Exempt Materials

Sales and Use Tax Exemptions for Production Activities The Maryland sales and use tax does not apply to sales of machinery and equipment used in production activities, sales of tangible personal property for consumption in production activities, or sales of tangible personal property for resale or incorporation as a material or part of other tangible personal property produced for sale.

What production activities are exempt from sales and use tax?

Exemption production activities include:

• assembling, manufacturing, processing, or refining tangible personal property for resale;
• generating electricity for sale;
• preparing textiles such as uniforms and linens for rental;
• establishing or maintaining clean rooms or clean zones required by federal laws pertaining to manufacturing drugs, medical devices, or biologics; and
• producing, repairing and maintaining machinery or equipment used in a production activity.

Servicing, maintaining, or repairing tangible personal property other than production machinery or equipment , or providing for the health and comfort of employees are not production activities.

What items are exempt?

• any tangible personal property used directly and predominantly in a production activity in any stage of operation on the production activity site - from handling raw materials or components to moving finished product;
• foundations to support other machinery and equipment or an item required to conform to air or water pollution laws and normally considered part of real property;
• safety equipment used in production activity;
• quality control machinery and equipment used in a production activity site;
• equipment and supplies used to remove finished goods on a production activity site;
• machinery used to produce bituminous concrete; and
• certain specified equipment used in aluminum production.

Do equipment leases qualify?

Yes. Lease payments of production activity equipment qualify for the exemption.

What about equipment used for both taxable and exempt purposes? If machinery or equipment is used both in a production activity and administrative, managerial, sales or any other non-operational activity, the exemption applies if it is used at least 50% of the time in a production activity.

What is meant by consumed "directly and predominantly"?

To meet the "directly" test, the use of the property must be integral and essential to the production activity, occur where the production activity is carried on and occur during the production activity. The "predominantly" test is met if the property is used more than 50% of the time directly in production activities.

Does food preparation by restaurants and food retailer qualify for exemption?

Generally, food processed for sale by grocery stores, bakeries and other food retailers does not qualify for exemption. However, there is a specific exemption for the sale of equipment to be used by a retail food vendor to manufacture or process bread or bakery goods for resale. To qualify for the exemption, the vendor must operate a substantial grocery or market business (as defined in Section 11-206(a) of the Tax-General Article) at the same location where the food is sold. The taxable price of each piece of exempt equipment must be at least $2,000.

Can utilities and fuel qualify for exemption from sales tax?

Yes. Sales of utilities and fuel qualify for exemption under the same terms as other consumables. However, the use of these items in operating administrative, commercial and storage facilities and in providing plant heating and air conditioning is not exempt. When utilities are sold through a single meter for both taxable and exempt uses, taxability is controlled by majority usage. The taxability of oil and coal is also controlled by majority usage where it is impractical to segregate qualifying and nonqualifying usage. The exemption for utilities and fuel is claimed by completing Form ST206, available from Taxpayer Service, and forwarding it directly to the vendor.

How are the production activities exemptions claimed?

No special forms are needed to claim the machinery and consumable exemptions, other than Form ST206 for utilities and fuel. If a vendor requires documentation to support a claim for the machinery exemption, a signed form certifying use in production activities may be provided. The consumables exclusion may be supported by a statement in the form of a resale certificate stating that the property will qualify.

Are purchases for research and development exempt?

Yes. The tax does not apply to purchases of tangible personal property for use or consumption in research and development. No special forms are required to claim the research and development exemption. If entitle-ment to exemption is not evident from the documents of sale, a vendor should obtain a certificate from the purchaser stating that the property will qualify.

How are the resale and incorporation exclusions claimed?

Vendors may not recognize the resale and incorporation exclusions unless you provide them with a resale certificate with a signed statement that the purchases are for resale and including the buyer's name, address and Maryland sales and use tax registration number. For more information on the use of resale certificates, request Business Tax Tip #4 - If you Make Purchases for Resale - from Taxpayer Service, or by calling Forms-by-Fax at 410-974-3299 and requesting document #4009 from index 2.

What is considered research and development?

Research and development means basic and applied research in the sciences and engineering and the design, development and governmentally mandated pre-market testing of prototypes and processes. Market research, research in the social sciences or psychology, and other nontechnical activities, routine product testing, sales services or technical and nontechnical services are not included.

Does the law have any special provisions for printers?

Yes. The tax does not apply to the sale of photographic materials used to produce an item (such as a photographic plate) used in composing, printing or producing another item used in printing. Sales of artwork, electrodes, electrotypes, composition, litho-graphic plates or negatives, mats, photoengravings, stereotypes or typographies for direct use by a person engaged in printing tangible personal property for sale are also exempt. A person selling the items, other than those that are photographic in nature, must pay the tax on all materials used to produce them. A printer who produces these items for self use also must pay tax on all materials.

Production activity definitions before July 1, 1998

Before July 1, 1998, the definition of production machinery and equipment and supplies was more restrictive. Production activity machinery and equipment had to be capitalized to claim depreciation using acceptable and consistent accounting standards to qualify for the exemption.
Tangible personal property that was not consumed directly and predominantly in a production activity within one year after the property was first used in a production activity was not exempt. In addition, safety equipment, quality control machinery and equipment, and equipment and supplies used to move finished goods on a production site as well as equipment used to maintain production machinery and equipment were not exempt.

If I overpaid the tax, how do I get a refund or credit?

If you've overpaid the tax on any production activity purchases that were exempt before July 1, 1998 you may apply for a refund within four years from the date of payment of the tax on Form ST205. For assistance or for information on procedures for filing claims, you may contact the Supervisor of Refunds at 410-767-1538 within the Baltimore Area or 1-800-492-1752 from elsewhere. The tax must be paid on production activity items that were fully exempt on or after July 1, 2000, but were not exempt before July 1, 1998. However a partial credit is allowed on these purchases. The credit was phased in over two years and was fully implemented July 1, 2000. The purchase of qualifying production activity machinery and equipment and supplies made on or after July 1, 1998, but before July 1, 1999, are entitled to a credit of one-third of the taxes paid. Purchases of qualifying machinery and equipment made on or after July 1, 1999, but before June 30, 2000, are entitled to a credit of two-thirds of the taxes paid.

How to claim the credit

For the first two years of the phase-in, a person claiming the credit for the categories of purchases listed in the right-hand column of the chart must pay the full amount of the sales tax at the time of purchase. The credit may then be claimed on line 9 of the purchaser's sales and use tax return for the period during which the tax was paid on the affected equipment. Credits to which a purchaser is entitled may be combined and taken as a refund on the sales and use tax return for the total amount of tax due on that return without regard to the $1,000 limitation for refunds on line 9. Unused credits may be carried forward and claimed on subsequent returns. Any person who can't claim the full amount of the credit within one year may apply for a refund in lieu of claiming the credit on the return.

The following comparisons show categories of equipment which qualify for the new credit. Exemption before July 1, 1998