Maximizing the Manufacturing Exemption from Ohio Sales/Use Tax: Part 2 – When is a Product “Complete”?

As described in Part 1 of this article, the scope of the manufacturing exemption from Ohio sales and use tax is determined by the beginning and end of the “manufacturing operation.” A product being manufactured is complete, thereby ending the manufacturing process, when all the processes that alter the product’s state or form or enhance its value are finished. A “manufacturing operation”, however, does not include packaging or quality testing performed after the product is complete.

Ohio Administrative Code Section 5703-9-21 provides several helpful examples illustrating when the manufacturing operation ends. Particularly instructive is one involving an ice cream manufacturer, which explains that ice cream is not complete until it is cooled and hardened in a specialized freezer – the hardening room. However, the freezer after the hardening room that stores the ice cream while awaiting distribution is not entitled to the exemption because it merely maintains, but does not change or alter, the product’s state and form as received by the consumer.

Nonetheless, any change in the state or form of a product, no matter how small, will continue the manufacturing operation. In a recent Ohio Board of Tax Appeals decision addressing when pet food is complete, one of the final steps of production was sending the pet food through a screening process which removed small burrs, smoothed rough edges and removed abnormally shaped kibbles. Since this screening process changed the product’s form, “albeit ever so slightly”, and enhanced its value, the screening equipment was exempt from Ohio sales and use tax. However, if the screening process would have only filtered out the kibbles that were too large or too small, without also smoothing them, the exemption likely would not have been available.

If you need help determining when the product you manufacture is considered “complete” for Ohio sales and use tax purposes, and therefore when your manufacting operation ends, please feel free to contact us.