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The Manufacturing Advisor: Tax Policy of Critical Concern to Manufacturers

Posted 2:25 PM by
The 2014 Indiana Manufacturing Survey: Strong for Today, Concerned for Tomorrow was full of enlightening information for the Hoosier manufacturing industry, but one of the most striking pieces of information to come from the survey was this: When asked to select the most critical factor in terms of manufacturing cost and viability, property tax policy and corporate tax policy were rated extremely important by 66% of respondents, finishing . just a single percentage point behind regulatory issues and healthcare. And, in this day of 24/7 coverage of the Affordable Care Act, that’s saying something. 

While even those of us who work every day in the world of state and local taxes were surprised by these findings, we shouldn’t have been. The fact is, studies show that state and local taxes typically make up 50% or more of a company’s total tax liability. Given the multitude of state and local taxes that most every business needs to account for in some way – income tax, sales tax, property tax, and other excise taxes – the reach of state and local tax is wide. So, when one category has the potential to comprise such a large percentage of company’s expenses, executives of these companies are going to sit up and take notice. 

We see this impact in a variety of ways when advising our clients. For a manufacturer under a sales and use tax audit, the nuances of whether purchases qualify for one of the many exemptions afforded to manufacturers is no easy task. As one example, Indiana provides an exemption for gloves worn by an employee engaged in production activities if the gloves protect the worker from injury. What constitutes an injury – something less than cuts? Chafing, perhaps? It may sound silly, but it’s a question sometimes asked by auditors. 

What about safety goggles worn by production workers? Such protective eyewear is exempt, but what if some goggles are worn by management as they walk through the plant or visitors during plant tours? These are taxable. Therefore, the manufacturer must account for the percentage of exempt versus nonexempt goggle usage.  

Beyond sales tax, income tax can also generate divisive issues for manufacturers. Enemy #1 on many a manufacturer’s “worst of”  lists is Indiana’s throwback rule. In Indiana and 20+ other states, if sales get sourced to a jurisdiction that does not tax the company’s net income, those sales are “thrown back” and sourced  to Indiana for purposes of the apportionment factor. Multistate manufacturers often call the throwback rule a “hidden tax” that, while not technically a tax, can have the identical effect of one. 

In the arena of property taxes, the continued existence of Indiana’s personal property tax is beginning to make the Hoosier state an outlier compared to its neighbors. Illinois, Ohio and Michigan have either eliminated or are in the process of eliminating their personal property tax, and Kentucky’s personal property tax has a lower effective rate than Indiana. Additionally, the 30% floor imposed on personal property is another red mark against Indiana’s property tax policy. 

While there is a lot to like about changes made to Indiana’s tax system over the past decade, manufacturers will argue that more work needs to be done. Chances are, as long as big fixes or even tweaks are still sought by manufacturers, survey respondents will continue to rank state taxes high on their list of factors critical to their success.

About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Group. Donna helps keep clients up-to-date on the multitude of tax rules and requirements in all 50 states. She guides them in the right direction as they address the complex issues that emerge on both the state and local levels. Connect with her on LinkedIn.