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2/5/2018
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Sales and Use Tax for Manufacturers
February 2018Minnesota Business Tax Education
Disclaimer
This presentation is for educational purposes only. It is meant to accompany an oral presentation and not to be used as a standalone document.
This presentation is based on the facts and circumstances being discussed, and on the laws in effect when it is presented. It does not supersede or alter any provisions of Minnesota laws, administrative rules, court cases, or revenue notices.
If you have any questions, contact us at [email protected] , 651-296-6181, or 1-800-657-3777 (toll-free).
Minnesota Business Tax Education ProgramProviding education opportunities about Minnesota tax laws.
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Introduction
This class is intended for businesses that make products intended to be sold ultimately at retail.
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Tell us about yourself …
Your name
Business and/or industry
What you do at your business relating to sales/use tax
Business location (city)
List the resources available to help answer my sales and use tax questions
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Course Objectives
After completing this class you will: Recognize when you owe sales or use tax
Recognize the differences between the “industrial production process” and the “integrated production process”
Identify the exemptions available to manufacturers
Distinguish how the use of an item determines if it qualifies for an exemption
Identify how to use and accept exemption certificates
Identify when you have paid tax in error and how to get a refund
List the resources available to help answer sales and use tax questions 5
Part 1
Sales and Use Tax Basics
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Sales and Use Tax Basics
Tax charged by the seller
Applies to retail sales of
Most tangible personal property
Some services and
Some digital products
Made in (or sourced to) Minnesota
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What is sales tax?
Sales and Use Tax Basics
Complement to sales tax
Self-assessed
Paid directly to the state
Applies to taxable purchases when sales tax was not charged
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What is use tax?
Sales and Use Tax Basics
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Sales and Use Tax is a Transaction Tax
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6.875%
Sales and Use Tax Basics
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What is the tax rate?
Sales and Use Tax Basics
Sourcing determines where the sale takes place and which taxes are imposed on the sale.
.
Minnesota Statutes 297A.668 and 297A.669
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1. Seller’s Address (if that’s where title to or possession of item takes place)
2. Delivery Address (if item is shipped or delivered to customer or where service is performed)
3. Billing Address(based on the address that the seller has in their records for the customer)
How do I determine what taxes apply to the sale?
Sourcing rules for leases or rentals of TPP
Sales and Use Tax Basics
1st PaymentGeneral Sourcing
Rules
(where transfer of property
occurs)
Subsequent Payments
Primary Property Location
(address provided to
lessor by lessee)
How do I determine what taxes apply to the sale?
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Sales and Use Tax Basics
Operating Lease vs. Capital Lease
CharacteristicsOperating Lease (Rental Agreement)
Capital Lease (Financing Agreement)
What is being transferred? Transfer of possession only; not title
Transfer of title upon possession or at the end of the lease agreement
Who owns property at the end of the lease?
Lessor owns property but lessee generally has a nominal buy-out option
The customer is required to buy the item at the end of the lease agreement
When is tax charged? Applied to each lease payment
Due up front13
What is a lease?
Type of Labor Examples Is it taxable?Repair labor Car repair
Equipment repair Calibrating equipment Sharpening tools
Construction labor Build an office building Kitchen remodel
Fabrication labor Custom sawing Bending sheet metal
Installation labor Computer equipment Modular furniture
Sales and Use Tax Basics
No (if separately stated)
Yes
Yes
No
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When is labor taxed?
Sales and Use Tax Basics
When are repair and maintenance contracts taxed?
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Type of Contract Is the contract taxable?Optional maintenance contracts (bundled – one nonitemized price)
Yes. Tax is due when the contracted maintenance is sold.
Optional maintenance contracts (unbundled – separate itemized prices)
No. The service provider charges sales tax to the customer on the taxable items when the repair is performed.
Extended warranty contracts No. The service provider owes tax on the parts provided under the contract.
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Part 2
Overview of Sales and Use Tax for Manufacturers
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Manufacturing Overview
Who are manufacturers?Anyone who creates a tangible product to be sold ultimately at retail is considered a manufacturer. Examples include: Crafters Fabricators Miners Paper mills Refiners
Note: Making prepared food does not qualify.
