Sales tax incentives available for manufacturing and energy companies in numerous states.

• Author: Wallace, Chris (American accountant)

Many states offer sales tax exemptions to companies that manufacture or are involved in the production or processing of oil and gas. The states examined here--Texas, Kansas, Missouri, Ohio, Pennsylvania, and West Virginia--account for considerable activity in the manufacturing and energy industries and offer generous sales tax exemptions.

Benefiting from those exemptions, though, can be complicated. Exemptions change over time. Claiming the exemptions also requires evaluating all vendor purchases and being aware of which purchases qualify as exempt from sales tax. Those complications are particularly relevant for a company that operates in multiple states.

Sales tax rules and regulations may also vary greatly from one manufacturing sector to another, and from one energy industry segment to another (i.e., upstream vs. downstream). The upstream segment of an energy business involves searching for and extracting raw materials, whereas the downstream segment usually refers to processing for use and distributing the finished product.

States may have general rules for mining operations that would apply to upstream businesses, or they may have specific rules for upstream activities. States' manufacturing rules generally apply to downstream operations as well as supply companies. Depending on the state, midstream operations (i.e., transporting the product by pipeline, train, truck, or barge) may be treated as mining or manufacturing activities, or both.

Here is a brief review of sales tax exemptions for Texas, Kansas, Missouri, Ohio, Pennsylvania, and West Virginia.

Texas

Midstream, downstream, and manufacturing companies benefit from Texas's manufacturing sales tax exemptions, which generally apply to equipment and supplies that directly cause a change to the item being produced for sale (Tex. Tax Code [section]151.318; 34 Tex. Admin. Code [section]3.300(a)(10)).

Under the Texas tax code, the manufacturing process begins with the first activity that changes a raw material or ingredient and ends with the packaging of that personal property as it will be sold (Tex. Tax Code [section]15 1.318(d); 34 Tex. Admin. Code [section]3.300(a)(9)). Available exemptions include repairs to qualifying items and necessary lubricants, chemicals, gases, and liquids used in manufacturing (34 Tex. Admin. Code [section]3.300(d)(7)).

Texas offers generous sales tax incentives to all energy industry segments, but the exemptions tend to be specific and can be tricky to...