Does Your State Tax Manufacturing Machinery?

This question arises several times a month: When buying used or new equipment, should sales tax be added? The answer is, “it depends.” It depends on the type of machine or equipment and the state in which you are purchasing.

Ideally, the purchase of manufacturing machines should be exempt from sales taxes to prevent tax pyramiding. This phenomenon occurs when taxes are applied multiple times throughout the production cycle. For example, you pay sales tax on the machine that makes a widget, which is then sold in stores or to a plant that also has a sales tax on items incorporating that widget. When states tax machinery, they create a system resembling a gross receipts tax, which is considered one of the most economically detrimental forms of taxation.

The good news is that most states have wisely chosen to exempt both used and new manufacturing machinery from sales tax. Buyers are required to fill out a tax exemption form (in Illinois, this is the ST-587 form) confirming that the machine is used in direct production of a taxed end-good. This process is straightforward and well-known in the manufacturing world. However, there are exceptions: Alabama, Mississippi, North Dakota, South Dakota, Nevada, the District of Columbia, and Hawaii tax not only the machinery used in manufacturing but also the raw materials involved.