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Manufacturing Overview
Our primary focus is to explain: The Industrial Production Process
- What qualifies for the Industrial Production Exemption
The Integrated Production Process- What qualifies for the Capital Equipment Exemption
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Overview of Sales and Use Tax for Manufacturers
Industrial Production is the process of taking raw materials out of inventory and creating a product intended to be sold ultimately at retail.
The Integrated Production Process involves a series of activities that result in making a product intended to be sold ultimately at retail.
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Production Flow
Raw Materials
Manufacturing Overview
Distribution
Industrial Production Process
Integrated Production Process
Production
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Part 3
Pre-production
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Pre-Production
Items used or consumed in R & D activities
Purchases of prototypes or materials used to make prototypes
Machinery, equipment and tools used primarily in R & D activities
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Research & Development (R & D)
3D CAD Design Engineering Software 23
Consumable materials (which would also include electricity) used to create your prototype on a 3D printer.
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Pre-Production
What items do you use in R & D activities that may qualify for an exemption?
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Pre-Production
Exempt purchases include: Component parts and ingredients of a product (inventory)
Taxable purchases include items used to: Receive raw materials
Store or preserve raw materials before the production process begins
Facilitate loading, unloading, handling, transportation or storage of products before the manufacturing process begins
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Managing Raw Materials
Pre-Production
Examples of taxable purchases:A forklift or industrial crane used primarily for raw materials management.
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Pre-Production
Examples of taxable purchases: The propane used in the forklift that is used primarily for raw materials management. Shelving or storage bins used to store raw materials inventory.
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Pre-Production
Do you have any items you use in raw materials inventory at your facility that may qualify for the capital equipment exemption?
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Pre-Production
Do you have items consumed in raw materials inventory that you should verify that you are not claiming the industrial production exemption?
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Please be back in 10 minutes.
Part 4
Production of the Product
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Production of the Product
Where does the production process BEGIN?
The production process begins with the removal of raw materials from inventory.
This is true for both the:
Integrated production process and
Industrial production process
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Start of the Production Process
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Production of the Product
Exempt purchases include: Industrial production exemption (M.S. 297A.68, Subd. 2)
Items used or consumed in production Utilities Product packaging
Separate detachable units
Capital equipment exemption (M.S. 297A.68, Subd. 5)
Special tooling (M.S. 297A.68, Subd. 6)
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Production Activities
Production of the Product
Propane and industrial gases used in production
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Production of the Product
Petroleum products and lubricants used in production equipment36
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Production of the Product
Utilities used to operate equipment, machines and tools that are used directlyin the industrial production process (e.g. electricity, water, and gas.)
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Production of the Product
Materials that directly affect the product 38
Short-lived accessory items for qualifying capital equipment that have a direct affect on the product
Production of the Product
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Production of the Product
Capital Equipment ExemptionExempt purchases include equipment and machinery that Are essential to producing the product
Perform an indispensable phase/stage in production
Are used in Minnesota
Are used at least 50% of the time in production
Produce a product ultimately sold at retail
Regulatory Equipment ≠ Essential Equipment 40
Printing press 41
Laser cutter 42
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Production of the Product
Equipment and machinery used to move the product through the production process
Conveyor
Industrial crane
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Ready-mixed concrete trucks
Production of the Product
Capital Equipment does NOT include:
Motor vehicles licensed for road use
except for
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Air Purification System for the Textile IndustryReminder: Regulatory equipment that does not have a direct affect on the product is taxable.
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Production of the Product
Capital Equipment ≠ Capital Assets
The term “capital equipment” is not the same as capitalized assets.
Items capitalized for accounting purposes do not automatically qualify as capital equipment.
Items that you expense for accounting purposes, such as leased equipment, may be considered “capital equipment."
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Production of the Product
Special Tooling Exemption
Exempt purchases
Dies, jigs, patterns, gauges, and other special tools that have value and use only for the buyer and use for which they are made.
Note: Materials purchased to make your own special tooling are taxable because “materials” are not “special tools."
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Production of the Product
What equipment do you have that may qualify for the special tooling exemption?
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Production of the Product
Industrial shelving used to store work-in-progress 55
Storing Work-in-Progress
Reusable items used for handling or moving materials through production may qualify for the capital equipment exemption.
Note: Reusable items used to store raw materials along the production line do not qualify for the industrial production exemption or the capital equipment exemption.
Production of the Product
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Storing Work-in-Progress
Production of the Product
Do you have any items you use at your facility to store work-in-progress that may qualify for an exemption?
