Note: The following is an excerpt from the introduction to the article as published in The State and Local Tax Lawyer. Nearly all states provide full or partial exemptions from sales and taxes paid on machinery, tools, and other equipment used in the process of manufacturing. Pennsylvania is no exception. However, Pennsylvania's sales and use taxes exemption is among a small group known for its restrictiveness. As time goes on without statutory or judicial revamping, the state's sales and use tax manufacturing exemption is becoming less practical and no longer fulfills the original statutory intent. Technology is changing the industrial world for the better; computer assisted design - computer assisted manufacturing (CAD/CAM) technology allows manufacturers to turn out a high product yield while lowering overhead payroll costs. Unfortunately, Pennsylvania's sales and use tax the exemption statute and the Regulations promulgated thereunder as interpreted by the courts continuously refuse to recognize the new hardware and software as meeting the requirement of "direct use;" the exemption's definition of manufacturing requires the direct use of equipment and machinery in the manufacturing process. As other state courts are broadening their understanding of manufacturing and technology, Pennsylvania lags noticeably behind. The impact of this refusal to modernize could be detrimental to the state's ability to attract and maintain industry within its borders. While there are currently few cases on this subject, those that have been decided show an explosion waiting to happen with sides quickly being drawn. In Parts I and II, this Article outlines general trends in manufacturing sales and use tax exemptions throughout the country and Pennsylvania's manufacturing sales and use tax exemption requirements. Part III addresses what constitutes "manufacturing" as interpreted by the Pennsylvania judicial courts under the state's sales and use tax law, as well as local business privilege taxes. Part IV compares the interpretation of "manufacturing" under Pennsylvania law with authority decided by courts in other jurisdictions to illustrate the widening gap across the country. Finally, Part V examines whether Pennsylvania's current manufacturing sales and use tax exemption requirements can accommodate the modernization of manufacturing technology and concludes that legislative change is not necessary.
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