2014 FL SALES TAX EXEMPTION ON MANUFACTURING EQUIPMENT

2014 FL SALES TAX EXEMPTION ON MANUFACTURING EQUIPMENT

In Florida, our legislature is always incentivizing manufacturers to set up camp in our state. Let's face it, Florida loves manufactures! From a sales and use tax perspective, the game is no different. On a regular basis, the Florida legislature creates sales and use tax incentives for manufacturers to move into Florida. Effective April 30, 2014 through April 30, 2017, a new law went into effect that allows for certain manufacturers who purchase new equipment to escape paying sales tax on those purchases. We have been receiving a number of inquiries on this issue so I thought it would be worthwhile to do a brief summary of the issues.

By way of brief background, there were (and still are) several equipment purchasing laws already on the books dealing with manufacturers. Prior to April 30, 2014, equipment purchased by a new manufacturer that was used for manufacturing was exempt from tax by applying for exemption status with the Florida Department of Revenue. In addition, if a manufacturer increased productive output (which can be creatively measured) by more than 5% (down from 10% in past years), then the equipment purchase could be exempt from sales and use tax. Furthermore, any money spent on repairs for manufacturing equipment is also exempt from sales and use tax. For a detailed summary of how this exemption works please follow the link to an article on the prior exemptions at the end of this article.

Effective April 30, 2014, our legislature took these sales and use tax exemptions a step further by doing away with the 5% increase in productive output, at least for a limited time. In other words, if a manufacturer who engages primarily in a business within the NAICS (North American Industry Classification System) codes 31, 32, or 33 purchases manufacturing related equipment, then the purchase can be exempt from sales and use tax. Unlike the previous version of the law, the new law does not require the purchaser to apply for tax exempt status. The manufacturer may either provide an exemption certificate to the seller to avoid sales tax at the time of purchase or the seller may apply for a refund for the sales tax up to three years after paying the tax. Sellers of equipment used in manufacturing should be aware of this change because not only is it a new way to encourage manufactures to buy your equipment, but your accounts receivable department will need to become aware of the new exemption forms (which MUST be kept to prove why your company did not change sales tax).

A word of caution here for manufacturers and manufacturing equipment retailers alike. While the Florida legislature loves manufacturers, the Florida Department of Revenue loves to subject both manufacturers and manufacturing equipment retailers to grueling sales and use tax audits. So you need to make sure not only of how to qualify for the exemption, but also how to make sure you have done everything necessary to buy or sell the equipment tax free – and you have the documentation to prove it.

For your convenience, the new Florida statute, 212.08(7), provides:

(jjj) Certain machinery and equipment.– (effective April 30, 2014)

1. Industrial machinery and equipment purchased by eligible manufacturing businesses which is used at a fixed location within this state for the manufacture, processing, compounding, or production of items of tangible personal property for sale shall be exempt from the tax imposed by this chapter. If at the time of purchase the purchaser furnishes the seller with a signed certificate certifying the purchaser's entitlement to exemption pursuant to this paragraph, the seller is relieved of the responsibility for collecting the tax on the sale of such items, and the department shall look solely to the purchaser for recovery of the tax if it determines that the purchaser was not entitled to the exemption.

2. For purposes of this paragraph, the term:

a. "Eligible manufacturing business" means any business whose primary business activity at the location where the industrial machinery and equipment is located is within the industries classified under NAICS codes 31, 32, and 33. As used in this subparagraph, "NAICS" means those classifications contained in the North American Industry Classification System, as published in 2007 by the Office of Management and Budget, Executive Office of the President.

b. "Primary business activity" means an activity representing more than 50 percent of the activities conducted at the location where the industrial machinery and equipment is located.

c. "Industrial machinery and equipment" means tangible personal property or other property that has a depreciable life of 3 years or more and that is used as an integral part in the manufacturing, processing, compounding, or production of tangible personal property for sale. A building and its structural components are not industrial machinery and equipment unless the building or structural component is so closely related to the industrial machinery and equipment that it houses or supports that the building or structural component can be expected to be replaced when the machinery and equipment are replaced. Heating and air conditioning systems are not industrial machinery and equipment unless the sole justification for their installation is to meet the requirements of the production process, even though the system may provide incidental comfort to employees or serve, to an insubstantial degree, nonproduction activities. The term includes parts and accessories for industrial machinery and equipment only to the extent that the parts and accessories are purchased prior to the date the machinery and equipment are placed in service.

3. This paragraph is repealed effective April 30, 2017.

From the manufacturing equipment buyer's perspective, here is what you need to know:

Under the new law, the purchaser must show its business is primarily an activity described in one of the listed NAICS codes. This is different than the old law, which allowed manufacturers to segregate lines of business to qualify. This means that your business must be more than 50% in one of these industry codes, and you should probably have this indicated of the first page of your federal income tax return (yes, your NAICS industry code is boldly stated on page 1). Check your return – if the industry code number does not start with 31, 32, or 33, then you need to find out why. Perhaps the code is simply wrong. Check now, because this is the first place the Florida Department of Revenue will look.
If you really don't fall primarily into one of these industry code, don't despair. You most likely can have the equipment exempted from sales tax under one of the older, but still active laws. See the article below for a discussion of the old manufacturing exemptions.
If you already bought equipment with sales tax, then you can still apply for a refund. You must request the refund directly from the selling vendor. The refund needs to be applied for within three years of when you paid the tax.
One last thing – your equipment purchases are not the only thing potentially exempt for sales tax. Manufacturers also enjoy an exemption for sales tax on electricity used in the manufacturing process – and it is refundable also. So if you are in the manufacturing industry – pull your electricity bills to see if you are paying sales tax. Not only can you get a refund, but you can also benefit from the exemption going forward as well. (Beware of "consultants" wanting to file this claim for a big contingency fee. The exemption on electricity is not complicated or terribly time consuming. It is something we can usually do for our firm's minimum fee, which could save you tens of thousands of dollars in contingency fees.)