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Production of the Product
Exempt purchases Outsourced fabrication services that are essential to producing their product.
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Outside Fabrication Labor
Production of the Product
Does your company subcontract with another business to perform fabrication labor for you?
If so, are there any items you can claim an exemption for that are used at their plant?
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Production of the Product
Exempt purchases
Quality control and testing activities done on the product
Calipers – used to measure thickness of an item60
Quality Control and Product Testing
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Laboratory equipment and supplies 61
Disposable lab testing supplies
Disposable latex and vinyl gloves
(suitable for general use)
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Dust Collector (Vacuum)
Equipment that performs a quality control function and has a direct affect on the product is exempt.
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Production of the Product
Do you have any items used in quality control that may qualify for an exemption?
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Production of the Product
Exempt purchases A structure within the integrated production process
Serve or perform a function essential to the production process, and
Used in producing products intended to be sold ultimately at retail
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Special Purpose Buildings
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Clean room
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Paint booth
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Production of the Product
Exempt Purchases Product packaging
Nonreturnable internal packaging materials that shape, form, stabilize and protect the contents
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Product Packaging
Production of the Product
Exempt Purchases
Warranty cards
Owners manuals
Content lists
Instruction sheets
Material safety data sheets
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Product Packaging
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Production of the Product
Exempt Purchases Product identification labels (e.g.
combination labels that identify the product and price for customers)
Expiration date labels (includes stickers or ink for labeling)
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Product Packaging
Production of the Product
Taxable Purchases Returnable containers such as steel drums,
barrels, bottles, gas cylinders, boxes, tanks, sacks, cans (except when used to package food and beverages)
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Product Packaging
Production of the Product
Do you have any taxable product packaging?
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Production of the Product
Where does the production process END?
In general, the industrial production process ends with the placement of the product in finished goods inventory.
vs. The integrated production process ends when the last process prior to loading
for shipment has been completed.
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End of the Production Process
Please be back in 10 minutes.
Part 5
Post-Production
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Post-Production
Taxable purchases
Items used primarily to facilitate loading, unloading, handling, transportation or storage of products after the manufacturing process ends.
Fuel to operate the equipment after the industrial production process ends. 76
Finished Goods Inventory (or Warehousing)
Industrial shelving used in finished goods inventory does NOT qualify.
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Post-Production
Exempt purchases
Equipment used to maintain conditions in finished goods (e.g. refrigerators, freezers, etc.)
Taxable purchases
Utilities used in the equipment that maintains the conditions in finished goods.
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Finished Goods Inventory (or Warehousing)
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Post-Production
Do you have any items used in finished goods inventory that may qualify for the capital equipment exemption?
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Post-Production
Are there items consumed in finished goods inventory that you should verify that you are not claiming the industrial production exemption on?
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Finished Goods Inventory (or Warehousing)
Post-Production
Disposal of scrap is outside the production process.
The equipment, machinery, and other items used to dispose of the scrap is taxable unless the scrap is:
Reused in the production process (i.e. “closed loop system”)
Used to make a different product that is ultimately sold at retail
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Disposal of Scrap
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Post-Production
Have you incorrectly claimed the capital equipment exemption on any equipment and machinery used to dispose of scrap and waste?
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Post-Production
Are there any circumstances in your production process where equipment used to dispose of scrap qualifies for the capital equipment exemption?
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Post-production
Exempt Purchases include: Nonreturnable pallets and skids
Nonreusable external packaging materials
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Shipping and Distribution
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Post-production
Exempt Purchases include: Dunnage that protects, braces, pads,
or cushions against damage
Stuffing materials such as straw, dry ice, shredded paper, cotton batting, “packing peanuts”, etc.
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Shipping and Distribution
Post-production
Exempt purchases include: Strapping machine
Wrapping materials such as paper or plastic wrap, wire, tape, staples, etc.
Taxable purchases include: Forklifts and industrial cranes used
primarily in shipping and distribution
Strapping Machine86
Shipping and Distribution
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Industrial cranes
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Post-Production
Taxable purchases include:
Returnable containers and packaging (except for food manufacturers)
Returnable skids and pallets
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Shipping and Distribution
Post-Production
Taxable purchases include:
Address labels, invoices, packing slips, and envelopes
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Shipping and Distribution
Post-Production
Taxable purchases include:
Warning labels that give shipping directions
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Shipping and Distribution
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Post-Production
Are there items you buy from your vendors without sales tax that are used in shipping and distribution that you need to accrue use tax on?
