North Carolina sales and use tax law provides an exemption for sales of mill machinery, machinery parts and manufacturing accessories, however these items are subject to a 1% privilege tax with a maximum tax of $80 per article until June 30, 2018. The 1% privilege tax has been repealed effective June 30, 2018 by Senate Bill 257 from the 2017 Legislative Session. Beginning July 1, 2018 purchases of qualifying mill machinery, machinery parts and manufacturing accessories will be exempt from both North Carolina sales and use tax as well as the privilege tax.
The repeal of the 1% privilege tax, originally found in NC Gen. Stat. § 105-187.51, was nearly prevented by Governor Roy Cooper’s veto of Senate Bill 257 on June 27, 2017. Governor Cooper cited budget concerns as his primary reason for vetoing the bill. However, the North Carolina Legislature voted on June 28, 2017 to override Governor Cooper’s veto and the bill was enacted.
In order to receive the have vendors or suppliers charge the reduced 1% privilege tax rather than the full North Carolina sales and use tax rate for periods prior to July 1, 2018 a qualifying manufacturer must supply their vendor with a Streamlined Sales and Use Tax Agreement Certificate of Exemption (North Carolina Sales and Use Tax Form E-595E). The same privilege tax rate is available to contractors and subcontractors in certain situations as well, and they may also use this form.
The term “Mill Machinery” refers to the following items sold to manufacturers for use in the manufacturing process:
- Motors for the production process along with their controls, connectors and repair parts
- Engines and generators
- Pumps for use in the industrial process
- Moistening or humidifying equipment used for the conditioning of materials for processing
- Boiler room machinery
- Material handling equipment
- Hand tools
- Metal and wood cutting accessories
- Quality control devices
- Equipment cleaning devices, i.e. air compressors, steam hoses, etc.
- Marking devices for ingredients in the production process
- Explosives used in mining and quarrying as part of the production process
- Packaging equipment
- Pollution abatement equipment
- Employee safety clothing worn to protect the quality of the manufactured product
- Fuel consumed in production
In regard to the $80 cap on items subject to the 1% privilege tax, a person buying articles should not treat the articles as one whole unit capped at $80 when the working unit is comprised of multiple articles combined to make a functional unit or operating system. Each individual article purchased is subject to its own $80 cap. Conversely, one single article that has to be shipped in multiple parts due to size or that must be disassembled for shipping purposes is still considered one article and the privilege tax would be capped at $80 on that item.
Beginning July 1, 2018 sales of the equipment listed below will be 100% exempt from both North Carolina sales and use tax as well as the privilege tax:
- Mill machinery or mill machinery parts to a manufacturing industry or plant and to contractors or subcontractors
- Sales to a major recycling facility
- Equipment sold primarily for research and development NAICS code 54171
- Equipment sold primarily in software publishing activities NAICS code 5112
- Equipment sold primarily in industrial machinery refurbishing NAICS code 811310
- Material handling equipment and material handling equipment repair parts
- Equipment and utilities sold to a secondary metals recycler
- Equipment used for extracting precious metals
- Equipment used in fabricating metal that has annual gross receipts of at least $8 million
- Repair or replacement parts for a ready-mix concrete mill
Fuel, piped natural gas or electricity consumed by a manufacturer in the operation of a manufacturing facility is exempt from North Carolina sales and use tax. For periods up to December 31, 2016 this exemption extended to fuel and piped natural gas used for comfort and heating of the facility. Effective January 1, 2017 fuel and piped natural gas not used in the manufacturing process is subject to the full North Carolina sales and use tax rate.
The statute of limitations for recovering North Carolina sales and use tax paid in error allows manufacturers to go back 36 months (3 years) from the date of the purchase. North Carolina will only issue sales tax refunds directly to the entity that paid the tax. Therefore manufactures must request a credit or check from their vendors who originally collected the sales tax. Once the vendor has the appropriate exemption certificate they can amend their sales and use tax returns and issue a sales tax refund to the manufacturer. For any use tax overpayments, the vendor may apply directly with the North Carolina Department of Revenue.
As with all sales and use tax research, the specifics of each case need to be considered when determining taxability. Additional advice from Agile Consulting Group’s sales tax consultants can be found on our page summarizing North Carolina sales and use tax exemptions.
Have a question? Contact Aaron Giles.
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