I just finished a batch of audits on manufacturing clients in Georgia and I am shocked at how many of them are paying sales tax on electricity when they should be exempt. Georgia Code 48-8-3.2 provides a 100% exemption on energy used directly in manufacturing. Out of 11 manufacturers I reviewed, 7 were paying full sales tax. We are talking about 7-8% tax on bills that run $15K to $40K a month. The refunds are substantial — one client recovered $67,000 going back 3 years. Is this something everyone else is seeing or am I just lucky?
Manufacturing sales tax exemption — how many clients are missing this?
Definitely not just you. Texas has a similar exemption under Tax Code Section 151.317 and I find it on probably 40% of manufacturing accounts I audit. The problem is the exemption does not apply automatically — the customer has to file a specific exemption certificate with the utility and most of them either never knew about it or forgot to update it after a name change or meter addition. It is probably the single easiest refund to find in this business.
Same in Tennessee. The manufacturing exemption is well established but so many companies never file the certificate. I had a plastics extruder in Chattanooga paying sales tax for 9 years because the certificate expired when they changed their corporate name after a merger. TVA was billing them correctly on the generation side but the local power company was adding state and local sales tax. Refund was $43K.
The tricky part in Tennessee is distinguishing between TVA in-lieu-of-tax payments and actual sales tax. TVA charges a tax equivalent payment that looks like sales tax on the bill but is technically different and is not subject to the manufacturing exemption. You have to know which line items are which. I have seen auditors file claims for refunds on the TVA payment and get rejected.
Good point Terry. In Georgia it is more straightforward — Georgia Power bills the sales tax as a separate line item and the exemption applies to the entire bill if the meter serves manufacturing operations. But I have run into a gray area with accounts that serve both manufacturing and warehouse space on the same meter. Georgia Power told me the exemption applies to the predominant use, which they define as more than 50% manufacturing. Had to get the client to provide a breakdown of square footage by use.
Arizona does not have a manufacturing exemption on electricity which is frustrating. But we do have a transaction privilege tax exemption for certain types of commercial operations. It is narrower but still worth checking. Point is you really have to learn the tax code in every state you work in.