Sales & Use Tax Blog

Kentucky Sales Tax Exemptions for Manufacturing

Kentucky sales and use tax law offers a tax exemption for manufacturers for tangible personal property that is to be directly used in the manufacturing or industrial process that has a useful life of less than one year.  The Kentucky sales and use tax exemption for manufacturers is an outlier when it comes to U.S. states sales and use tax exemptions for manufacturers as it exempts purchases with a useful life of less than one year, whereas most states provide a sales and use tax exemption for purchases with a useful life of more than one year.

Kentucky Sales Tax Exemptions for Manufacturing - Plastic manufacturer

Kentucky defines “directly used in manufacturing” as the process in a plant facility that starts with the movement of raw materials from storage into a “continuous, unbroken, integrated process” and ends when the finished product is packaged for sale. Agile Consulting Group’s sales tax consulting team is well equipped to help Kentucky manufacturers understand and apply this tax exemption.  From our experience working Kentucky sales and use tax recovery reviews, our sales tax consulting team has compiled a helpful list of items purchased by many types of manufacturers that qualify for the Kentucky sales and use tax exemption for manufacturers.

Examples of Kentucky Sales Tax Exemptions for Manufacturing

Examples of non-taxable tangible personal property used directly in manufacturing include:

Exempt Tangible Personal Property:

  • Industrial supplies (Do not need to come in direct contact with manufactured product)
    • Lubricants
    • Oils
    • Grease
    • Machine waste
    • Abrasives
    • Chemicals
    • Solvents
    • Fluxes
    • Anodes
    • Filtering materials
    • Catalysts
    • Dyes
    • Refrigerants
    • Explosives
    • Non-combustible gases, including cutting and welding gases (ONLY if they come into direct contact with the product being manufactured or processed as opposed to maintaining machinery and equipment)
  • Industrial tools (Required to come in direct contact with manufactured product)
    • Hand tools
      • Jigs, dies, drills, cutters, rolls, reamers, chucks, saws, spray guns
    • Tools attached to a machine
      • Molds, grinding balls, grinding wheels, dies, bits, cutting blades
    • Materials that become an ingredient or a component part of the product for sale
      • Cost of goods sold items for resale
    • Safety apparel (Must be required by OHSA Regulations)
      • Gloves, googles, ear plugs, hard hats, work boots, etc.
    • Machinery for new and expanded industry (KAR 103 §30:120)
      • Only exempt if incorporated for the first time into a plant facility
      • Cannot be a replacement for existing machinery unless the new machinery:
        • Performs a different function, or
        • Manufactures a different product, or
        • Has a greater productive capacity than the machinery being replaced
      • Repair labor
        • Only exempt if labor is separately stated on invoice

Some common examples of taxable tangible personal property which does not qualify for the Kentucky sales and use tax exemption for manufacturers include:

Taxable Tangible Personal Property:

  • Repair, replacement, or spare parts
    • Tangible personal property used to maintain, restore, mend, or repair machinery or equipment
  • Replacement machinery
    • Taxable unless incorporated for the first time into a plant facility; or the replacement machinery has a greater production capacity than the replaced machinery

Kentucky also offers a partial tax exemption for energy and energy producing fuels used in manufacturing, industrial processing, mining, or refining. However, this exemption only exists if the cost of the energy or fuels used exceeds 3% of the cost of production.  Our sales tax consulting team has found this to be a very beneficial Kentucky sales and use tax exemption for manufacturers, however, the calculations and documentation required to support the exemption are often challenging for taxpayers to substantiate on their own.

In order to spark growth and investment in the manufacturing industry in Kentucky, the Kentucky Enterprise Initiative Act (KEIA) was enacted July 1, 2018. KEIA provides a Kentucky sales and use tax refund on the total amount of tax paid on building and construction materials over $500,000 that are permanently incorporated as part of an economic development project, research and development equipment, electronic processing equipment, or flight simulation equipment. To qualify, an eligible company has to submit an application and be approved by the Kentucky Cabinet for Economic Development (KEDFA).

To take advantage of the Kentucky sales and use tax exemption for manufacturing, manufacturers will need to fill out and sign Form 51A111 “Certificate of Exemption Machinery for New and Expanded Industry” and distribute them to qualifying vendors. Once the vendor has the Kentucky sales and use tax exemption certificate on file, they can set up their customer’s account as exempt from sales and use tax moving forward.

The state of Kentucky allows for manufacturers to request a refund for sales and use tax paid on exempt items up to 48 months (4 years) from the date the tax was paid to the state. In Kentucky, only the entity that collected and remitted the sales tax to the state is able to get refunded the overpaid tax amount. A Kentucky taxpayer cannot pursue sales tax refunds directly from the Kentucky Department of Revenue. The manufacturer will need to have their vendors fill out, sign, and send in Form 51A209 “Sales and Use Tax Refund Application” to the Kentucky Department of Revenue. Once the vendor secures the refund from the state they will then issue the refund back to the customer.  Alternatively, manufacturers can request a sales tax credit or refund check directly from their vendors if their vendors are willing to amend their sales and use tax returns with the state.  For use tax self-assessed and paid directly to the Kentucky Department of Revenue, a taxpayer may file a refund claim directly with the state or it may amend its Kentucky sales and use tax returns.

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 consulting team can be found on our page summarizing Kentucky 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 a member of Agile Consulting Group’s sales tax consulting teams at (888) 350-4TAX (4829) or via email at info@salesandusetax.com.

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