Lumber Manufacturing: Production Exemption
Do you manufacture rough or finished lumber that you'll sell? If so, you might qualify for the production exemption.
If you qualify for the production exemption, you can buy some equipment and supplies without paying sales or use tax. This guide talks about sales and use tax issues that are unique to lumber manufacturers.
To be eligible for this exemption, your business must:
- Engage in a qualifying lumber manufacturing activity. This includes manufacturing rough or finished lumber, such as sawmilling or lumber milling.
- Devote the majority of your business operations to qualifying lumber manufacturing activities. Example: Spending more than 50% of the business' working time and activities manufacturing rough or finished lumber.
- Own the lumber you manufacture
- Sell the lumber you manufacture
- Report your business' profit or loss on an income tax return.
Note: Custom sawmilling for someone else who owns the wood isn't a qualifying activity.
Separately operated business segment
A separately operated business segment can also qualify. It can be a division, branch, or even a cost center. You must keep separate accounting records for the business segment to qualify as a separately operated business segment. This includes recording income, expenses, wages, and assets of the business segment separately. You must also have employees dedicated to operating the separate business segment.
Your business devotes 40% of its business operations to sawmilling wood you'll sell and 60% doing custom sawmill work on someone else's wood. Manufacturing wood you own and will sell is an exempt activity, but custom sawmilling on another's wood isn't. Because your business doesn't spend the majority of its business activities in a qualifying activity, you don't qualify for the lumber manufacturing exemption. Your sawmilling activities might qualify for an exemption if you make them a separate operation.
The lumber manufacturing exemption is only for businesses that devote the majority of their business operations to qualifying lumber manufacturing activities trying to make a profit.
- It doesn't include manufacturing of:
- Paper products*
- Operations that aren't eligible for the exemption include:
- Lumber manufacturing as a hobby
- Manufacturing lumber for personal use
- Manufacturing lumber for use by your business
* Note: Although these manufacturing activities (plywood, particleboard, etc.) aren't "lumber manufacturing," they could qualify for the production exemption.