Do sandpaper and router bits that a furniture maker uses up while making furniture qualify for Missouri's manufacturing exemption?

Subject

Materials and Supplies Used to Make Furniture Exempt from Tax under 144.054

Plain-English summary

The Missouri Department of Revenue ruled that sandpaper and router bits consumed by a furniture maker while making furniture qualify for the manufacturing exemption under Section 144.054.2, RSMo.

Applicant is a maker of furniture. Items like sandpaper and router bits are consumed by the Applicant in the furniture making process. The Department explained that Section 144.020.1.(1), RSMo generally taxes the purchase price of tangible personal property, and Section 144.030.2.(4), RSMo has a separate exemption for "replacement parts" -- but that exemption requires the item to have "a degree of permanence and durability" under 12 CSR 10-111.010(2)(G). Because sandpaper and router bits are consumed (used up) during the furniture-making process, they lack that permanence and durability, so they don't qualify as "parts."

Instead, the Department found they fit the definition of "materials and supplies" -- items that would otherwise be "parts" except that they are consumed in a processing and production cycle. Under Section 144.054.2, RSMo, materials and supplies consumed in manufacturing a product are exempt from state sales tax and from local use tax. The ruling is careful to note this exemption does not reach local sales tax: Applicant still owes local sales tax on the sandpaper and router bits, even though state sales/use tax and local use tax do not apply.

What this means for you

Furniture makers and other manufacturers

If your business consumes items like sandpaper, router bits, or similar shop supplies in the course of making a product, this ruling supports treating those items as exempt "materials and supplies" under Section 144.054.2, RSMo, rather than taxable "parts." The key fact the Department relied on is that the items are used up (consumed) during production rather than remaining as a durable, replaceable component. Remember that even if state sales/use tax and local use tax don't apply, local sales tax can still apply to the same purchase.

Accountants and tax professionals

When advising a manufacturing client on whether a consumable item qualifies for the Section 144.054.2 exemption, check whether the item has "a degree of permanence and durability" (which would push it toward the taxable "parts"/replacement-parts category under Section 144.030.2.(4), RSMo) or whether it is consumed in the processing and production cycle (which supports the "materials and supplies" exemption). Also flag for clients that the 144.054.2 exemption is only partial: it covers state sales tax and local use tax, but not local sales tax.

Businesses relying on this ruling

This letter ruling is binding on the Department only with respect to the Applicant who requested it, only for three years from its date, and only so long as the facts and the underlying law don't change. A different furniture maker, or any other manufacturer, with similar facts should confirm those facts match before assuming the same result and should consult a Missouri tax professional.

Common questions

Q: Do sandpaper and router bits used to make furniture qualify for a manufacturing exemption?
A: Yes. The Department ruled they are "materials and supplies" that qualify for the manufacturing exemption under Section 144.054.2, RSMo, because they are consumed in the furniture-making process.

Q: Why don't sandpaper and router bits qualify as "replacement parts" instead?
A: Because the replacement-parts exemption under Section 144.030.2.(4), RSMo, requires items to have "a degree of permanence and durability" under 12 CSR 10-111.010(2)(G). Since the Applicant's sandpaper and router bits are consumed during the furniture-making process, they lack that permanence and durability.

Q: Does the Section 144.054.2 exemption cover all taxes on these items?
A: No. It exempts the items from state sales and use taxes and from local use tax, but the ruling specifically states the Applicant is "not exempted from paying local sales taxes on the items" under Section 144.054.2, RSMo.

Q: What is the difference between "parts" and "materials and supplies" under Missouri regulations?
A: Under 12 CSR 10-111.010(2)(G), "parts" are durable, separable, replaceable components of machinery or equipment. "Materials and supplies" are items that would otherwise be "parts" except that they are consumed in a processing and production cycle -- which is what happens to sandpaper and router bits in furniture making.

Q: Can another manufacturer rely on this ruling for its own consumable supplies?
A: Not automatically. This is a Missouri letter ruling binding on the Department only as to the requesting Applicant, only for three years from its date, and only while the facts and law remain unchanged. Other manufacturers should confirm their own supplies are similarly consumed in production (not durable, replaceable parts) and consult a tax professional.

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8209

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated August 2, 2022.

The facts as presented in your letter ruling request are summarized as follows:

Applicant is a maker of furniture.  Items like sandpaper and router bits are consumed by the Applicant in the furniture making process.

ISSUE :

Do sandpaper and router bits used in the course of making furniture qualify for a manufacturing exemption?

RESPONSE :

Yes, sandpaper and router bits are materials and supplies, and therefore qualify for the manufacturing exemption under section 144.054.2.

Section 144.020.1.(1) RSMo, generally imposes a tax upon the purchase price paid for tangible personal property.

Section 144.030.2.(4) RSMo, contains a state and local sales tax exemption for replacement parts.

Section 144.054.2 RSMo, contains a state sales tax, and local use (but not a local sales) tax, exemption for parts, materials, and supplies consumed in the manufacturing of a product.

Section 12 CSR 10-111.010(2)(G). Defines "parts" to include:

"Articles of tangible personal property that are components of machinery or equipment, which can be separated from the machinery or equipment and replaced. Like machinery and equipment, parts must have a degree of permanence and durability."

Section 12 CSR 10-111.010(2)(G). Defines "materials and supplies" to include items that would otherwise constitute "parts" except they are consumed in a processing and production cycle.

In this instance, the Applicant has represented that the items are consumed in the furniture making process.  Based upon the Applicant's representations, the items lack the degree of permanency and durability to qualify as "parts" under the replacement parts exemption to state and local sales and use taxes found in Section 144.030.2.(4) RSMo.  Based upon the Applicant's representations, the items do qualify as "materials and supplies" exempt from state sales and use taxes, and local use taxes, under Section 144.054.2 RSMo.  Please note , the Applicant is not exempted from paying local sales taxes on the items under Section 144.054.2 RSMo.

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change. For this reason, the interpretation set forth above should be reviewed on a regular basis. Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Legal Counsel Nathan Jefferson, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.

Sincerely,

Wayne Wallingford