Unlocking Sales Tax Savings: What New England Manufacturers Need to Know

Manufacturers operating in Connecticut, Massachusetts, or Rhode Island, may have unknowingly paid sales and use taxes on purchases that were eligible for exemption. As state authorities do not notify businesses of potential exemptions, it is incumbent upon each manufacturer to conduct thorough due diligence to determine applicable eligibility.

Some, but not all, of these exemptions relate to the purchase of machinery, equipment, materials, tools, fuels, components, and repair parts. The New England states vary in terms of the level of exemption, qualifications, and items that qualify.

In general, Connecticut, Massachusetts, and Rhode Island offer a range of exemptions for purchases made by qualifying manufacturers; the examples outlined below represent a subset of those potentially available.

• Utilities: Gas, electricity, and fuel
• Materials: Ingredients and component parts
• Consumables
• Machinery and Equipment
• Fabrication Services

Eligibility for these exemptions within the various states require classification as a qualified manufacturer, processor, or other qualifying business. Processors and fabricators are subject to further limitations regarding exempt items.

Each of these states has further restrictions, requirements, and potential benefits that manufacturing companies should be aware of.

Connecticut

• Full (100%) and partial (50%) exemptions exist depending on the character of the business, the tangible personal property, and the use by the taxpayer. To qualify for full exemption, the following criteria must be met:
  • The manufacturing process must occur at an establishment that has manufacturing as its predominant purpose (i.e., manufacturing plant or an industrial plant).
  • The finished product must be intended for sale by the manufacturer or a third party.

Massachusetts

• Additional exemptions exist for corporations, including limited liability companies which elect to be taxed as corporations, that are granted a Massachusetts manufacturing classification. Furthermore, software development has recently been classified as a manufacturing activity in state case law. To apply for this status, file Form 355Q with the Commissioner.
  • This classification further allows manufacturers to be exempt from sales and use tax for materials, tools, fuel, and machinery used in research and development (R&D). Manufacturing corporations with this status are entitled to further benefits, such as a property tax exemption and the Massachusetts investment tax credit.
  • Companies without this classification are still eligible for sales and use tax exemptions but will not receive the benefit on purchases related to R&D.

Rhode Island

• Rhode Island allows you to pay a use tax based on the percentage of the nonexempt use of equipment (if the percentage is determinable).
  • Manufacturers would pay an estimate on their use tax return, and 24 months after the sale when the actual usage is determinable, the difference would be submitted with the next month’s use tax return.
    
    

  For current purchases, manufacturers should furnish the following forms to vendors on qualifying purchases:

  • Connecticut: The specific exemption certificate utilized is dependent on the qualifying item being purchased. See Connecticut exemption certificates for more details.
  • Massachusetts: Form ST-12
  • Rhode Island: Form SU07-58

A manufacturer who has paid sales and use tax on purchases that could have qualified for exemptions, may still have an opportunity to receive a refund. Each state has a particular procedure and time period for when such refund claims or requests may be submitted. Following the applicable state procedure in the prescribed time for filing is critical and a failure to do so can result in lost tax savings.

The above highlights several tax exemptions available to manufacturers and several others may apply depending on the specific nature of your operations. Tailored opportunities exist that align with your industry, and it’s worth exploring them in greater detail. Additionally, property tax exemptions may be available to qualifying manufacturers that meet the relevant criteria.

Determining what qualifies as a manufacturing activity, a manufacturing facility, or an eligible exempt purchase can be complex. These definitions often vary by state and require in-depth analysis of the governing laws and regulations.

Additionally, there are several state cases and guidance documents which seek to define or narrow the scope of these exemptions. As a result, vendors may take more conservative positions in terms of imposing tax where it may not necessarily be required. Accordingly, a careful review of purchases and tax accruals is necessary from both a compliance and tax savings perspective.

Citrin Cooperman’s State and Local Tax Practice specializes in helping manufacturers make well-informed decisions regarding their purchases. Through our comprehensive taxability reports and targeted analyses, we clearly identify which products are subject to tax — enabling you to maximize exemptions and stay compliant. To learn more, please contact your Citrin Cooperman advisor or Sarah Bray at sbray@citrincooperman.com.