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Part 6
Production Support
Functions
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Production Support Functions
Exempt purchases Equipment, machinery, and tools
used to construct, maintain, and repair qualifying capital equipment
Taxable purchases
Items used or consumed in these activities do not qualify for the industrial production exemption
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Tool Room Operations
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Production Support Functions
Taxable purchases include items used for:
Internal product and production tracking
Inventory management
Production analysis
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Production Administrative Support
Production Support Functions
Taxable purchases include items used for:
Protective equipment
Clean room apparel and equipment (reusable and disposable)
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Protective and Safety Items
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Protective safety clothing 97
Production Support Functions
Taxable purchases include:
Sprinkler system components
Fire alarm monitoring
First aid kits and eye wash stations
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Fire Prevention, First Aid, and Hospital Stations
Production Support Functions
Taxable purchases include utilities used to:
Heat the manufacturing facility in the winter
Cool the plant in the summer
Provide overhead lighting on the production floor
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General Heating, Cooling, and Lighting
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Production Support Functions
Did you include general heating, cooling, and lighting in your utility exemption percentage?
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Production Support Functions
Items that do not qualify for exemption include:
Dust Collections Systems
Emission control systems
Welding ventilation systems
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Pollution Control, Prevention, and Abatement
Production Support Functions
Exempt purchases
Chemicals
Materials
Supplies
Taxable purchases
Equipment and machinery
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Waste Treatment
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Production Support Functions
Are there items consumed in treating waste that you should verify that you are claiming the industrial production exemption?
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Part 7
Administrative Support
Functions
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Administrative Support Functions
Examples of administrative activities include: Customer service activities
General office administration
Managerial functions
Taxable items used to perform these activities include: Furniture
Office equipment and supplies
Prewritten computer software
Training materials and supplies
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General Administrative Activities
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Computer
Computer Printer
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Administrative Support Functions
Taxable purchases:
Chemicals and cleaning agents used to clean: Production tools and equipment (except food processing equipment)
Areas around food processing equipment
Buildings and other structures
Janitorial cleaning materials and services
Materials used to construct or remodel real property107
Building Cleaning and Maintenance
Pressure Washer 108
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Administrative Support Functions
Taxable purchases:
PA systems
Telecommunications equipment and services
Two-way radios
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Communications
Administrative Support Functions
Taxable purchases:
Business cards Coffee mugs, key chains, and pens Order forms Point of sale displays
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Sales Operations
Administrative Support Functions
Taxable purchases:
Employee security services Plant security Security access equipment and badges Security system maintenance and monitoring
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Security
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Part 8
Exemption Certificates
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Exemption Certificates
All sales of tangible personal property and taxable services are taxable unless:
The item is exempt by Minnesota Statutes, or
The purchaser provides the seller with a completed exemption certificate
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Do I need an exemption certificate?
Exemption Certificates
The following are examples of use-based exemptions:
Capital equipment Industrial production/manufacturing Utilities used in production
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Use-based exemptions
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The green boxes identify the fields that are required for a complete exemption certificate.
The purchasing agent must retain the contract as supporting documentation.
The seller’s information is not required but it doesn’t hurt to complete these fields.
Jane Smith
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Exemption Certificates
Certificate of Exemption, Form ST3(Minnesota Department of Revenue form)
Certificate of Exemption, Form F0003 (Streamlined Sales Tax form)
Uniform Sales and Use Tax Certificate (Multistate Tax Commission form)
Other state’s exemption certificates (if all required elements are included)
Self-prepared exemption certificate (if all required elements are included) 116
Different Types of Exemption Certificates
Exemption Certificates
Required elements for a complete exemption certificate:
Purchaser's name and address
Purchaser's Minnesota tax ID number
Purchaser’s type of business
Reason for exemption
Purchaser's signature & Date
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Complete Exemption Certificates
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Exemption Certificates
Know if you qualify to claim an exemption
Complete an exemption certificate
Give it to the seller at the time of purchase
Liable for any use tax, interest, and penalties
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Purchaser’s Responsibilities
Exemption Certificates
You should review all exemption certificates and verify:
All required fields are complete.
