Minnesota Sales Tax Exemptions for Manufacturers' Packaging Materials and Equipment

Manufacturers purchase packaging for several different purposes: enclosing the finished product, protecting it during shipment, tracking inventory, moving materials within the plant, and displaying information to customers.

Minnesota does not treat all of these purchases alike. The result generally depends on whether the item is packaging material or machinery, whether it is returnable, whether it packages a product intended to be sold at retail, and whether it accompanies the product or remains in the manufacturer's operations.

For equipment, the analysis also asks whether the machinery is used primarily in a qualifying integrated production process.

Minnesota's Industrial Production Exemption

Minnesota Statutes section 297A.68, subdivision 2 exempts materials stored, used, or consumed in the industrial production of tangible personal property intended to be sold ultimately at retail. The statute specifically includes packaging materials and also includes returnable containers used to package food and beverage products.

Minnesota Revenue explains that nonreturnable materials used to package products can be purchased exempt. Its examples include:

• Nonreturnable internal packaging that shapes, stabilizes, or protects the contents
• Nonreturnable pallets and skids
• Nonreusable external packaging and dunnage that protects, braces, pads, or cushions the product
• Cartons, containers, cans, boxes, and bags
• Product-identification labels, including combination labels identifying the product and its price
• Packaging for food and beverage products
• Materials used to repair or recondition returnable food and beverage containers

These examples appear in Minnesota Revenue's Industrial Production Fact Sheet.

How Common Packaging Purchases May Be Treated

The following classifications provide a practical starting point. Actual treatment depends on the item's documented use.

Minnesota's published examples do not separately name every variety of tape or adhesive. Their treatment should therefore be supported by function. Tape that seals a customer's nonreturnable carton is materially different from tape used for warehouse floor markings, equipment repair, office work, or general maintenance.

Returnable Containers and Reusable Pallets

Returnable containers are generally taxable. Minnesota provides a specific exception for returnable containers used to package food and beverage products.

Accordingly:

• A one-way pallet or skid accompanying the finished product may qualify.
• A pallet circulated between the manufacturer, warehouse, and customer generally does not qualify as exempt packaging merely because products are shipped on it.
• Reusable totes, racks, drums, bins, trays, and shipping containers ordinarily require separate analysis and are generally taxable unless the food-and-beverage exception or another exemption applies.
• Internal material-handling containers that never accompany the sold product should not be classified as exempt nonreturnable packaging.

Minnesota Revenue also states that packaging a completed product may be a qualifying production activity through the last process before loading for shipment, but excludes returnable shipping items such as pallets from that qualifying activity. See Minnesota Revenue's Capital Equipment Fact Sheet.

Which Labels Qualify?

Minnesota Revenue expressly recognizes product-identification labels and combination labels that identify the product and its price for customers.

Depending on their content and use, this category may include labels stating:

• Product name or identity
• Size, weight, or quantity
• Ingredients
• Directions, warnings, or required regulatory information
• SKU or UPC information presented on the retail product
• A combination of product identity and retail price

Shipping and Address Labels

Minnesota's industrial-production guidance does not expressly list ordinary carrier, destination, or address labels as exempt product-identification labels. A packaging position may exist when a label is an inseparable part of a nonreturnable shipping package, but the facts and authority should be reviewed before treating all shipping labels as exempt.

Warehouse and Inventory Labels

Labels used only for warehouse locations, work-in-process routing, asset tracking, inventory control, or internal production tracking generally fall outside the product-identification category. Minnesota Revenue identifies warehousing, inventory management, and internal product and production tracking as nonqualifying capital-equipment activities. That distinction also counsels against classifying internal tracking labels as exempt product packaging without additional authority.

Promotional and Advertising Labels

A promotional sticker does not automatically become exempt merely because it is attached to a package. Its primary purpose and relationship to the finished retail product should be documented.

Minnesota has a separate exemption under section 297A.68, subdivision 11 for qualifying advertising materials transferred outside Minnesota for use solely outside the state. That exemption can include associated boxes, labels, containers, and banding, but only when its out-of-state-use conditions are satisfied.

Packaging Machinery and Equipment

Packaging machinery is analyzed under Minnesota's capital-equipment exemption rather than the consumable-material exemption.

Capital equipment generally means machinery and equipment that:

• Is purchased or leased and used in Minnesota
• Is used primarily—generally 50% or more of its operating time—to manufacture, fabricate, mine, or refine tangible personal property
• Produces property intended to be sold ultimately at retail
• Is essential to the integrated production process

Minnesota Revenue explains that the production process ends when the final process before loading the product for shipment is completed. Packaging the completed product before loading is recognized as a qualifying activity.

Potentially qualifying equipment may therefore include:

• Carton-forming and case-packing machines
• Bottling, filling, and sealing equipment
• Label applicators used on retail products or qualifying product packaging
• Shrink-wrapping and stretch-wrapping machines
• Strapping and banding equipment
• Palletizers used in the qualifying packaging process
• Product-coding equipment that applies product-identification information
• Conveyors essential to and used primarily in the qualifying packaging line
• Repair and replacement parts for qualifying packaging equipment

Equipment used primarily after packaging—such as general warehouse equipment, inventory-tracking systems, loading equipment, distribution equipment, or machinery maintaining reusable shipping assets—may not qualify.

Mixed-use machinery needs an operating-time analysis. For example, a label printer used primarily to create product-identification labels presents a stronger exemption position than one used mainly for warehouse-bin labels and internal shipping documents.

Form ST3 and Audit Documentation

Minnesota allows qualifying exemptions at the time of purchase, but the correct designation on Form ST3, Certificate of Exemption, matters:

• For qualifying manufacturing consumables and product packaging, Minnesota Revenue directs manufacturers to select the Industrial production/manufacturing exemption.
• For qualifying machinery and equipment, select the Capital equipment exemption.
• A retailer or wholesaler purchasing inventory or packaging for resale may instead use the Resale exemption.

Manufacturers should retain:

• Completed Forms ST3
• Vendor invoices with specific product descriptions
• Packaging specifications and bills of materials
• Photographs or diagrams showing how materials accompany the product
• Records distinguishing disposable from returnable containers
• Customer or vendor agreements addressing pallet and container returns
• Equipment diagrams and production-flow narratives
• Operating-time studies for mixed-use machinery
• Sample product labels and an explanation of each label's function
• Separate general-ledger accounts for product packaging, reusable assets, and warehouse supplies

Minnesota Revenue permits eligible taxpayers to seek refunds for tax paid in error on qualifying capital equipment or industrial-production items, subject to the applicable procedures and limitation periods.

Practical Takeaway

The strongest dividing line is functional: does the material form part of the nonreturnable package for a product sold at retail, or does the equipment perform the final packaging step before loading for shipment?

If so, an industrial-production or capital-equipment exemption may apply. If the item instead supports internal storage, inventory control, general distribution, or repeated reuse, the purchase is more likely taxable unless a specific exception applies.

Brown & Associates can help manufacturers classify packaging purchases, test mixed-use equipment, review exemption certificates, and identify potential Minnesota refund or use-tax exposure.

This article provides general educational information and is not tax or legal advice. Minnesota law and administrative guidance should be confirmed for the specific transaction, use, and period under review.