Iowa Sales and Use Tax on Manufacturing and Processing

Manufacturing Exemption

Sales of machinery, equipment, replacement parts, supplies, computers, computer peripherals, and materials used to construct or self-construct those items are exempt from tax if the items are any of the following:

1. Directly and primarily used in processing by a manufacturer.
2. Directly and primarily used to maintain a manufactured product's integrity or to maintain any unique environmental conditions required for the product.
3. Directly and primarily used to maintain unique environmental conditions required for either the product or the machinery, equipment, computers, or computer peripherals used in processing by a manufacturer.
4. Test equipment directly and primarily used by a manufacturer in processing to control the quality and specifications of a product.
5. Directly and primarily used in research and development of new products or processes of processing.
6. Only computers and computer peripherals used in processing or storage of data or information by an insurance company, financial institution, or commercial enterprise. See rule 701—215.18(4) for additional explanation.
7. Directly and primarily used in recycling or reprocessing of waste products.
8. Pollution control equipment used by a manufacturer. It is not necessary that the equipment be "directly and primarily" used in any kind of processing.

Sales of fuel or electricity consumed by machinery, equipment, computers, or computer peripherals used in any exempt manner described in paragraphs "a," "b," "c," "d," "e," "g," and "h" are exempt from tax. Sales of electricity consumed by computers or computer peripherals used in the manner described in paragraph "f" remain subject to tax.

Manufacturer Defined

"Manufacturer” is defined in Iowa Code section 423.3(47) as “a business that primarily purchases, receives, or holds personal property of any description for the purpose of adding to its value by any process of manufacturing with a view to selling the property for gain or profit.” Manufacturing includes refining, purifying, combining of different materials, packing of meats, and activities subsequent to the extraction of quarrying or mining materials.

Contract Manufacturer

A contract manufacturer is considered to be a manufacturer. A contract manufacturer is a manufacturer that processes tangible personal property on the behalf of other manufacturers. A contract manufacturer does not sell the tangible personal property it processes on the behalf of another manufacturer.

Examples of Businesses that Qualify as Manufacturers:

• Bookbinders
• Newspaper publishers
• Contract manufacturers
• Printers
• Those engaged in quarrying or mining (see below)
• Producers of drugs or agricultural supplies
• Lumber millers

Examples of Businesses that are NOT Manufacturers:

Iowa Code section 423.3(47)(d)(4)(c) also excludes persons “not commonly understood as manufacturers” from being able to claim this exemption. This includes persons primarily engaged in the following activities:

• Construction contracting (engaging in or performing a “construction contract” as defined in rule 701—219.8.
• Repairing personal or real property.
• Providing health care.
• Farming.
• Transporting for hire.

Quarrying and mining businesses are considered manufacturers with respect to activities performed after raw materials are severed from the ground. These activities can include crushing, washing, sizing, and blending of aggregate materials.

Example:

Company A owns and operates a gravel pit. It sells the gravel extracted from the pit to others who use the gravel for surfacing roads and as an ingredient in concrete. Company A removes overlay and raw gravel from the pit. It then transports the gravel to a plant where washing and sizing of the gravel takes place. Company A is a manufacturer, but only with respect to those activities which occur after it severs the gravel from the ground.

Iowa Code section 423.3(47)(d)(4), as amended in 2018 by Senate File 2417, abrogates The Sherwin-Williams Company v. Iowa Department of Revenue, 789 N.W.2d 417 (Iowa 2010). Effective May 30, 2018, businesses that operate at a premises “primarily used to make retail sales” are not engaged in manufacturing and cannot claim the exemption at that premises. Premises primarily used to make retail sales include:

• Bars & Taverns
• Casinos
• Convenience Stores
• Floral Shops
• Gas Stations
• Grocery Stores
• Hardware & Home Improvement Stores
• Mobile Food Vendors Vehicles, Trailers, or Other Facilities
• Other Retail Stores
• Paint & Paint Supply Stores
• Prepared Food Retailers Establishments
• Racetracks
• Racing & Gaming Establishments
• Restaurants
• Retail Bakeries

For additional explanation, see rule 701—215.15(5).

Machinery Defined

As defined in rule 701—215.14(2), machinery is any mechanical, electrical, or electronic device designed and used to perform some function and to produce a certain effect or result.

