Sales-Use Tax Exemption: Property Consumed, Destroyed,
or Losing Its Identity In Manufacturing

NOTE: This Article Has Been Replaced by a Revised Article Dated October 27, 2011. See the new article...

Section 77.54(2), Wis. Stats. (2007-08), as amended by 2009 Wis. Act 28, provides, in part, an exemption from Wisconsin sales and use taxes for tangible personal property or an item under sec. 77.52(1)(b), Wis. Stats., that is used exclusively and directly by a manufacturer in manufacturing an article of tangible personal property or an item or property under sec. 77.52(1)(b) or (c), Wis. Stats., that is destined for sale and is consumed, destroyed, or loses its identity in the manufacture of the article of tangible personal property or an item or property under sec. 77.52(1)(b) or (c), Wis. Stats., destined for sale, except for fuel and electricity. (Emphasis added)

The requirement of exclusive and direct use by a manufacturer in sec. 77.54(2), Stats., was added by 2009 Wis. Act 28, and first effective on August 1, 2009.

Examples of property that qualified for exemption under sec. 77.54(2), Wis. Stats., prior to amendment by 2009 Wis. Act 28, but no longer qualify for exemption under sec. 77.54(2), Wis. Stats., as amended by 2009 Wis. Act 2, and effective as of August 1, 2009, include:

(1) Property that is consumed, destroyed, or loses its identity by a person who is not a manufacturer, even if the person who is not a manufacturer consumes such property in performing a service relating to a manufacturer manufacturing tangible personal property destined for sale. See sec. Tax 11.41(3)(a)3., Wis. Adm. Code, CR 10-094.

Example: A testing laboratory performs tests on samples of products furnished to it by the manufacturer, who is manufacturing the product for sale. The testing is performed for the manufacturer as a part of the manufacturer's quality control process during the manufacture of the product. During the testing of the product, certain tangible personal property purchased by the testing laboratory is consumed, destroyed, or loses its identity in the testing process.

Prior to August 1, 2009, the testing laboratory could purchase the property consumed, destroyed or losing its identity during the testing process without tax, under sec. 77.54(2), Stats., since the property was consumed within the scope of manufacturing and the statute did not require that it be consumed by a manufacturer. (See Cherney Microbiological Services, Ltd. v. Wisconsin Department of Revenue, ¶400-215. Wisconsin Tax Appeals Commission, No. 94-S-209, April 23, 1996.)

Effective August 1, 2009 and thereafter, the testing laboratory must pay Wisconsin sales or use tax on its purchases of tangible personal property that it uses and is consumed, destroyed, or loses its identity during the testing process. The testing laboratory does not meet the requirement in sec. 77.54(2), Wis. Stats., as amended by 2009 Wis. Act 28, that the property consumed, destroyed, or losing its identity in the manufacture of an article of tangible personal property destined for sale be used exclusively and directly by a manufacturer.

(2) Chemicals and cleaning agents used by a manufacturer to clean the room where manufacturing tangible personal property destined for sale takes place, including walls, ceilings, floors, drains, windows, and doors, even if the cleaning is required in order to meet sanitation standards required by state and federal regulatory agencies. Such items are not used directly in the manufacturing process. See sec. Tax 11.41 (3) (b) 9., Wis. Adm. Code, CR 10-094.

Prior to August 1, 2009, purchases of these chemicals and cleaning agents by a manufacturer qualified for exemption under sec. 77.54(2), Wis. Stats., as the property was consumed in manufacturing tangible personal property and the statute did not require that the property be used directly in the manufacturing process. (See Oscar Mayer & Co. v. Wisconsin Department of Revenue ¶202-388. Wisconsin Tax Appeals Commission, Docket No. S-9323, May 30, 1984.)

As of August 1, 2009 and thereafter, purchases of these chemicals and cleaning agents by the manufacturer do not qualify for exemption under sec. 77.54(2), Wis. Stats., as amended by 2009 Wis. Act 28, since the cleaning chemicals and agents are not used directly by the manufacturer in the manufacturing process.

Last updated December 7, 2010