That the certificate is signed
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Seller’s Responsibilities
Part 9
Refund Requestsand
Amended Returns
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Review your invoices
Refund Requests and Amended Returns
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How far back can I request a refund?
Refund Requests and Amended Returns
3 ½ years*
*Exceptions to the general rule apply in cases of an audit if you paid an assessment order in full or signed, Form ST21, Consent to Extend Statute . 122
Statute of Limitations
Refund Requests and Amended Returns
How is the 3 ½ year statute of limitations calculated?
Type of tax paid Calculation of 3½ year statuteSales tax(paid to seller)
You have 3½ years from the 20th day of the month following the purchase invoice date.
Use tax(paid directly to state)
You have 3½ years from the original tax return due date.
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Capital Equipment Refund
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Note: If you paid sales tax on capital equipment purchased after June 30, 2015 (last four highlighted entries), it needs to be claimed as a purchaser request for refund rather than a capital equipment request for refund.
Refund Requests and Amended Returns
Supporting Worksheet
Complete a separate worksheet for each type of request
Use a separate column for each taxing jurisdiction
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Capital Equipment Refund
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Purchaser Refund
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Refund Requests and Amended Returns
Where do I send Form ST11?
To file a refund request electronically, send it to [email protected] Refund requests in paper form should be mailed to:
Minnesota Department of Revenue525 Lake Avenue SouthSuite 405
Duluth, MN 55802
Remember to attach all required documentation!
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Refund Requests and Amended Returns
File an amended return if: Made an error on a previously filed return
Paid too much or too little
Use a separate column for each taxing jurisdiction Number of periods How do I file the amended return?One Adjust your return in e-Services
Multiple Send Form ST11 with a worksheet detailing the adjustment for each period.
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Amended Returns
Part 10
Communicating with the
Department of Revenue
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Communicating with the Department of Revenue
Have a sales and use tax question?
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Communicating with the Department of RevenueSales and Use Tax Division
Minnesota Revenue website: revenue.state.mn.us Questions relating to Sales and Use Tax Law?
Email: [email protected] Questions relating to your Sales and Use Tax account activity?
Email: [email protected] Prefer telephone assistance?
Phone: 651-296-6181 or 800-657-3777
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Communicating with the Department of Revenuefor Other Divisions
Business Income Taxes (Corporation Franchise Tax, Partnership Tax, S Corporation Tax, Estate Tax, Fiduciary Tax)651-556-3075 Email: [email protected]
Withholding Tax 651- 282-9999 or 1-800-657-3594 Email: [email protected]
Business Registration651-282-5225 or 1-800-657-3605 Email: [email protected]
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Minnesota Department of Revenue Website revenue.state.mn.us
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Minnesota Department of Revenue Website GovDelivery
Choose the updates you want - by tax type and publication type
Choose the frequency of notifications
Sign in directly or use your social media account –
Facebook, Yahoo! or Google
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Minnesota Department of Revenue WebsiteSales and Use Tax Videos youtube.com/MNRevenue
Available Videos: e-Services Instructional Videos
Education Video Series
Inside Scoop: Streamlined Sales Tax
Training Videos
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Minnesota Department of Revenue Website Social Media
Keep up with the latest news from the Minnesota Department of Revenue on Twitter, Facebook, and LinkedIn.
twitter.com/MNRevenue
facebook.com/MNRevenue
linkedin.com/company/minnesota-department-of-revenue
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Communicating with the Department of Revenue
Please notify us if you have changes to any of the following: Mailing address(es)
Business location(s)
Legal organization
NAICS code
Contact information
Owners and/or officers139
Part 11
Course Review
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Course Review
Manufacturers often mistakenly claim the capital equipment exemption on these items:
Access-required devices (e.g., catwalks, ladders, and man lifts)
Cabinets and other storage items
Regulatory-required equipment (e.g., OSHA, pollution control)
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Equipment commonly taxed incorrectly
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Course Review
Items to look for when reviewing invoices:
Multi-use equipment, including qualifying and non- qualifying activities (e.g., computers, forklifts, hand tools)
Capital Equipment is:
Machinery and equipment
Used at least 50% of the time
In the integrated production process142
Equipment commonly taxed incorrectly
Course Review
These items commonly qualify for the capital equipment exemption but are often overlooked:
Repair parts, including replacement parts that are on the original equipment
143
Equipment commonly taxed incorrectly
Course Review
These items are commonly mistaken as qualifying for the industrial production exemption:
Percentage of utilities used in equipment that performs qualifying and non-qualifying activities, during the non-qualifying activities(e.g., conveyors, cranes, and forklifts)
Multi-use items purchased with an exemption certificate (e.g., all “keep fill“, bolts, ink cartridges, lube, and nuts )
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Materials consumed in production taxed incorrectly
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Course Review
Items to look for when reviewing invoices: Utilities for overhead lighting and space heating
Utilities consumed in non-production equipment (updated utility study recommended)
Utilities consumed in equipment that qualifies for the integrated production process but not the industrial production process (e.g., freezer at a meat processing plant)
Utilities study for one utility used to pro-rate taxability for another utility (e.g., electrical percentage applied to gas and/or water) 145
Materials consumed in production taxed incorrectly
Scenario Discussions
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Scenario 1 – DDD Windows
You’re an accounts payable clerk for a company that manufactures windows. This company also installs windows. You have vendor invoices for a manlift and shelving that do not have sales tax.