Machinery includes:

• The basic unit of the machinery
• Any attachment necessary for the basic unit to function
• All devices used or required to control, regulate, or operate a piece of machinery when such devices are both:
• Directly connected with or are an integral piece of the machinery, and
• Used primarily for control, regulation, or operation of machinery
• Devices necessary to the operation of or used in conjunction with what is ordinarily thought of as machinery

Machinery does NOT include:

• Buildings designed specifically to house or support machinery

Equipment Defined

As defined in rule 701—215.14(2), “equipment” refers to devices or tools used to produce a final product or achieve a given result. This includes tables on which property is assembled on an assembly line, if those tables are directly and primarily used in processing by a manufacturer.

Equipment includes, but is not limited to:

• Tables on which property is assembled on an assembly line
• Chairs used by assembly line workers
• Coolers that do not change the nature of materials stored in them
• Equipment that eliminates bacteria
• Palletizers
• Storage bins
• Property used to transport raw, semifinished, or finished goods within a manufacturing plant
• Vehicle-mounted cement mixers if used by a manufacturer, not a contractor (May be subject to a 5% one-time registration fee as part of a vehicle subject to registration)
• Packaging and bagging equipment, including conveyor systems
• Quality control equipment
• Core and mold-making equipment and sand-handling equipment directly and primarily used in the mold-making process by a foundry
• Containers, pallets, packing cases, shipping cases, wrapping materials and similar items used for packaging or facilitating the transportation of tangible personal property to be sold at retail or for resale.

Replacement Parts and Supplies Defined

Iowa Code section 423.3(47)(d)(7) defines “replacement part” as tangible personal property other than computers, computer peripherals, machinery, equipment, or supplies, regardless of the cost or useful life of the tangible personal property, that meets all of the following conditions:

• The tangible personal property replaces a component of a computer, computer peripheral, machinery, or equipment, which component is capable of being separated from the computer, computer peripheral, machinery, or equipment.
• The tangible personal property performs the same or similar function as the component it replaced.
• The tangible personal property restores the computer, computer peripheral, machinery, or equipment to an operational condition, or upgrades or improves the efficiency of the computer, computer peripheral, machinery, or equipment.

Iowa Code section 423.3(47)(d)(8) defines “supplies” as tangible personal property, other than computers, computer peripherals, machinery, equipment, or replacement parts, that meets one of the following conditions:

• The tangible personal property is to be connected to a computer, computer peripheral, machinery, or equipment and requires regular replacement because the property is consumed or deteriorates during use, including but not limited to saw blades, drill bits, filters, and other similar items with a short useful life.
• The tangible personal property is used in conjunction with a computer, computer peripheral, machinery, or equipment and is specially designed for use in manufacturing specific products and may be used interchangeably and intermittently on a particular computer, computer peripheral, machine, or piece of equipment, including but not limited to jigs, dies, tools, and other similar items.
• The tangible personal property comes into physical contact with other tangible personal property used in processing and is used to assist with or maintain conditions necessary for processing, including but not limited to cutting fluids, oils, coolants, lubricants, and other similar items with a short useful life.
• The tangible personal property is directly and primarily used in an activity listed in Iowa Code section 423.3(47)“a”, including but not limited to prototype materials and testing materials.

Computer and Computer Peripheral Defined

As defined in Iowa Code section 423.1(10), “computer” means an electronic device that accepts information in digital or similar form and manipulates the information for a result based on a sequence of instructions. Iowa Code section 423.1(10A) defines “computer peripheral” as “an ancillary device connected to the computer digitally, by cable, or by other medium, used to put information into or get information out of a computer.” For additional discussion of the taxability of computers and computer peripherals, see this additional guidance.

Materials Used To Construct Or Self-construct Computers, Computer Peripherals, Machinery, Equipment, Replacement Parts, And Supplies Defined

As defined in rule 701—215.14(2), “materials used to construct or self-construct computers, computer peripherals, machinery, equipment, replacement parts, and supplies” means tangible personal property that is incorporated into a computer, machinery, equipment, replacement part, or supply when the computer, computer peripheral, machinery, equipment, replacement part, or supply is constructed or assembled.

Pollution Control Equipment Defined

As defined in rule 701—215.20(2), “pollution-control equipment” refers to:

• Any disposal system or apparatus used or placed in operation primarily for the purpose of reducing, controlling, or eliminating air or water pollution
• Any equipment required or certified by a government agency of Iowa or the United States, such as:
  • Wastewater treatment facilities
  • Scrubbers used in smokestacks

“Pollution-control equipment” does NOT include:

• Noise pollution equipment
• Equipment used only for worker safety, such as a gas mask

Directly and Primarily Defined

To be exempt, machinery, equipment, replacement parts, supplies, computers, computer peripherals, or materials used to construct or self-construct those items must not only be used in processing, but must be used directly and primarily in processing. Rule 701—215.15 provides further detail about the exemption including definitions of “directly used” and “primarily used.”

