23 Feb New Jersey Sales and Use Tax Exemptions for Manufacturers
The New Jersey sales and use tax exemption for manufacturers enables machinery, apparatuses, or equipment to be purchased without paying New Jersey sales and use tax. New Jersey Revenue Statute 54:32B-8.13(a) further clarifies the sales and use tax exemption by stating that the machinery, apparatuses or equipment must be for use or consumption directly and primarily in the production of tangible personal property by manufacturers, processors, assemblers or refineries. This New Jersey sales and use tax exemption for manufacturers applies to any such machinery, apparatus, or equipment regardless of whether the item is purchased, rented or leased.
Since machinery, apparatus, or equipment only qualifies for a New Jersey sales and use tax exemption if it is used or consumed directly and primarily in production, it is relevant to understand how New Jersey defines production, direct use, and primary use.
From our firsthand experience providing sales and use tax consulting services in New Jersey as well as from the guidance provided in New Jersey Administrative Code 18:24-4.4(b), production is defined as beginning when the raw materials are introduced into a series of systematic manufacturing, processing, assembling, or refining operations. Production ceases when the product is in the form that will be sold to consumers. Production does not include any distribution activities, which means that machinery or equipment used to pack products into shipping containers after the product has been manufactured into the form in which it will be purchased by the consumer does not qualify for this New Jersey sales and use tax exemption for manufacturers.
N.J. Admin. Code 18:24-4.4(c) states that machinery, apparatus, or equipment is considered to be “directly used in production” only when it is used to “initiate, sustain, or terminate the transformation of raw materials into finished products.” There are three factors that are used to determine whether machinery, apparatus, or equipment meets the direct use criteria:
- Physical proximity of the machinery, apparatus, or equipment in relation to the production process in which it is used
- Proximity of time of use of the machinery, apparatus, or equipment in relation to property used before and after it in the production process
- The active causal relationship between the use of the machinery, apparatus, or equipment and production of the product. Even though particular property may be essential to the production process because its use is required by law or practical necessity does not mean that the property meets the direct use provision according to N.J. Statutes. For example, property used to prevent accidents has no causal relationship to the production of a product, therefore it is not considered directly used.
Regarding the “primary use” provision, N.J. Admin. Code 18:24-4.4(d) states that a single unit of machinery, apparatus, or equipment used for two different activities, one activity qualifying as direct use and one activity not qualifying as direct use, is only exempt from New Jersey sales and use tax if its directly used in manufacturing, processing, assembling or refining operations more than 50 percent of the time. For example, if a manufacturer purchases a forklift that is used 60 percent of the time to move work in process and 40 percent of the time in loading finished goods onto a truck, then the forklift qualifies for exemption since it is directly used in production more than 50 percent of the time.
In order to claim this exemption on future qualifying purchases, New Jersey manufacturers must supply their vendors with a valid exemption certificate. The proper form that should be completed is the New Jersey Exempt Use Certificate (ST-4). This certificate can be found at the New Jersey Division of Taxation website. For manufacturers who have already paid the sales tax to their vendors or remitted use tax to the N.J. Division of Taxation on qualifying exempt purchases, they can complete the A-3730 Claim for Refund form. An application for a refund must be submitted within four years from the date of payment. This refund claim form can also be found on the N.J. Division of Taxation website.
As with all sales and use tax research, the specifics of each case need to be considered when determining taxability. Additional advice from Agile Consulting Group’s sales tax consultants can be found on our page summarizing New Jersey sales and use tax exemptions. If you have questions, comments or would like to discuss the specific circumstances you are encountering regarding this particular issue or any other sales and use tax issue, please contact us about our sales and use tax consulting services at (888) 350-4TAX (4829) or via email at email@example.com.