Minimize Sales Tax Obligations by Exploring Utility Studies for Manufacturing Operations

May 3, 2024

It’s broadly known that many states offer sales tax exemptions for items used in the manufacturing process. These exemptions typically apply to raw materials, chemicals, computers, industrial fixtures, equipment, machinery, and certain services. However, there’s an interesting newcomer to this space: 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 here’s the good news: 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 that 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 to Obtain a Utility Sales Tax Exemption Certificate

  1. Application Process:
    1. Like other sales tax exemptions, you must document the exempt percentage and submit an exemption certificate for utility purchases.
    2. 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.
  2. State-Specific Applications: Each state has its own application process. For example:
    1. Missouri: Businesses can use Form 149 to certify the qualification for a utility exemption which is the same form used for other sales tax exemptions.
    2. Kansas: Businesses request exemptions using an application specific to utilities, known as Form ST-28B.
  3. Information Required: When completing the exemption application, states typically ask for the following details:
    1. Your contact information
    2. The utility company’s contact information
    3. A description of how you use your utilities
    4. The percentage of energy used in the manufacturing process
  4. Determining Energy Usage:
    1. Calculating the percentage of utilities used for exempt activities is crucial.
    2. 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 utilized 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 MarksNelson, 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.

Determining Your Savings from Utility Sales Tax Exemptions

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

  1. Exempt Utility Use Percentage:
    1. Your savings depend on how much of your utilities are used for exempt activities.
  2. Your State’s Law:
    1. In states like Kansas, 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.
    2. However, in states like Missouri, the exemption rates are graduated. Missouri provides 0%, 25%, 50%, 75%, or 100% exemptions 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 You Need a Utility Study?

Utility sales tax exemption calculations can be intricate, but they are 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 that it might be beneficial — or even necessary — to recalculate your exempt utility usage if you’ve:

  1. Changed utility providers
  2. Merged with another business
  3. Altered your production process
  4. Purchased new machinery
  5. Adjusted your manufacturing output (either reduced or expanded)
  6. Received a new meter from your service provider
  7. 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!


Tim Anderson is a key member of the real estate practice area at MarksNelson, leading the real estate valuation and commercial property tax appeal specialty groups. He partners with clients to secure credits and incentives, provide economic development guidance, and advise on state and local tax... >>> READ MORE

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