in-20261021-IR-045260384NRA: DEPARTMENT OF REVENUE

DEPARTMENT OF REVENUE Sales Tax Information Bulletin #64 Subject: Manufacturing and Production Exemptions Publication Date: September 2026 Effective Date: October 1, 2026 References: IC 6-2.5-5-3; IC 6-2.5-5-4; IC 6-2.5-5-5.1; IC 6-2.5-5-6; 6-2.5-5-30; 45 IAC 2.2-1-1; 45 IAC 2.2-5-8; 45 IAC 2.2-5-11; 45 IAC 2.2-5-12; 45 IAC 2.2-5-14; 45 IAC 2.2-5-15.5 Disclaimer: Information bulletins are intended to provide nontechnical assistance to the general public. Every attempt is made to provide information that is consistent with the appropriate statutes, rules, and court decisions. Any information that is not consistent with the law, regulations, or court decisions is not binding on either the department or the taxpayer. Therefore, the information provided herein should serve only as a foundation for further investigation and study of the current law and procedures related to the subject matter covered herein. INTRODUCTION In general, the sale of any tangible personal property is subject to Indiana sales and use tax unless the transaction is entitled to a statutory exemption. Indiana has four statutory exemptions pertaining to specific types of tangible personal property directly used, consumed, or incorporated in direct manufacturing or production. In brief, and subject to certain exceptions, transactions involving the following are exempt from sales tax: The purpose of this bulletin is to explain these exemptions in more detail. DEFINITIONS "Consume" means the dissipation or expenditure by combustion, use, or application, and does not mean or include the: of tangible personal property. "Material handling equipment" means equipment that transports materials: (1) within the production process; and (2) from an onsite location. The type of equipment that would fall within the meaning of this term would include dollies, forklifts, chain or belt conveyers, and pallet jacks. "Onsite location" means a location where the manufacturing or production takes place that is owned or leased by the person occupationally engaged in manufacturing or production and property contiguous to said property, which is also owned or leased by the same person occupationally engaged in manufacturing or production. "Transportation" means the movement, transporting, or carrying of persons or property from one place to another and includes loading and unloading of persons or property into or from transportation vehicles. MACHINERY, TOOLS, AND EQUIPMENT USED DIRECTLY IN DIRECT PRODUCTION OR MANUFACTURING The purchases of machinery, tools, and equipment are exempt from sales and use tax if the machinery, tools, and equipment (including material handling equipment purchased for the purpose of transporting materials into activities from an onsite location) are directly used in the direct production or manufacture of other tangible personal property for sale. To be "directly used in direct production" is what is called a "double direct" test. The machinery, tools, or equipment must be directly used, and the direct use of the property has to be in direct production. The phrase "directly used in direct production" means that the property must be integral and essential to the production process. It must have an immediate impact on the article being produced. Some examples of machinery, tools, and equipment that are directly used in direct production are discussed later. Manufacturing or Production Results in a Substantial Change Manufacturing or production refers to a business's performance of an integrated series of operations that places tangible personal property in a form, composition, or character different from that in which it was acquired. The change in form, composition, or character must be a substantial change, and it must result in a transformation of property into a different product having a distinctive name, character, and use. Operations such as compounding, fabricating, or assembling are examples of the types of operations that may qualify under this definition. Indiana statute also specifically clarifies that commercial printing is treated as the production and manufacture of tangible personal property. For further information on commercial printing, please refer to Sales Tax Information Bulletin #69, available at in.gov/dor/resources/tax-library/information-bulletins. Machinery, Tools, and Equipment Must Have an Immediate Effect on the Article Produced The machinery, tools, and equipment are directly used in direct production if they have an immediate effect on the item produced. Machinery, tools, or equipment have an immediate effect on the article being produced if they are an essential and integral part of an integrated process that produces tangible personal property for sale. Component parts of a unit of machinery or equipment that themselves have an immediate effect on the article being produced are exempt if such components are an integral part of such manufacturing unit. The fact that particular property may be considered essential to the conduct of the business of manufacturing because its use is required either by law or by practical necessity does not itself mean that the property has an immediate effect upon the article being produced. Instead, in addition to being essential for one of those reasons, the property must also be an integral part of an integrated process which produces tangible personal property. The fact that the equipment either may not touch the work-in-process or cause a change in the product by itself is not determinative as to whether it is essential or integral, as illustrated in the examples below: It also isn't determinative that the equipment is built in a manner to service various pieces of exempt equipment, as an alternative to building the equipment into each of the pieces of exempt machinery, as illustrated in the examples below: The exemption includes safety clothing or equipment that is required to allow a worker to participate in a production process without injury or to prevent contamination of the product during production. However, clothing or other equipment furnished to workers that is used primarily for the workers' comfort and convenience are not exempt if the workers are able to participate in