Calling All Food Manufacturers: Tax Savings on Costs of Goods Sold

Thoughtware Article Published: Dec 05, 2017
Metal Tool for Manufacturers

The food industry faces many pressures in today’s environment, from increasing regulatory requirements around food safety and training to consumer demands for transparency and sustainable sourcing. However, one thing remains constant: pressure on margins. A well-run manufacturer knows its numbers—profitability by market segment, product line, the cost of innovation, market share, etc. There’s a tight grip on controlling costs and creating efficiencies in the process to reduce waste. That being said, what if there were hidden dollars ripe for savings right under your nose?

In this instance, the hidden dollars in question are sales tax dollars, and the savings can be substantial. Sales tax rates vary across states, but typically average about 7 percent. Most states have an exemption for manufacturing products designed to allow manufacturers to purchase raw materials, equipment, machinery, repair parts, packaging and even services without paying sales tax. You also can claim exemptions on fuel, electricity and steam if you conduct a study to determine how much is used in production. Not many companies would turn down a potential 7 percent tax savings!

Most manufacturers are aware of these exemptions and assert wholeheartedly to claiming them. However, intent and reality often are two different sets of facts. Simple overpayments, e.g., paying sales tax on large inventory purchases, occasionally slip through the cracks. No one really intends for this tax to be paid, but these can happen as a result of human error or lack of training. Other potential opportunities for finding easy money include a change in accounts payable clerks or major suppliers. Examining repair and replacement part purchases is another often-overlooked area. Most companies are fairly adept at reviewing the initial equipment purchase due to the large size of the capital expenditure, but fail to review ongoing maintenance purchases for the same equipment.

Not all money is easy to find. For example, Iowa has a little-known exemption for services available only to food manufacturers. It’s buried in the statutes where only the savviest reader can find it. There are many states like this, with specific additional exemptions or expansions for food manufacturers that aren’t available to other manufacturers. Some states will even give you exemptions related to your research and development efforts.

Taxes don’t have to be complicated, and you don’t have to know all the rules to start making progress. Asking a simple question like, “Are we paying tax on packaging?” can lead to surprising findings. Savings can be found retroactively, as many states allow you to claim refunds for three or four years of historical payments. These reviews can be quite lucrative. Food manufacturers have recovered millions in overpaid taxes over the years.

A couple of tips to help you get started:

  • Review a few major vendors in select categories.
    • For example, choose two or three from inventory, packaging and equipment parts. Did you find some inconsistencies?
  • Review vendors from which you purchase a variety of items for many reasons.
    • Grainger, McMaster-Carr and Motion Industries are popular vendors that come up frequently.
    • These “mixed bag” vendors can create confusion for purchasing departments trying to determine whether to pay tax on items purchased.

Contact your trusted BKD tax advisor for more information on how you can get started on this savings opportunity. You’ll never know what money is left on the table if you don’t look.

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