Kentucky sales tax applies to retail sales of tangible personal property, as well as the provision of specified services. However, as is the case with most things in the tax world, there are exceptions to the general rule. Taking advantage of these exceptions can save a company considerable amounts of money.

Supplies, Tools, and Materials Exemption

In order to qualify for an exemption, an item must be either:

• “materials which enter into and become an ingredient or component part of the manufactured product”
• or “other tangible personal property which is directly used in manufacturing or industrial processing, if the property has a useful life of less than one year.”

For purposes of the above exemption, supplies include lubricating oils, grease, machine waste, abrasives, chemicals, filtering materials, dyes, and similar items. Industrial tools are limited to hand tools, such as jigs, dies, drills, cutters, rolls, reamers, saws, and other similar items. Normally, for industrial tools to be considered directly used in manufacturing, they must come into direct contact with the product being manufactured.

Even with the exemption, a manufacturer may still pay some sales tax, as the exemption does not include repair costs, replacement parts, or spare parts.

Manufacturing Machinery Exemption

While not all machinery is exempt from sales tax, Kentucky does provide an exemption for machinery that is for “new and expanded industry.” In order to qualify for this exemption, the machinery must meet three criteria. The machinery:

• must be used directly in manufacturing
• must be used for the first time in a Kentucky plant facility
• cannot replace existing machinery
• unless it increases consumption of recycled materials by more than 10%, performs different functions, manufactures a different product, or has a greater productive capacity

Energy Used in Manufacturing Exemption

Companies in the industry often overlook this final exemption for manufacturers. Kentucky exempts sales tax from all energy or energy-producing fuels used in the course of manufacturing or processing, as long as the costs of the energy or fuel exceeds 3% of the manufacturers’ cost of production.

These exemptions from sales tax may appear rather straight forward, but they are all somewhat complex in practice. We can help you navigate these exemptions and save your company money. To get started, call Derek Gray at (502) 992-3480 or email him at dgray@blueandco.com.