This document provides an overview of several state and local tax planning ideas and exemptions for manufacturers in Ohio. It discusses the 50% small business income deduction available to individual taxpayers, opportunities to reduce city income tax apportionment through the sales factor, requirements for Ohio use tax registration, considerations for properly filing the Commercial Activities Tax, potential state nexus exposures, and exemptions available under the Ohio sales and use tax for manufacturing equipment, materials, parts and consumables. The presentation aims to help manufacturers understand and take advantage of applicable tax savings while avoiding common pitfalls.

1. Tax Savings & Pitfalls for
Manufacturers
Presented by: WIRE-Net

2. State and Local Tax
Planning Ideas
Chad A. Bice, CPA

3. 50% Small Business Income Deduction
Effective 1/1/13:
 Individual taxpayers filing the IT1040 are allowed a deduction
equal to 50% of the taxpayer’s Ohio small business income
up to $250,000 ($62,500 MFS & $125,000 MFJ).
 Ohio small business investor income means the portion of a
taxpayer’s adjusted gross income that is business income
apportioned or allocated to Ohio.
• Schedule C Income
• Schedule E Income from S Corporations, partnerships and rentals.
• Schedule F

4. City Income Tax Apportionment Savings
Taxable Income is generally apportioned to Ohio cities
based on a 3 factor formula: Property, Payroll and Sales
 Apportionment Example:
• 100/100 Property
• 90/100 Payroll
• 100/100 Sales
– 290/3 = 96.67% of taxable income apportioned to City
 Potential to reduce sales factor
• Sales of tangible personal property that are regularly solicited at the
customer’s place of business outside the filing city should NOT be
included in the numerator of the sales factor.

5. Ohio Use Tax - Are you one of the 300,000+
Companies without an account?
What is use tax?
 When no sales tax is charged on taxable goods or
services
• Internet purchases
• Out of state purchases
• In state purchases
 Increase in use tax audits
Sales tax is charged on the front-end by the seller.
Use tax is due on the back-end by the purchaser, when the sales tax
collection process breaks down.

6. Ohio CAT Tax - Simple Right?
The Commercial Activities Tax (CAT) sounds simple but:
 Are you sourcing your sales correctly?
• Ohio vs. Non Ohio sourced sales?
 Are you filing correctly / most advantageously?
• Separate
• Combined
• Consolidated
 You might want to review your filing status and sourcing
technique

7. State Nexus – Are you exposed?
Are you filing in multiple states?
 Income/Franchise Tax
 Sales/Use Tax
 Gross Margins Tax
 Gross Receipts Tax
If not, do you know if you have nexus?
 A minimum connection between your business and the taxing jurisdiction that
gives that jurisdiction the right to subject your company to tax.
 Physical Presence (Quill) – Sales Tax
 Public Law 86-272 – solicitation of tangible personal property
 Economic Presence
 Aggressive States
Do you have exposure? Is a Nexus Study in order?

8. Ohio Sales/Use Tax - Manufacturing
Exemption
Basic Rule - Exemption applies to raw materials to be
incorporated into a manufactured good and things
directly used in the manufacturing process.
 Requires a state change of the property being changed.
 Exemption extends from first change to last change.
 Items before the beginning of the mfg. process, after the end,
or not directly related are not part of the mfg. exemption.

9. When does the mfg. process start?
Begins when the raw materials or parts are “committed” to the
manufacturing process. This commitment doesn’t have to be
irrevocable, but they must have reached the point, after
materials handling from initial storage has ceased, where they
normally will be utilized within a short period of time.
If the raw materials or parts are stored after being received at
the manufacturing facility, the raw materials or parts are not
committed until after they are removed from initial storage and
where the materials or parts have been mixed, measured,
blended, heated, cleaned, or otherwise treated or prepared for
the manufacturing process, whichever first occurs.

10. Why is this important?
Things used in any activity, including movement or
storage of the materials or parts before they are
committed to the manufacturing process are taxable.
 Items such as forklifts, shrink wrap, shrink wrap machinery,
pallets, shelving, tags, cranes/lifts/pulleys, tables/platforms,
tooling, conveyors, boxes, containers, transport to or from
storage, etc. are taxable if used before the manufacturing
process begins.

11. When does the manufacturing process end?
When a manufactured item is completed.
 When its in the form and condition as it will be sold by the
manufacturer. When all processes that change or alter its
state or form or enhance its value are finished, even though
the item subsequently will be tested to ensure its quality or be
packaged for storage or shipment.
 If the product will be further manufactured by the same
manufacturer at a different manufacturing facility, the product
is still in-process and is not completed.
 Can be numerous manufacturing processes in same plant,
look for completed saleable products.

