Wisconsin has become increasingly aggressive in its audits of sales and use tax.  Because such audits usually cover four to six years of activity and include interest at 12% and penalty assessments of 25%, noncompliance can be costly.  To assist you in reducing your company’s exposure upon audit, the following is a summary of the general rules and exemptions applicable to manufacturers.

Rules Applicable to Sales

While most manufacturers’ sales are exempt from sales tax because the purchaser intends to resell the product, these sales are not automatically exempt.  A signed resale certificate from each customer must be kept on file verifying that their purchases are indeed for resale.   In addition to the resale exemption, several other exemptions are also available.  If you are not taking advantage of such exemptions, you are overcharging your customers and thereby reducing your ability to compete.  The following are some of the most common:

Sales of property shipped to a customer outside of Wisconsin using your own trucks or a common carrier.  Wisconsin can only tax those transactions which take place within its boundaries.  More complex rules apply when a contract carrier is used.

Sales to a government unit or school.  Customers which qualify for this exemption include the U.S. government and its agencies; the state of Wisconsin and its agencies; any county, city, village, town, or school district in Wisconsin; and all public schools, vocational schools, state colleges, public universities, and public school districts.

Sales to certain nonprofit entities providing a completed Certificate of Exemption.  All nonprofit entities do not qualify for this exemption.  Generally, only religious, charitable, educational, or scientific organizations will qualify.
 
Sales to American Indian tribes, enrolled members, and certain Indian corporations or partnerships.  These sales are only exempt if the product is delivered to the tribal reservation. 

Rules Applicable to Purchases

Generally, a manufacturer must pay Wisconsin sales or use tax on each of its purchases, including those purchased from an out-of-state vendor, unless a specific exemption applies.  The most common of those exemptions are discussed below.

Machinery and processing equipment, including repairs and parts, used exclusively and directly in the manufacturing process.  The manufacturing process includes the conveyance of raw materials from inventory to the first work point, from one work point to another, and from the last work point to finished goods storage.  Understanding the beginning and ending points of this process provide many tax-saving opportunities.  Inspecting raw materials after they are removed from storage on their way to the first work point and packaging products for shipment before putting them into finished goods storage allow inspection and packaging equipment that is normally taxable to be exempt instead.

Equipment that is used for both manufacturing and another purpose does not qualify for this exemption.  Thus, a forklift is not exempt if it is used half the time to move materials around the manufacturing floor and half the time to unload raw materials and load finished product onto delivery trucks.  Other purchases which do not qualify under this exemption include machines and tools used for: storage, delivery, safety or fire protection, cleaning and maintenance of manufacturing equipment or facilities, waste disposal, testing or quality control, or research and development.

Materials and supplies that are a component or ingredient or are consumed, destroyed, or lose their identity in the manufacture of products you will sell to customers.  This exemption allows nontaxable purchases not only of raw materials, but also any other materials consumed during manufacturing that do not actually become a part of the finished product, including acids, bleaching agents, oils, greases, sandpaper, etc.  This exemption does not include apparel or safety equipment worn by employees unless such apparel is required to prevent contamination of the product.

Containers, labels, boxes, and other packaging and shipping materials that you will use to transport your product to customers.  Packaging and shipping materials include materials used inside a package to stabilize or protect the contents and include cardboard fillers, shredded paper, twine, gummed tape, wrapping paper, rubber bands, pallets, skids, and mailing tubes. 

Purchases of printed material designed for advertising purposes that you will distribute free of charge outside of Wisconsin.  This is perhaps one of the most overlooked exemptions available.  Items that qualify for this exemption include direct mail advertising, brochures, postcards, catalogs, and order blanks inserted in the catalogs.  This exemption does not cover price lists, stock order books, order forms, stocking and purchasing guides, matchbooks, calendars, etc.

Purchases of finished artwork.  While the purchase of finished artwork is normally taxable, your purchase is exempt if it is transferred to another vendor to use in the printing of your catalogs, brochures, etc.  Unlike the above exemption, this exemption does not require that the printed materials be distributed outside of Wisconsin.

Conclusion

Noncompliance with sales and use tax rules can prove very expensive if your business is audited.  Therefore, Wisconsin taxpayers must take steps to ensure they have adequate procedures in place and monitor their compliance with such procedures if they want to avoid a costly surprise upon audit.