As the end of the year approaches and thoughts turn to tax filings, auto suppliers should keep the “industrial processing” exemption in mind. Generally, Michigan imposes a 6% tax on purchasers of tangible personal property. But there is a significant exception for property used in “industrial processing.”
Industrial processing is defined as the activity of converting or conditioning personal property by changing the form, composition, quality, combination or character of property for ultimate sale at retail or for use in the manufacturing of a product to be ultimately sold at retail. Industrial processing starts when tangible personal property moves from raw materials storage and ends when finished goods first come to rest in inventory storage.
The industrial processing exemption is clearly available for machinery and equipment used during the manufacturing process. Examples of other property eligible for the industrial processing exemption, as determined by the Michigan Department of Treasury, include the following:
- Property used in engineering related to industrial processing;
- Property used for inspection, quality control or testing before materials or products first come to rest in finished goods inventory storage;
- Equipment used for processing of production scrap and waste up to the point it is stored for removal from the plant of origin;
- Equipment used for grinding up production scrap to be reused for the manufacturer’s own purposes, or to be resold to other industrial processors;
- Equipment used for in-process shipping and receiving within the same legal entity;
- Fuel or energy used for an industrial processing activity; and
- Computers used in operating industrial processing equipment, in a computer assisted manufacturing system, or a computer assisted design or engineering system integral to an industrial process.
The Department of Treasury has found that the industrial processing exemption is not available for the following property:
- Property used for purchasing, receiving or storage of raw materials, as these activities occur before industrial processing begins;
- Property used in sales, distribution, warehousing, shipping or advertising activities;
- Office equipment, including data processing equipment, used for nonindustrial processing purposes; and
- Office furniture and office supplies.
Property used in both exempt industrial processing activities and in non-exempt activities qualifies for the exemption for the portion of the cost attributable to the exempt use. For example, a forklift truck that moves in-process parts for 60 percent of the time and is usedin shipping and receiving for the remaning 40% of the time would qualify for a 60% industrial processing exemption.
Though this is a good exemption to keep in mind, we have seen increased Department of Treasury scrutiny with respect to it, so make sure to consult with your tax professional first.