It’s no secret many states offer sales tax exemptions for items used in the manufacturing process: exemptions for raw materials, chemicals, computers, industrial fixtures, equipment, machinery, even certain services. However, an interesting newcomer just joined this space, as utility purchases may also qualify for exemptions.

Are Utilities Subject to Sales Tax?

In most states, utilities are indeed subject to sales tax. Utility companies calculate sales tax based on usage, and businesses pay these taxes during each billing cycle. But the good news is that manufacturers can potentially reduce or even eliminate this tax by obtaining a utility sales tax exemption certificate.

What is a Utility Sales Tax Exemption Certificate?

This certificate instructs the utility company to exempt a portion of the sales taxes assessed on your utility bill. To qualify, you must demonstrate you use utilities for qualifying exempt activities. Each state maintains its own list of such activities, but generally, businesses that use utilities for producing, manufacturing, or processing tangible personal property can obtain these exemption certificates.

Remember, understanding your state’s specific regulations is crucial to taking advantage of these exemptions and potentially saving your company significant costs.

How Can I Obtain a Utility Sales Tax Exemption Certificate?

Make sure you follow the application process: Like other sales tax exemptions, you must document the exempt percentage and submit an exemption certificate for utility purchases.

Submit one exemption certificate for each utility provider. For instance, if you use water, natural gas, and electricity in your manufacturing process, you’ll need to submit three separate exemption certificates based on each’s exemption percentage.

Each state has its own application process. For example, Businesses in Missouri can use Form 149 to certify the qualification for a utility exemption, which is the same form used for other sales tax exemptions. In Kansas, however, businesses request exemptions using an application specific to utilities, known as Form ST-28B.

When completing the exemption application, states typically ask for the following details:

• 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

To determine your energy usage, it’s crucial that you calculate the percentage of utilities used for exempt activities, so seek assistance if needed to accurately determine this percentage.

Remember, understanding your state’s specific regulations is essential to taking advantage of these exemptions and potentially saving your company significant costs.

What is a Utility Study?

A utility study is commonly requested by manufacturers to assess the proportion of utilities used in their manufacturing processes. In certain states, these studies are mandatory. If you do not properly document and have support for the exemption, you run the risk of the state denying the exemption and requiring repayment of tax for unqualified exemptions previously taken.

Typically, a CPA firm collaborates with an engineer to conduct utility studies. At Springline, we work closely with licensed engineers when needed. Our goal is to ensure accurate analyses and gather the essential information to substantiate the exempt percentage used in your application.

How Do I Determine My Savings From Utility Sales Tax Exemptions?

The amount you save through utility sales tax exemptions hinges on two key factors:

• Exempt utility use percentage – Your savings depend on how much of your utilities are used for exempt activities.
• Your state’s law – In some states, the sales tax exemption aligns with your exempt utility use. For instance, if 45% of your electricity supports manufacturing, 45% of your electric bill becomes tax-free.
• In other states, the exemption rates are graduated – 0%, 25%, 50%, 75%, or 100%, for example – and based on the calculated exempt percentage from a utility study.

Remember, understanding your state’s specific laws and maximizing your exemptions can significantly impact your bottom line! 

When Do I Need a Utility Study?

Utility sales tax exemption calculations can be intricate, but they’re often worthwhile. Not only does a utility exemption certificate reduce your future utility bills, but it also allows you to claim substantial refunds for previously paid taxes, freeing up cash for your business.

If you already possess a utility exemption certificate, that’s excellent! However, keep in mind it might be beneficial (or even necessary) to recalculate your exempt utility usage if you’ve:

• Changed utility providers
• Merged with another business
• Altered your production process
• Purchased new machinery
• Adjusted your manufacturing output (either reduced or expanded)
• Received a new meter from your service provider
• Relocated or expanded your operations

If you’re curious about whether you’d be a suitable candidate for a utility study, don’t hesitate to reach out to us. Our manufacturing and distribution industry experts are well-versed in sales tax laws across the country. Contact us today so we can explore how you can optimize your tax savings!

TAGS: Tax Services Overview, Manufacturing, SALT