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.
The Tangible Personal Property Used or Consumed in a Production Activity citations are from COMAR 03.06.01.32-2 and COMAR 03.06.01.24.
Tax-exempt production activities include:
- Assembling, manufacturing, processing, or refining tangible personal property for sale or resale (except for processing food or beverages by a food vendor);
- Generating electricity for sale or for use in production activity;
- Establishing or maintaining clean rooms or clean zones required by federal laws pertaining to manufacturing drugs, medical devices, or biologics;
- Producing, maintaining, and repairing production machinery or equipment;
- Laundering, maintaining or preparing textiles in providing the taxable service of commercial cleaning or laundering of textiles for a buyer engaged in a business that requires this service on a recurring basis of a commercial cleaning or laundering of the textiles;
- Providing for the safety of employees, including safety glasses, hard hats and breathing apparatus; or,
- Providing for quality control.
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.
Tax-exempt items include:
- 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.
“Direct” and “predominant” use
Tangible personal property is considered to be used “directly” when the use of the property is integral and essential to the production activity; the use occurs where the production activity is carried on and occurs during the production activity.
The property is considered to be used "predominantly" when the property is used directly in production activities more than 50 percent of the time.
Lease payments of production activity equipment also qualify for the exemption. 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 percent of the time in a production activity.
Food preparation by restaurants and food retailers
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.
Utilities and fuel
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 non-qualifying usage. To claim the exemption for utilities and fuel, contact Taxpayer Service to obtain Form ST206 and send the completed form to the vendor.
Research and development
The sales tax does not apply to purchases of tangible personal property for use or consumption in 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.
No special forms are required to claim the research and development exemption. If entitlement to exemption is not evident from the documents of sale, the vendor should obtain a certificate from the purchaser stating that the property will qualify.
Resale and incorporation exclusions
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, contact Taxpayer Service and request Business Tax Tip #4, If you Make Purchases for Resale.
The sales 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, photo engravings, 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.
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.