The Pennsylvania sales tax exemption for manufacturing offers both manufacturers and processors an exemption on purchases of tangible personal property, including machinery and equipment, predominantly used directly in manufacturing or processing operations per PA Code 32.32. This Pennsylvania sales tax exemption for manufacturing also applies to repair parts for machinery and equipment, as well as supplies that are directly used or consumed in the manufacturing or processing operation.
PA Code 32.1 defines manufacturing as, “an integrated series of operations which places personal property in a form, composition or character different from that in which it was acquired.” Some examples of activities that qualify as manufacturing are compounding, fabricating, and processing. PA Code 32.1 also defines the manufacturing operation as, “the series of production activities, beginning with the first production operation and ending with the packaging of the product for the ultimate consumer.” Since this definition limits the scope of the manufacturing operation to the first stage of production through the packaging of the final product for sale, activities such as collecting, weighing or storing raw materials and loading or delivery of the packaged goods to the customer do not qualify for the Pennsylvania sales tax exemption for manufacturing.
Two important criteria in the Pennsylvania sales tax exemption for manufacturing involve the provision stating that machinery, equipment, repair parts, or supplies must be predominantly used in the manufacturing operation and directly used in the manufacturing operation. Per PA Code 32.32(a)(2), tangible personal property must be used more than 50% of the time in manufacturing operations to be considered as having a predominant use. For example, if a forklift is used 55% of the time to move work-in-process and used 45% of the time to load the final product onto a delivery truck, then this forklift would be considered as having a predominant use in the manufacturing operation and would be entirely exempt for sales and use tax purposes.
Per PA Code 32.32(a)(1), to determine whether tangible personal property is directly used in the manufacturing operation, there are three factors to consider:
- The physical proximity of the property to the actual production process
- The proximity of the time of use of the property in relation to time of use of other property used before and after it in the production process
- The active causal relationship between use of the property and production of the final product
Assuming the property meets the predominant use and direct use criteria and is part of the manufacturing operation, some types of property that would qualify for the Pennsylvania sales tax exemption are:
- Machinery and equipment used to transport, convey, handle or store the product
- Repair parts to machinery and equipment used to transport, convey, handle or store the product
- Equipment, machinery and supplies used to control, abate or prevent air, water or noise pollution
- Property used for quality control in testing and inspecting the product throughout the production cycle
- Packaging equipment and supplies that are used to ship the final product to the ultimate consumer
- Research & development equipment and supplies that are used to create a new or improved product or devise a new method of production
- Safety supplies that are used to protect employees during the manufacturing operation and are required by OSHA
- Electricity and natural gas used to power production equipment. A utility survey must be completed for each meter claimed to be exempt and should be prepared by either a plant engineer or independent consulting firm. This survey needs to indicate the usage of each meter that has a direct causal relationship to the manufactured product.
To claim the Pennsylvania sales tax exemption for manufacturing on machinery and machine tools, qualifying manufacturers need to complete the Pennsylvania Exemption Certificate (REV-1220) and provide a copy of this certificate to their vendors. For manufacturers who have already paid sales taxes to their vendors, they can complete and submit the Board of Appeals Petition Form (REV-65) to recover sales taxes on qualifying tangible personal property predominantly used directly in a manufacturing operation. The Board of Appeals Petition Form can also be used to recover use taxes accrued on exempt tangible personal property predominantly used directly in a manufacturing operation. A Board of Appeals Petition must be filed within three years of the actual payment of the tax, otherwise the statute of limitations will have lapsed, and any taxes paid in error will not be eligible for a refund. Both forms can be located on the Pennsylvania Department of Revenue website.
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 Pennsylvania sales and use tax exemptions.
Have a sales tax question? Contact Aaron Giles.
Subscribe to TaxConnections Blog
Enter your email address to subscribe to this blog and receive notifications of new posts by email.