KSM recently released its Indiana Legislative Update, summarizing important tax and economic development legislative changes that occurred in this year's Indiana General Assembly.
The legislature addressed everything from long-simmering issues to new topics, sprinkling in clarifications of old laws and (if history is our guide) new laws that will require clarification in the future. However, there were a handful of new laws that specifically impact manufacturers.
While the highly anticipated expansion of the Indiana sales tax exemption for manufacturers – via the elimination of the double-direct test – did not come to pass, there were plenty of other tax law changes affecting manufacturers that did. Below are four that we find especially significant:
- Elimination of the throwback rule: For multistate companies shipping their product out-of-state, the throwback rule has historically inflated the calculation of Indiana sales for purposes of income tax apportionment. Sales to states in which the company did not file an income tax return were “thrown back” and treated the same as if they were shipped to Indiana. This has long been argued as negatively impacting companies with manufacturing and/or distribution facilities in Indiana. Effective Jan. 1, 2016, this rule is no more.
- R&D exemption narrowed: The R&D exemption provides that certain equipment purchased for research and development activities can be purchased exempt from sales tax. The definition of what does and does not qualify was tweaked, including a new requirement that the underlying activity be deemed “essential and integral” to experimental or laboratory research and development. This added requirement narrows the scope of the exemption, potentially impacting manufacturers with Indiana R&D activities.
- Manufacturing exemption expanded: Although Indiana’s “double-direct” test for determining the sales tax exemption for manufacturing equipment was not eliminated, the legislature made a modest change to expand its scope. The double-direct test requires a subjective analysis of when production begins and ends, with equipment used outside of this integrated process not eligible for the exemption. The manufacturing exemption was expanded to include material handling equipment used for the purpose of transporting materials into production activities from an onsite location. Manufacturers will now be able to acquire some equipment involved in pre-production activities exempt from tax, such as a forklift used to move raw goods.
- Exemption for labels: A new exemption was created for labels to be affixed to a product being sold if the label is required in order to comply with state or federal law. This new law’s silence on its potential impact on other types of packaging may result in a narrowing of the current packaging exemption. If this new law results in a but-for test, it would undoubtedly lead to a more restrictive exemption and increased packaging costs for manufacturers.
A full legislative summary can be found on our website. If you see a reference to a particular piece of legislation that is of interest, feel free to contact us. We are happy to discuss it with you.
About the Author
Tim Cook is the partner-in-charge of Katz, Sapper & Miller's State and Local Tax Practice. Tim supervises and coordinates all state and local tax consulting services, including business incentives and site selection, multistate taxes, and unclaimed property. Connect with him on LinkedIn.
About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Practice. Donna provides a wide variety of tax consulting services in the areas of multistate sales and income taxes, business incentives, controversy services, and other state taxes. Connect with her on LinkedIn.
About the Author
Tim Conrad is a state and local tax consultant in Katz, Sapper & Miller’s State and Local Tax Practice. Tim provides consulting services on technical tax matters, including multistate income, property and sales taxes, as well as economic development services. Connect with him on LinkedIn.