From the manufacturing equipment seller's perspective, here is what you need to know:

As the seller of manufacturing equipment, your job is really all about documentation. You need to have a proper exemption certificate for each and every sale that does not include sales tax. Keep the exemption certificate with the sales records for that particular sale and you will easily be able to find it when the sales tax auditor comes knocking. If you don't have it, then you might be able to get the exemption certificate after the fact. But do you really want to take the chance that the purchaser is even still in business two or three years from now? In other words, train your accounts receivable department to charge sales tax if they don't have an exemption certificate for each and every sale – and keep that certificate with the sales records. Fail to do this and your company will likely become subject to the sales tax you did not collect from your customers – plus penalties and interest.
As the seller, it is not your job to determine whether your buyer qualifies for the exemption. If you accept an exemption certificate in good faith from the buyer (and you keep that exemption certificate), then you have done your duty to the state. Some auditors like to push back if the buyer is say called "Bob's Speed Boats," because the name strongly implies that business is not primarily engaged in manufacturing. But you will most likely survive the auditor's questions if you accepted the exemption certificate in good faith. Now, if your sales crew gets overly zealous and starts telling everyone to "simply fill out this exemption certificate and I don't have to charge you tax," then you might run into a problem. So educate your sales personnel enough so they can use the exemption as a selling tool, but not to abuse it. Enough said on this topic.
If a client is due a large refund of sales tax – then they might be able to use it as a down payment on new equipment! So it might be worth it to you to review your client list to see if there are manufacturing clients that have not been taking advantage of the new or old laws. If you need help educating them, then we would be glad to assist as a free initial consultation with your customer.

In addition to the exemption and refund opportunities discussed above, manufacturers should always be on the lookout for exemptions when purchasing expensive equipment. Manufactures should not be shy about what type of process might qualify for "manufacturing." For instance, a fuel company argued that a pump which blended different grades of fuel was "manufacturing equipment." It is also noteworthy that manufacturing equipment used for pollution control is also exempt. The moral of the story is that if your business sor your client's business buys equipment that is arguably used for manufacturing, then it is worthwhile to look into a sales and use tax exemption.

Moffa, Gainor, and Sutton is a law firm focused primarily on Florida sales and use tax controversy. With offices in Tampa and Fort Lauderdale, we serve clients throughout the state. If you have any questions or concerns about this manufacturing exemption or any other Florida sales and use tax matter, then please do not hesitate contacting one of our lawyers for a FREE INITIAL CONSULTATION via the phone number or email at the top of this web page.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., based in Fort Lauderdale, Florida. Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. You can read more about Mr. Donnini in his firm BIO HERE.

About the author: Mr. Sutton is a Florida licensed CPA and Attorney and a shareholder in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Sutton's primary practice is Florida tax controversy, with an almost exclusive focus on Florida sales and use tax. Mr. Sutton worked for in the State and Local Tax department of one of the Big Five accounting firms for a number of years and has been an adjunct professor of law at Stetson University College of Law since 2002 teaching State and Local Tax and at Boston University College of Law since 2014 teaching Sales and Use Tax. Mr. Sutton is a frequent speaker on Florida sales and use taxes for the FICPA, Lorman Education, NBI, and the Florida Society of Accountants. Mr. Sutton has also been the State and Local Tax Chairman for the American Association of Attorney – Certified Public Accountants. You can read more about Mr. Sutton in his firm BIO HERE.

AUTHORITY

Sec. 212.08(7)(jjj), Florida Statutes (new manufacturing exemption)

Sec. 212.08(7)(ff), Florida Statutes (electricity manufacturing exemption)

Sec. 212.08(5)(b), Florida Statutes (manufacturing equipment exemption used by new company or to increase productive output)

Rule 12A-1.043, Florida Administrative Code (Manufacturing)

ADDITIONAL RESOURCES

FLORIDA TAX INCENTIVES FOR BUSINESS, published November 10, 2013, by Jerry Donnini, Esq.

FL SALES & USE TAX MACHINERY & EQUIPMENT EXEMPTION SIGNED INTO LAW – FINALLY!, published May 21, 2013, by James Sutton, CPA, Esq.

SHIPPING CHARGES vs FL SALES TAX, published June 8, 2014, by James Sutton, CPA, Esq.

FL TAX – VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, published October 5, 2012, by Jerry Donnini, Esq.

FL TAX ALERT: USE TAX ON MANUFACTURERS / FABRICATORS INSTALLING TPP OUT OF STATE, published April 19, 2012, by James Sutton, CPA, Esq.