How to Use the Ohio Sales Tax Exemption for Manufacturing

The Ohio sales tax exemption for manufacturing is a provision in the state’s tax code that reduces production costs for qualifying businesses. It removes the sales and use tax from purchases of machinery, equipment, and other items used directly in the production of tangible personal property for sale. The exemption is not automatic; businesses must actively claim it and maintain records to justify their tax-free purchases.

Determining if Your Business Qualifies

To qualify for the exemption, a business must be engaged in “manufacturing” as defined by Ohio law. Manufacturing is a process that changes, converts, or transforms materials into a different state or form. This includes activities like refining materials, assembling parts, and preparing raw materials through processes such as mixing, measuring, or blending. The core requirement is the physical transformation of property that will be sold.

The state establishes a clear beginning and end to the “manufacturing operation,” which determines eligibility. The process begins when raw materials are committed to production, such as when they are first mixed, measured, or treated. For a commercial bakery, the operation starts when flour and sugar are first measured and mixed, not when they are in storage.

The manufacturing operation ends when the product is in its final, saleable form, before it is packaged for shipment or placed into finished goods inventory. An item is complete when all processes that alter its state or form are finished. For a furniture maker, the operation ends when the final coat of varnish on a table is dry and the piece is fully assembled. Subsequent activities, like wrapping the table for delivery, occur after the manufacturing operation has ended.

This definition means many businesses can qualify, including metal fabricators changing sheet metal into parts, food processors turning raw vegetables into canned goods, and plastics companies molding polymer resins into products. Conversely, some businesses do not qualify. Construction contractors are typically not considered manufacturers because they improve real property, and restaurants that prepare food for immediate consumption are providing a service. Repair services also do not qualify because they restore existing property, not create a new product.

Identifying Exempt Purchases

The standard for determining if a purchase is exempt is “direct use.” An item must be used or consumed primarily and directly in the manufacturing operation to qualify. Purchases for administrative functions, general facility maintenance, or post-production activities like shipping do not meet this standard.

Production machinery and equipment that directly act upon the product are a primary category of exempt items. This includes machinery that shapes, forms, cuts, or assembles the materials being worked on. For a plastics manufacturer, this would include injection molding machines and the robotic arms that trim excess material. Equipment used to treat materials, such as a furnace that heats metal before it is stamped, is also exempt.

Handling equipment like forklifts, cranes, and conveyor systems is exempt only when used to transport work-in-process between different stages of production. A forklift used exclusively to move partially assembled components from one machine to the next on the factory floor would be exempt. In contrast, a forklift used to unload raw materials into storage or move finished goods to a warehouse is taxable.

While the manufacturing operation ends before a product is packaged, Ohio law provides a separate exemption for packaging materials and machinery. To qualify, the packaging must become part of the final product sold to the consumer, such as bottles for beverages or boxes for cereal. The machinery used to fill, seal, or wrap this packaging is also exempt. Packaging used only for shipment, such as crates and pallets, is not exempt.

Consumables and adjuncts that are consumed during production may also be exempt if they are integral to the manufacturing operation. This category includes fuel for exempt machinery, chemicals that treat the product, and lubricants for production equipment. For instance, the oil used for a metal stamping press or catalysts used in a chemical reaction would be exempt. Janitorial supplies are not considered directly used in manufacturing and are taxable.

Claiming the Exemption and Required Documentation

The primary method for claiming the exemption occurs at the point of sale. A manufacturer must provide a correctly filled-out exemption certificate to the vendor at the time of purchase. Upon receiving a valid certificate, the vendor is obligated to accept it in good faith and not charge sales tax on the transaction.

The two primary documents for this purpose are the Sales and Use Tax Unit Exemption Certificate (Form STEC U) and the Blanket Exemption Certificate (Form STEC B). The Form STEC U is for single, specific purchases, such as a large piece of machinery from an infrequent vendor. The Form STEC B is more efficient for ongoing relationships, as it covers multiple, recurring purchases of exempt items from a single supplier.

When completing these forms, the purchaser must provide their business information and state the specific reason for the exemption, which is “used directly in a manufacturing operation to produce tangible personal property for sale.” The purchaser is responsible for ensuring the information is accurate and the exemption is valid. The vendor must retain the certificate as proof for why sales tax was not collected.

If a manufacturer mistakenly pays sales tax on an exempt purchase, they can seek a refund from the state by filing a Form ST-AR, Application for Sales Tax Refund. The application must be filed within four years of the date the tax was paid and include a copy of the invoice showing tax paid, proof of payment, and the appropriate exemption certificate.

Record-Keeping and Audit Preparedness

After claiming an exemption, a manufacturer must maintain comprehensive records to justify every tax-exempt purchase. Inadequate record-keeping can lead to the disallowance of exemptions and the assessment of back taxes and penalties during a sales and use tax audit.

The core documents to keep on file are copies of all exemption certificates (STEC U and STEC B) provided to vendors. Each certificate should be linked to its corresponding purchase invoices, which must be detailed enough to show the date, item purchased, and cost. This link is fundamental to proving a specific purchase was claimed as exempt.

For significant purchases like large machinery, additional documentation is advisable to support the “direct use” claim. This can include operational manuals describing the machine’s function or plant layouts showing how the equipment fits into the production flow. These documents can help demonstrate that the equipment is integral to the manufacturing operation.

During an Ohio sales tax audit, an auditor will scrutinize these records to verify that the exemption was applied correctly. The auditor may also tour the facility to observe equipment in operation and compare their findings with the purchase records. Having organized, complete, and accessible records facilitates a smoother audit process and strengthens the business’s position in substantiating its claimed exemptions.