Welcome to the latest post in our series about how state tax legislation affects various technology industry niches! Today our focus is on semiconductor manufacturing. What multi-state tax issues do they face? Keep reading to find out.
An Overview of Manufacturers
Semiconductor manufacturing is the process of creating, “A substance, as silicon or germanium, with electrical conductivity intermediate between that of an insulator and a conductor: a basic component of various kinds of electronic circuit element (semiconductor device) used in communications, control, and detection technology and in computers.”
So basically it’s how the parts necessary for computers and technology are made (and how Silicon Valley got its nickname).
Examples of semiconductor manufacturing companies include:
- Intel
- Samsung
- Qualcomm
- Toshiba
- Broadcom
- Infineon
- Sony
- Freescale
- Nvidia
State Tax Issues for Semiconductor Manufacturing Companies
Although a lot of semiconductor manufacturing is done overseas, some of the engineering and testing is done here in the United States, which often creates multi-state tax implications.
- Nexus: If you’ve been following this blog series, you know that we always discuss nexus, or taxable presence. Manufacturing companies obviously have nexus in the state(s) in which they are manufacturing, but they also may create nexus if they are sending a salesforce into other states. Oftentimes semiconductor manufacturers outsource the actual manufacturing to third parties. To the extent that those third party manufacturers retain parts or other inventory owned by the company in a state, that also creates nexus.
- Sales Tax: Companies in this industry typically sell their products for resale, rather than to the final consumer. If, of course, they do sell to the final consumer, they need to take into account the sales tax rules in those states in which they have nexus. Where they sell predominantly for resale, they need to make sure that they retain valid resale certificates. This type of documentation is key under audit. Also, many states offer manufacturing exemptions for property placed in service for manufacturing purposes. Another item that’s a bit unique to manufacturers is that they often take products out of inventory for testing. This is also a significant area for audit. In general, where a product is pulled out of inventory for use by the company in testing (or sometimes, to be given away to a customer), the company should be prepared to pay use tax on the item withdrawn from inventory.
- Income Tax: Semiconductor manufacturers, like so many of our technology clients, engage in substantial research and development efforts. And many states offer income tax credits for research and development – most of which are based on the federal R&D credit (which used to expire annually, but was recently made permanent). Companies should be aware of not only the state R&D credits, but other investment and employment credits available for expansion of plants, increased headcount, etc.
How Miles Consulting Assists Semiconductor Manufacturing Companies
While the semiconductor manufacturing industry is not a “new” technology field, companies in this industry continue to innovate in order to make the better, faster chip. We work with clients in this industry to make sure they are appropriately filing in states in which they have nexus, are claiming proper exemptions available in various states for sales tax, and are benefitting from income tax credits and incentives.
One example that we’ve talked about before, is the relatively new California Partial Manufacturers Exemption, where companies can take a partial exemption from California’s sales tax for property used in manufacturing or research and development activities in the state; we assist companies in claiming and documenting the exemption. We also remind clients that it’s important to obtain (and maintain) supporting documentation currently – even though the audit may not come for a few years. It’s always difficult to obtain documentation after the fact. That’s obviously true not just for this particularly exemption, but also for other exemptions and credits.
I hope this series about multi-state tax issues has been enlightening for you! If you want to know more, please don’t hesitate to contact us; we’re happy to answer your questions and help you handle the multi-state tax issues facing you and your company!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Partial Manufacturer’s Exemption for Sales Tax. To learn more, contact us today at www.MilesConsultingGroup.com.
