Many states provide sales tax exemptions for items used in the manufacturing process. This often applies to the purchases of raw materials, chemicals, computers, industrial fixtures, equipment, machinery, and even some services. But many companies are surprised to learn that utility purchases may also be exempt.
Utilities Are Subject to Sales Tax?
In many states, yes, utilities are subject to sales tax. Utility companies will charge sales tax based on usage, and businesses will pay those taxes each billing cycle. Fortunately, manufacturers may be able to reduce — or even eliminate — this tax by obtaining a utility sales tax exemption certificate.
What is a Utility Sales Tax Exemption Certificate?
A utility sales tax exemption certificate will instruct the utility company to exempt a portion of the sales taxes they assess on your utility bill. To qualify, you must prove that you use utilities on exempt activities. Each state’s list of exempt activities is different, but most states will provide exemption certificates to businesses that use utilities to produce, manufacture, or process tangible personal property.
How Do You Obtain a Utility Sales Tax Exemption Certificate?
Like all other sales tax exemptions, you must apply to get an exemption certificate for utility purchases. One application is required for each utility provider. So, if you use water, natural gas, and electricity in your manufacturing process, you would need to apply for three separate exemption certificates.
Each state has its own application. For example, in Missouri, businesses can apply for a utility exemption using Form 149, which is the same form they use for other sales tax exemption requests. But in Kansas, businesses request exemptions using an application specific to utilities, Form ST-28B.
On most exemption applications, states will ask for the following information:
- Your contact information
- The utility company’s contact information
- A description of how you use your utilities
- The percentage of energy used in the manufacturing process
This last requirement — determining the percentage of utilities you use on exempt activities — is where you might need a bit of help.
What Is a Utility Study?
Manufacturers often commission a utility study to determine how much of their utilities are used in the manufacturing process. In fact, some states require them.
Utility studies are typically performed jointly by a CPA firm and an engineer. At MarksNelson, we work in tandem with licensed engineers when necessary to ensure that our analyses are accurate and that we have the information necessary to support the exempt percentage we use on your application.
How Much Will You Save?
The taxes you save will depend on two factors: (1) your exempt utility use percentage, and (2) your state’s laws. Some states, like Kansas, will exempt sales taxes in the same percentage as your exempt utility use (e.g., if 45% of your electricity is used in your manufacturing process, 45% of your electric bill will be sales tax-free). But other states, like Missouri, have graduated exemption rates. For example, Missouri provides a 0%, 25%, 50%, 75% or 100% based on the exempt percentage calculated in a utility study.
When Do You Need a Utility Study?
Utility sales tax exemption calculations are complex, but they are often worth doing. Not only will a utility exemption certificate lower your utility bills moving forward, but you can claim a hefty refund for prior taxes paid and free up some cash for your business.
If you already have a utility exemption certificate in place, great! Just keep in mind that it may be worthwhile — or even required — to recalculate your exempt utility usage if you’ve:
- Changed utility providers
- Merged with another business
- Changed your production process
- Purchased new machinery
- Reduced or expanded your manufacturing output
- Gotten a new meter from your service provider
- Relocated or expanded