12. Why is this important?
Establishes the manufacturing cycle.
Within the cycle, production machinery, materials
handling equipment that moves the product
between the production machines, and any
equipment, such as tanks, shelves, or racks, that
temporarily store or hold the product in between
production machines are exempt.
Items after manufacturing and before packaging are
outside of the exemption, and may be taxable of no other
exemption applies.

13. Exempt - Machinery and consumables
Production machinery (actually touches the product).
 Blending, mixing, measuring, washing, agitating, filtering,
heating, cooling, or similar processes.
Consumables - Catalysts, solvents, water, acids, oil, and
similar consumables that interact with (but not become
part of) the product and that are an integral part of the
manufacturing operation.

14. Exempt – Transport (while in mfg. process)
Materials handling equipment that moves the product
through a continuous manufacturing operation or that
temporarily stores the product during the manufacturing
operation.
 Note: Motor vehicles licensed to operate on public highways
are outside of the exemption however.
Temporary Storage – looking for items that serve as a
placeholder only. Holding for the next machine in the
process in line is ok, waiting for a month (which is not
needed for curing or the like) is too long – that’s regular
storage and is taxable.

15. Exempt - Power
The power itself, the generation or extraction of the
power, and anything used to get the power there, are
exempt.
 Electricity, coke, gas, water, steam, and similar substances.
 Producing or extracting those substances.
 Machinery, equipment, and other tangible personal property
used to treat, filter, pump, alter voltage, or otherwise make the
substance suitable for use in the manufacturing operation.
 Wiring to get power to the machines on the mfg. floor or to the
facility.

16. Exempt - Reclamation
Machinery, equipment, and other tangible personal
property that treats, filters, cools, refines, or otherwise
renders water, steam, acid, oil, solvents, or similar
substances used in the manufacturing operation
reusable, provided that the substances are intended for
reuse and not for disposal, sale, or transportation from
the manufacturing facility.
 It has to be the same manufacturing facility….moving things
from one building to another doesn’t count.

17. Exempt - Parts, repairs, and installation
Parts, components, and repair and installation services
for items used in the manufacturing process are exempt.
 Replacement parts for nontaxable equipment are not taxable.
 Any repair service or installation service purchased from an
independent contractor for repairing or installing nontaxable
equipment is not taxable.
Monitoring items that display conditions of/in the
machinery are exempt. Recordkeeping devices are
taxable.

18. Exempt - Repair/Remanufacturer of items
used in manufacturing
Machinery, equipment, fuel, power, material, parts, and
other tangible personal property used to manufacture
machinery, equipment, or other tangible personal
property that itself will be used in manufacturing.
 Creation of tooling, replacement parts, metal pallets, or
consumables (acid).
 This is a separate manufacturing process.
 Machines used to sharpen blades or other tooling

19. What is not included in the exemption?
Items used for:
 Administration
 Personnel
 Security – including monitoring devices to observe personnel
 Inventory Control
 Recordkeeping – testing?
 Ordering/Billing
 Waste collection handling (but see reuse and environmental)

20. What is not included in the exemption?
Items used for:
 Storage of raw materials or finished products
 Storage of fuel, water, solvents, etc.. to be used in
manufacturing
 Storage lockers for clothes, tools, etc..

21. What is not included in the exemption?
Items used for:
 Transport of items that are not between steps in a continuous
manufacturing operation
 Tangible property to be incorporated into realty (business
fixtures are not incorporated into realty)
 General environment control or monitoring (temperature, dust
collection, lighting, etc..) except in special limited areas where
such control is essential for production to occur).
• Note that keeping things from entering the exterior environment is a
separate exemption.

22. What is not included in the exemption?
Items used for:
 Safety equipment for workers, unless it is integrated into
machinery (eyeglasses, gloves, earplugs, first aid supplies,
fire extinguishers, etc..)
 Research and Development (there is a separate exemption
for this)
 Vehicles that are registered for operation on highways.

23. Questions?

24. Contact Information
Chad A. Bice, CPA – Tax Director, Director, State & Local
Tax.
Direct Dial: 740-454-3198
chad.bice@reacpa.com
Christopher Axene, CPA –Federal Tax Planning
Direct Dial: 614-923-6558
chris.axene@reacpa.com

25. Questions?