Do you need to accrue use tax on these items?
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Scenario 2 – New World Meat Processing
You’re an accounts payable clerk for a meat processing plant. The plant uses a computer system to track their inventory. Your co-worker states that the inventory computer system is exempt under quality control because they must be able to track the meat if it gets recalled. If they do not track the meat, the FDA will not allow them to sell it.
Does the tracking system qualify for an exemption?
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Scenario 3 – Fast Print and Mailing
You work for a store that offers mail box rental, package service, custom printing, and copying. You are not paying tax on any of your printing or copy machines. You also do not pay tax on any of the ink or supplies for the machines
Some machines are used only by employees for custom jobs.
Other machines are available to the public for per copy fees and also used by employees for large custom jobs.
Do the printers and copiers qualify for the capital equipment exemption? Does the ink qualify for the industrial production exemption?
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Scenario 4 – Sawmill Wood Furniture Manufacturing
You work for a small furniture manufacturer that expanded their wood furniture line to include custom finishes. To provide custom finishes they moved to a bigger location with several buildings.
They saw and assemble unfinished furniture pieces in the wood shop building.
They custom finish the pieces in the finishing building.
Both buildings have dust control systems to protect the equipment and the product.
Do either of the dust control systems qualify for the capital equipment exemption?
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Scenario 5 – ABC Manufacturing
You work for a large manufacturer who has given a blanket exemption certificate to the welding supply store.
The invoices include charges for welding gases, tanks, and cutting tips.
The welding gases are used to repair qualifying capital equipment.
Would all these items qualify for either the capital equipment exemption or the industrial production exemption?
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Scenario 6 - Smith Gravel Company
You work for a road contractor who has multiple gravel pits. The company sells class 5, crushed rock, and pit run and also uses these materials in their construction jobs.
The company has never requested a capital equipment refund.
The company is giving exemption certificates to many of their suppliers after the exemption for capital equipment became an upfront exemption.
The company keeps a breakdown of retail sales versus construction contracts.
From this information can you determine if the equipment used in the gravel pit qualifies for the capital equipment exemption?
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Scenario 7 - Just Turkeys
You work for a turkey processing plant that must maintain a temperature of 37 degrees on the processing floor. The processed turkeys are flash frozen and stored in freezers until they are shipped out. You are reviewing the electric bills and utility studies and find that all of the electricity associated with the cooling and freezers was purchased exempt.
Are you allowed to purchase all of your electricity for cooling and freezers exempt?
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Scenario 8 - Clear Water
You work for a bottled water company that has a proprietary filter system. The company is building a new building for all of the pipes and filters for the system. You are purchasing all of the building materials exempt from tax under the special purpose building exemption.
Do the building materials qualify for this exemption?
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Course Summary
We discussed… When sales and use taxes are owed The capital equipment and industrial
production exemptions The refunds and exemptions available
to businesses engaged in “industrial production."
How to request a refund of taxes paid using Form ST11
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Questions?
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Thank you!Permission of the Minnesota Department of Revenue must be secured
before exhibiting, reproducing, distributing or making any other use of any part of this presentation.
Produced by the Minnesota Department of Revenue600 North Robert Street, St. Paul, Minnesota 55146
©Copyright 2018, Minnesota Department of Revenue, All Rights Reserved
Minnesota Business Tax Education157