Property is directly used only if it is used to initiate, sustain, or terminate the transformation of any activity.

To determine if property is directly used, consider the following:

• Physical proximity of the property in question to the activity in which it is used
• Proximity of the time of use of the property in question to the time of use of other property used before and after it in the activity involved
• Active causal relationship between the use of the property in question and the activity involved.

Just because a particular piece of property may be essential to the activity because its use is required by law or practical necessity does not, of itself, mean that the property is directly used.

The following examples are not directly used in manufacturing and processing; machinery and equipment is taxable when used:

• Exclusively for the comfort of workers, such as air cooling, air conditioning, and exhaust systems
• In support operations, such as a machine shop in which production machinery is assembled, maintained, or repaired
• By administrative, accounting, and personnel departments>
• By plant security, fire prevention, first aid, and hospital stations
• In plant cleaning, disposal of scrap and waste, plant communications, lighting, safety, or heating

The primary use of property is the activity or activities for which the property is used more than half of the time.

Processing Defined

“Processing” is defined in rule 701—215.15(3) as "a series of operations in which materials are manufactured, refined, purified, created, combined, transformed, or stored by a manufacturer, ultimately into tangible personal property." In general, processing begins with receiving or producing raw materials and ends at the point the products are delivered for shipment or transferred from the manufacturer.

Receiving or producing raw materials means activities performed on tangible personal property only. Activities performed on real property are not exempt for manufacturing purposes.

Processing Includes:

• Refinement or purification of materials
• Treatment of materials to change their form, context, or condition
• Maintenance of the quality or integrity of materials, components, or products
• Maintenance of environmental conditions necessary for materials, components, or products
• Quality control activities
• Construction of packaging and shipping devices
• Placement into shipping containers or any type of shipping device or medium
• Movement of materials, components, or products until shipment from the manufacturer

Example 1 - processing begins

Company A manufactures fine furniture. It owns a grove of walnut trees which it uses as raw material. Employees cut the trees, transport the logs to the factory, offload them, and store the logs in a warehouse to begin curing the wood before taking it to the sawmill.

Processing begins when the logs are loaded at the grove for transport to the factory.

The same company also buys mahogany logs from a supplier in Honduras. Company A uses its own equipment to offload the logs from railroad cars at its manufacturing facility. It then transports, stores, and saws the logs.

Processing begins when Company A offloads the logs from the railroad cars.

Example 2 - middle stages of processing

Company C is a microbrewery. It uses a variety of kettles, vats, tanks, tubs, and other containers to mix, cook, ferment, settle, age, and store the beer it brews. It also uses a variety of pipes and pumps to move the beer among the various containers involved in brewing.

All stages of this brewing are part of processing. Transforming the raw materials from one state to another, such as fermenting and aging, is part of processing. Simply holding the materials in an existing state, such as storage of hops in a bin or storage of beer prior to bottling, is also a part of processing. Any movement of the beer between containers is an activity which is a part of processing, whether this movement is an integral part of the production of beer or not.

Example 3 - end of processing

After the brewing process is complete, Company C places its beer in various containers, stores it, and moves it to its customers by a common carrier that picks up the beer at the brewery. The following are still part of processing: C’s activities of placing the beer into bottles, cans, and kegs; storing it after packaging; and moving the beer by use of a forklift to the common carrier’s pickup site.

Fuel Defined

Fuel includes heat, steam, electricity, gas, water, or any other tangible personal property consumed in creating heat, power, steam, or for generating electric current.

Fuel Consumed in Processing - Exempt

Fuel consumed in processing is exempt from Iowa sales and use tax.

Fuel consumed in processing means fuel that is directly applied in the actual processing of tangible personal property.

Fuel to Operate Exempt Machinery, Equipment, Computers, and Computer Peripherals - Exempt

If the machinery, equipment, computer, or computer peripheral is exempt to a manufacturer, the fuel used to operate or run the machinery, equipment, computer, or computer peripheral is also exempt.

Fuel for General Purposes - Taxable

Fuel used for the purpose of general heating, ventilating or lighting of buildings – even if the buildings are warehouses, processing plants, or offices – and any use other than that of direct processing is taxable.

Exempt and Taxable Fuel

When practical, electricity consumed as power or used directly in processing must be separately metered and separately billed by the supplier.

If it is impractical to separately meter and bill the fuel, the manufacturer must give the supplier an exemption certificate that shows what percentage of the fuel is exempt. The exemption certificate must be supported by a study showing how the percentage was developed. The study must show the taxable use and the nontaxable use to correctly report the exempt percentage.