the production process without it. The following types of equipment are likewise not exempt because of the lack of an essential and integral relationship with an integrated production system: The following examples give more comprehensive illustrations of how the above principles apply within specific manufacturing processes: Examples of the Application of the Immediate Effect Standard The integrated production process begins at the point of the first operation or activity constituting part of the production process and ends at the point that the production has altered the item to its completed form, including packaging, if required. Any machinery, tools, or equipment used in preproduction or postproduction activities are therefore not eligible for this exemption. Examples of Preproduction and Postproduction Equipment Storage Equipment Tangible personal property used in or for the purpose of storing raw materials or finished goods after completion of the production process is not exempt. However, temporary storage equipment needed for moving materials being manufactured from one machine to another, or from one production step to another, may be exempt subject to the following conditions: Examples of Storage Equipment Transportation Equipment Transportation equipment used to transport work-in-process or semi-finished materials to or from storage is not subject to tax if the transportation is within the production process. However, the following uses of transportation equipment would be taxable because they are used in preproduction or postproduction activities: Examples of Transportation Equipment Maintenance, Replacement, and Testing Equipment Machinery, tools, and equipment used in the normal repair and maintenance of machinery used in the production process which are predominantly used to maintain production machinery are subject to tax. Replacement parts, used to replace worn, broken, inoperative, or missing parts or accessories on exempt machinery and equipment, are exempt from tax. Machinery, tools, and equipment used to test and inspect the product as part of the production process are exempt. Nonexempt Use of Machinery Tools and Equipment Machinery, tools, and equipment used in managerial sales, research, and development, or other nonoperational activities, are not directly used in manufacturing and, therefore, are subject to tax. This category includes, but is not limited to, tangible personal property used in any of the following activities: Energy Equipment Equipment used to modify energy purchased from public utilities purchased for the production process is exempt if the equipment is used to modify the utilities for use by exempt equipment. Further, equipment used to create energy that can otherwise be purchased exempt from a public utility for use by exempt equipment is exempt. However, for any equipment that qualifies as essential and integral to the production process and also is used in an alternative nonessential or nonintegral manner, or both, the exemption only applies to the percentage of use of the equipment used in the exempt manner. MACHINERY, TOOLS, AND EQUIPMENT DIRECTLY USED IN DIRECT EXTRACTION AND MINING, PROCESSING, OR REFINING The guidance above also applies to the processes of fabrication, assembly, extraction, mining, processing, refining, or finishing. The information in this section provides specific guidance on extraction and mining, and processing and refining. Extraction and Mining "Extraction" means the removal of natural resources, minerals, and mineral aggregates from the earth, pits, or banks. "Mining" includes commercial mining (both deep and surface mining), quarrying, gas and oil drilling, and any other commercial extraction of natural resources, minerals, and mineral aggregates from the earth. It also includes the extraction for commercial purposes of coal, clay, crushed and graded stone, gravel, sand, oil, natural gas, gypsum, slate, ore, and all materials and similar natural resources and mineral aggregates. For purposes of the exemption as it pertains to extraction and mining, "direct use in the extraction and mining process" begins at the point of the first operation or activity constituting part of the integrated production process. Utilization by the purchaser in extraction or mining begins with the first drilling of the shaft or well or the first removal of overburden in surface mining or quarrying. It ends when the item being mined or extracted has been physically removed from the mine, well, or quarry. Examples of Application of Exemption to Extraction and Mining Processing or Refining "Processing or refining" is defined as the performance by a business of an integrated series of operations which places tangible personal property in a form, composition, or character different from that in which it was acquired. The change in form, composition, or character must be a substantial change. Operations such as distilling, brewing, pasteurizing, electroplating, galvanizing, anodizing, impregnating, cooking, heat treating, and slaughtering of animals for meal or meal products are examples of the types of operations which constitute processing or refining, although any operation which has such a result may be processing or refining. Indiana statute specifically also includes the retreading of tires and the felling of trees (for further use in production or for sale in the ordinary course of business) as the processing of tangible personal property. For purposes of the exemption as it pertains to processing or refining, "direct use" begins at the point of the first operation or activity constituting part of the integrated production process and ends at the point that the processing or refining has altered the item to its completed form, including packaging (if required), and does not include pre-processing or refining, or post-processing or refining, activities. Ultimately, a processed or refined end product must be substantially different from the component materials used. Example of Processing or Refining SALES OF TANGIBLE PERSONAL PROPERTY DIRECTLY USED IN THE DIRECT PRODUCTION OF MACHINERY, TOOLS, AND EQUIPMENT DESCRIBED ABOVE Transactions involving tangible personal property are exempt from Indiana sales tax if the