Taxable purchases:

PA systems

Telecommunications equipment and services

Two‐way radios

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Communications


Taxable purchases:

Business cards

Coffee mugs, key chains, and pens

Order forms

Point of sale displays

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Sales Operations


Taxable purchases:

Employee security services

Plant security

Security access equipment and badges

Security system maintenance and monitoring

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Security

Part 8

Exemption

Certificates

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Exemption Certificates

All sales of tangible personal property and taxable services are taxable unless:

The item is exempt by Minnesota Statutes, or

The purchaser provides the seller with a completed exemption certificate

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Do I need an exemption certificate?


The following are examples of use‐based exemptions:

Capital equipment

Industrial production/manufacturing

Utilities used in production

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Use‐based exemptions

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The green boxes identify the fields that are required for a complete exemption certificate.

The purchasing agent must retain the contract as supporting documentation.

The seller’s information is not required but it doesn’t hurt to complete these fields.

Jane Smith

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Certificate of Exemption, Form ST3(Minnesota Department of Revenue form)

Certificate of Exemption, Form F0003 (Streamlined Sales Tax form)

Uniform Sales and Use Tax Certificate (Multistate Tax Commission form)

Other state’s exemption certificates (if all required elements are included)

Self‐prepared exemption certificate (if all required elements are included) 116

Different Types of Exemption Certificates


Required elements for a complete exemption certificate:

Purchaser's name and address

Purchaser's Minnesota tax ID number

Purchaser’s type of business

Reason for exemption

Purchaser's signature & Date

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Complete Exemption Certificates


Know if you qualify to claim an exemption

Complete an exemption certificate

Give it to the seller at the time of purchase

Liable for any use tax, interest, and penalties

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Purchaser’s Responsibilities


You should review all exemption certificates and verify:

All required fields are complete.

That the certificate is signed

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Seller’s Responsibilities

Part 9

Refund Requests

and

Amended Returns

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Review your invoices

Refund Requests and Amended Returns

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How far back can I request a refund?


3 ½ years*

*Exceptions to the general rule apply in cases of an audit if you paid an assessment order in full or signed, Form ST21, Consent to Extend Statute . 122

Statute of Limitations


How is the 3½ year statute of limitations calculated?

Type of tax paid Calculation of 3½ year statute

Sales tax(paid to seller)

You have 3½ years from the 20th day of the month following the purchase invoice date.

Use tax(paid directly to state)

You have 3½ years from the original tax return due date.

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Purchaser Refund

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File an amended return if:

Made an error on a previously filed return

Paid too much or too little

Use a separate column for each taxing jurisdiction

Number of periods How do I file the amended return?

One Adjust your return in e‐Services

Multiple Send Form ST11 with a worksheet detailing the adjustment for each period.

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Amended Returns

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Multi Period Amended Return

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Multiple Period Amended Return Worksheet


Where do I send Form ST11?

To file a refund request electronically, send it to [email protected]

Refund requests in paper form should be mailed to:

Minnesota Department of Revenue

525 Lake Avenue South

Suite 405

Duluth, MN 55802

Remember to attach all required documentation!

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Part 10

Communicating with the

Department of Revenue

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Communicating with the Department of Revenue

Have a sales and use tax question?

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Minnesota Revenue website: revenue.state.mn.us

Questions relating to Sales and Use Tax Law?Email: [email protected]

Questions relating to your Sales and Use Tax account activity?Email: [email protected]

Prefer telephone assistance?Phone: 651‐296‐6181 or 800‐657‐3777

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Sales and Use Tax General Contact Information


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Business Income Taxes (Corporation Franchise Tax, Partnership Tax, S Corporation Tax, Estate Tax, Fiduciary Tax) 651‐556‐3075 or 1‐800‐657‐3666 (toll free) Email: [email protected]

Withholding Tax

651‐ 282‐9999 or 1‐800‐657‐3594

Email: [email protected]

Business Registration

651‐282‐5225 or 1‐800‐657‐3605

Email: [email protected] 133

General Contact Information for Other Divisions

Communicating with the Department of Revenue Revenue has a new website!• Improved design and

content

• Easier navigation

• Mobile responsive

• Task‐based layout

Choose the updates you want ‐ by tax type and publication type

Choose the frequency of notifications

Sign in directly or use your social media account –

Facebook, Yahoo! or Google

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GovDelivery e‐Services Instructional Videos

Education Video Series

Inside Scoop: Streamlined Sales Tax

136youtube.com/MNRevenue


Sales and Use Tax Videos

Keep up with the latest news from the Minnesota Department of Revenue on Twitter, Facebook, and LinkedIn.

twitter.com/MNRevenue

facebook.com/MNRevenue

linkedin.com/company/MNRevenue

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Social Media


Please notify us if you have changes to any of the following:

Mailing address(es)

Business location(s)

Legal organization

NAICS code

Contact information

Owners and/or officers

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Part 11

Course Review

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Course Summary

We discussed… When sales and use taxes are owed The capital equipment and industrial

production exemptions The refunds and exemptions available

to businesses engaged in “industrial production."

How to request a refund of taxes paid using Form ST11

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Questions?

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Thank you!Permission of the Minnesota Department of Revenue must be secured before exhibiting, reproducing, distributing or making any other use

of any part of this presentation.

Produced by the Minnesota Department of Revenue600 North Robert Street, St. Paul, Minnesota 55146

©Copyright 2019, Minnesota Department of Revenue, All Rights Reserved

Minnesota Business Tax Education142

Documents

SUT for Manufacturers - October 2019 FINAL wo Review · 2019-10-01 · 43 Metal lathe 44 Turn‐key line machine 45 Food processing equipment 46 47 Meat slicer 47 Key duplicating