Expanded tax exemption puzzles manufacturers

Weddle is traveling throughout the state to make sure that Missouri manufacturers are aware of an expanded sales exemption that takes effect Aug. 28. A bigger challenge she faces is bringing together manufacturers and the Missouri Department of Revenue to determine how the new rule is applied.

The exemption comes from Senate Bill 30, an omnibus tax bill Gov. Matt Blunt signed into law in June. The bill was sponsored by Sen. Gary Nodler, R-Joplin, and handled by Rep. Bryan Stevenson, R-Joplin, in the House of Representatives.

While the previous tax exemption for manufacturers covered only materials that ended up in the final manufactured product, the new exemption is more broad, covering energy, water, chemicals and other materials consumed during the manufacturing process. There is some confusion, however, in terms of what exactly should be considered exempt.

“There are more questions than answers at this point in time,” said Cary Jones, a partner at Springfield-based accounting firm BKD LLP. “People agree in concept about what we want to achieve, but like a lot of things, implementing it is a lot harder than it sounds.”

Among the expanded exemptions are electrical energy, gas – natural or artificial, water and energy sources, though Weddle says the bill stops short of using the broad term utilities.

Weddle said the Missouri chamber has heard “horror stories” about the exemption as it applies to consumption of energy, namely because it can be difficult to determine usage specific to the manufacturing process.

“We’ve heard from a manufacturer in Texas who said the utility company … required a manufacturer to get a separate meter for their manufacturing usage,” Weddle said. “So for most mid- to small-size manufacturers, it was too cost prohibitive.”

One aspect of the expanded exemption that most everybody can agree on, however, is that it’s good news for manufacturing – because without it, Missouri manufacturers were at a disadvantage to their counterparts in neighboring states. While Arkansas is phasing out its exemption, Weddle said, the only neighboring state that currently does not have a broad-based exemption is Illinois, where the tax break is only applied to manufacturers in enterprise zones.

The idea behind the exemption is that it will enable manufacturers to expand their operations, create more jobs and stimulate the economy.

Emergency measures

The DOR is expected to set temporary emergency rules on Aug. 15, and those will remain in effect for six months – after which time a final set of rules will be issued.

How the exemption will be applied to manufacturers’ utility bills is of particular interest to Lora Ruzicka, controller for SRC Holdings Corp. She said that many of the 47 companies under the SRC umbrella stand to benefit from the exemption, though she hasn’t yet totaled all of the potential savings.

“The obvious one is going to be the utilities,” Ruzicka said. “Heavy Duty alone pays a $40,000 (monthly) utility bill. The savings there could be rather extensive.”

But utility savings won’t be the only savings for SRC’s companies.

“What they call consumable goods, like grinding wheels and drill bits are currently taxed,” she added. “Under the new law, they will no longer be taxed.”

What’s needed now, Weddle said, is for DOR to figure out specifics for applying the exemption.

In addition to the temporary emergency rules that will be in place during that process, DOR is expected to return with multiple examples for application of the exemption, and Weddle said manufacturers need to be active and outspoken about their needs, and she recommends contacting vendors now.

Accountant Jones calls that good advice.

“A vendor is not necessarily going to be educated about this, and with anything that is new, it may take them time to implement it as well,” he said. “If you let them know ahead of time this is coming … you can work with them to make sure it turns out right.”

By the letter

Manufacturers also should be prepared to make their own cases when it comes to implementation of the law, Weddle said, because manufacturing is too diverse for a one-size-fits-all approach.

A possible solution could be a private letter of ruling from the DOR, which would outline rules for an individual manufacturer.

“You write the letter of ruling request with your research, documentation and a result in mind, hoping that they go along with your request,” Jones said. “If you get that … (and) if your company is audited, you bring out your letter of ruling and the auditor is bound by that letter for three years. What you get is certainty that you are applying the law correctly.”

Weddle has appeared at six forums throughout the state, including stops in Joplin and Springfield. The first Springfield forum was held Aug. 9; the next one will be Aug. 15.

So far, interest in the issue has come from manufacturers of all sizes.

“We’ve had some mom-and-pop shops come and ask some questions and some major corporations,” Weddle said. “It applies to everyone.”

Tax Exemption Forum

What: Manufacturers Exemption

Implementation Forum, presented by the Missouri Chamber of Commerce and Industry

When: 8 a.m.–1:15 p.m., Aug. 15

Where: University Plaza Hotel and Convention Center, 333 S. John Q. Hammons Parkway

To attend: Registration is available via a link on the Springfield Area Chamber of Commerce Web site, www.springfieldchamber.com, or by calling the state chamber, (573) 634-3511.

The cost is $149 for Missouri chamber members and $179 for nonmembers.

Sales Tax Exemptions

Under Senate Bill 30, which takes effect Aug. 28, exemptions include:

• energy sources including electrical gas (natural, artificial or propane) water and coal;

• chemicals; and

• machinery, equipment and materials consumed in manufacturing; or in the processing of recovered materials; or for research and development related to manufacturing of any product.

The Missouri Department of Revenue is working to better define these exemptions, with examples, and will issue a temporary set of emergency rules on Aug. 15. According to Tracy Weddle, director of tax and fiscal affairs for the Missouri Chamber of Commerce, exemptions will likely vary among individual manufacturers, depending on the processes they use.

Source: Missouri Chamber of Commerce and SB 30