person acquiring the property acquires it for the person's direct use in the direct production of the machinery, tools, or equipment described above. This includes material handling equipment purchased for the purpose of transporting materials into any of the activities described above from an onsite location. This exemption extends only to tangible personal property directly used in the direct production of manufacturing or agricultural machinery, tools, and equipment to be used by the manufacturer or producer. Further, the machinery, tools, and equipment must have an immediate effect upon the article being produced or manufactured, meaning it is an essential and integral part of an integrated process which produces tangible personal property. The machinery, tools, or equipment must qualify based on all elements described above (i.e., preproduction and postproduction activities; storage; transportation; tangible personal property which has an immediate effect upon the article produced; maintenance and replacement; testing and inspection; and managerial, sales, and other nonoperational activities). SALES OF TANGIBLE PERSONAL PROPERTY DIRECTLY CONSUMED IN DIRECT MANUFACTURING, PROCESSING, REFINING, OR MINING Transactions involving tangible personal property are exempt from Indiana sales tax if the person acquiring the property acquires it for direct consumption as a material to be consumed in the direct production of other tangible personal property in the person's business of manufacturing, mining, production, processing, repairing, refining, or extraction. In this context, to "consume" means the dissipation or expenditure by combustion, use, or application, and does not mean or include the: of tangible personal property. This exemption includes transactions involving acquisitions of tangible personal property used in commercial printing. "Direct consumption in the direct production by manufacturing, processing, refining, extraction, or mining" does not include preproduction or postproduction activities, subject to the following conditions: Further, purchases of materials to be directly consumed in the production, manufacturing, processing, refining, extraction, or mining process are only exempt if they have an immediate effect on the article being produced, meaning it is an essential and integral part of an integrated process which produces tangible personal property. Purchases of materials to be consumed during these process are also exempt from tax if the consumption of such materials has an immediate effect upon machinery, tools, or equipment which are both directly used in the direct production or mining process and are exempt from tax for reasons discussed in the sections above. Non-Exempt Use of Consumable Materials Purchases of materials consumed in production, manufacturing, processing, refining, extraction, or mining activities beyond the scope of those described above are taxable. Such activities include: Utilities Directly Consumed in a Direct Production Process Utilities may be sold exempt by a public utility or power subsidiary for direct consumption in the direct production of other tangible personal property in the customer's business of manufacturing, mining, production, processing, repairing, recycling, refining, oil extraction, mineral extraction, or irrigation. Sales Tax Information Bulletin #55 further explains the nature of the exemption and how the application process works. The bulletin can be found at the following address: in.gov/dor/resources/tax-library/information-bulletins/. MATERIAL INCORPORATED INTO TANGIBLE PERSONAL PROPERTY PRODUCED FOR RESALE Transactions involving tangible personal property are exempt from Indiana sales tax if the person acquiring the property acquires it for incorporation as a material part of other tangible personal property which the purchaser manufactures, assembles, refines, or processes for sale in the person's business. This exemption includes transactions involving acquisitions of tangible personal property used in commercial printing. "Incorporated as a material or an integral part into tangible personal property for sale by such purchaser" means: The exemption applies only to tangible personal property to be incorporated as a material or an integral part into tangible personal property produced for sale by a purchaser engaged in the business of manufacturing, assembling, refining or processing. This exemption does not apply to persons engaged in producing tangible personal property for their own use. ENVIRONMENTAL QUALITY CONTROL EQUIPMENT A person who is occupationally engaged in manufacturing, processing, refining, or mining may purchase environmental quality control equipment exempt from the sales or use tax. The equipment must constitute, be incorporated into, or consumed in the operation of, a device, facility, or structure predominantly used and acquired for the purpose of complying with any federal, state, or local environmental quality statutes, regulations, or standards. INDUSTRIAL PROCESSORS Transactions involving manufacturing machinery, tools, and equipment are exempt from Indiana sales tax if the person is an industrial processor and acquires that property for the person's direct use in an industrial processing service. This includes material handling equipment purchased for the purpose of transporting materials into an industrial process from an onsite location. However, the exemption does not apply to transactions involving distribution equipment or transmission equipment acquired by a public utility engaged in generating electricity. Further, transactions involving tangible personal property are exempt from Indiana sales tax if the industrial processor acquired the property for the industrial processor's direct consumption as a material to be consumed in an industrial processing service. An industrial processor is not making a retail transaction when the processor: For more information on exemptions related to industrial processors, please refer to Sales Tax Information Bulletin #82, available at in.gov/dor/resources/tax-library/information-bulletins. If you have any questions concerning this bulletin, please contact the Tax Policy Division at taxpolicy@dor.in.gov. _________________________