A sales and use tax exemption is available in a majority of states for manufacturers— including Ohio. So who is considered a manufacturer? A manufacturer is someone engaged in manufacturing, processing, assembling, or refining a product for sale.  Materials must be changed or converted from one form to another. If applicable, this valuable exemption can save you tax on purchases, but it is important to understand the rules.  Ohio has increased the amount of sales and use tax audits performed, and manufacturers are being examined to ensure they are complying with the law.  Understanding the rules, educating employees, and implementing policies can save you time and money should you be audited.

Misconception to Note

A common misconception is that all purchases made by a manufacturer are exempt—this is not the case.  The Ohio manufacturing exemption is available for purchases of tangible personal property used in the manufacturing process (R.C. 5739.011).  A manufacturer is considered the consumer of tangible personal property he/she does not use in the manufacturing process, i.e. office and cleaning supplies.  They are also responsible for paying sales and use tax on taxable services used in the business, unless it is service on exempt property.

A company should define the manufacturing process in order to determine what purchases can qualify for the exemption. The manufacturing process is as follows:

  1. The process begins when raw materials or parts are committed to the manufacturing process.
  2. The process ends when the finished product is in the form and condition to be sold.
  3. An item is complete when all processes that change or alter its state or form, or enhance its value, are finished — prior to quality testing or packaging for storage or shipment.

All raw materials incorporated into the product qualify for exemption.  In addition, all production machinery and equipment used in the manufacturing process qualify, and the installation, maintenance, and repair of these machines do as well.  By defining the process and making sure the employees in charge of purchasing items used in the process are informed, a company can ensure that they take advantage of all exemption opportunities.

The exemption is taken by providing the applicable vendor with an exemption certificate. Ohio has the following exemption form options that can be used:

  • The Blanket certificate (STEC-B)
  • The Unit certificate (STEC-U)
  • The Streamlines Sales and Use Tax certify certificate (STEC-SST)

All three forms require the purchaser to provide name, address, and the reason for the exemption—stating that the item will be used in the manufacturing of tangible goods for sale is an acceptable reason.  The Blanket certificate will allow the vendor to treat all purchases from the vendor as exempt.  The Unit certificate exempts only the individual purchase.  It is important to not give a Blanket certificate to a vendor the company makes both taxable and exempt purchases from because all purchases will be treated as tax free.

The sales and use tax rules for manufacturers are complicated.  Making sure the employees who are involved in the purchasing process are informed of both the sales and use tax rules, and the manufacturing process of the company, can help ensure the company is in compliance with the law and minimizes the possible negative consequences of an audit.  Contact one of our manufacturing tax advisors for further questions.