Fuel Exemption Certificate

A Sales Tax Exemption Certificate for Energy used in Processing and Agriculture (31-113) is given by a purchaser to a seller when making tax-free purchases. The seller has the right to demand additional documentation be attached to the certificate, as long as it is reasonably necessary to support the claim of exemption. This could be an electrical consultant’s study or a document prepared by the purchaser.

The purchaser does not have to file a certificate or attach documentation every time a transaction takes place unless a substantial change in the operation has occurred.

A purchaser who makes tax-free purchases and then uses or otherwise disposes of the fuel in a taxable manner is liable for the sales tax and must remit that tax directly to the Department.

See Appendix A for information on how to calculate a fuel exemption.

Recycling Defined

Recycling means any process by which waste, or materials which would otherwise become waste, are collected, separated, or processed and revised or returned for use in the form of raw materials or products. The term includes the composting of yard waste.

Recycling does not include any form of reprocessing or energy recycling.

Recycling or reprocessing begins when the waste products are collected or separated. Recycling or reprocessing ends when waste, or a material which would become waste, is in the form of a raw material or in the form of a product.

Machinery, Equipment, Computers, and Computer Peripherals Used in Recycling

The sale or rental of machinery, equipment, replacement parts, supplies, computers, computer peripherals, and materials used to construct or self-construct those items are exempt from tax if they are used directly and primarily in the recycling or reprocessing of waste products. This includes equipment used in the movement of property which is integral to recycling or reprocessing.

Exempt if used directly and primarily in the recycling or reprocessing of waste products:

• Compactors
• Grinders
• Forklifts
• Balers
• Cutters>
• Crushers
• Shears
• Endloaders
• Other moving devices
• Vehicle moving waste to a recycling center

Taxable:

• Bin used only for storage
• Vehicle moving waste to a landfill

For additional examples, see rule 701—215.19(4).

The sale of machinery, equipment, replacement parts, supplies, computers, computer peripherals, and materials used to construct or self-construct those items used in research and development is exempt from tax.

Machinery, equipment, replacement parts, supplies, computers, computer peripherals, and materials used to construct or self-construct those items are used directly in research and development only if they are used in actual experimental or laboratory activity that qualifies as research and development.

Research and Development Defined

Research and development means experimental or laboratory activity whose ultimate goal must be the development of new products or processes of processing.

Research and Development does NOT Include:

• Testing or inspection for quality control purposes
• Efficiency surveys
• Management studies
• Consumer surveys
• Advertising
• Promotions
• Research in connection with literary, historical, or similar projects

Example

Company A, maintains a research and development laboratory to develop a corn plant. It purchases the following items: a computer which will process data relating to the genetic structure of the various corn plants which Company A is testing, an electron microscope for examining the structure of corn plant genes, a steam cleaner for cleaning rugs in the laboratory offices, and a calculator for use by the laboratory director’s secretary. The computer and the microscope are directly used in the research; the steam cleaner and the calculator only indirectly used. Therefore, purchase of the computer and microscope is exempt from tax; purchase of the steam cleaner and calculator is taxable.

Under Iowa Code section 423.3(48), the services of design and installation of new industrial machinery and equipment for sale or rent are exempt from sales tax if industrial machinery and equipment are both:

• New, and
• Used in processing by a manufacturer

“New” means never having been used or consumed by anyone and does not include reconstructed, rebuilt, repaired, or previously-owned machinery or equipment.

The charges for design or installation must be separately identified, charged separately, and reasonable in amount. “Industrial machinery and equipment” means machinery and equipment as defined in rule 701—215.14(2) and does not include computers, computer peripherals, replacement parts, or supplies. See rule 701—215.22 for further discussion of this exemption.

Iowa Code section 423.3(49) provides an exemption for carbon dioxide in a liquid, solid, or gaseous form, electricity, steam, and other taxable services and the lease or rental of tangible personal property when used by manufacturers of marketable food products for human consumption.

Fuel Exemptions Specific to Qualified Manufacturers

Eligible manufacturers may claim an exemption for fuel or electricity if it is used in:

• Treatment of material to change its form, context, or condition in order to produce a marketable food product; for example:
  • Washing, sorting, and grading of fruits, vegetables, and eggs
  • Mixing and agitation of liquids
  • Sterilization
• Cooling or heating to:
  • Maintain the quality or integrity of the food
  • Avoid spoilage of the food
  • Keep the food in marketable condition
  • Maintain environmental conditions necessary for safe or efficient use of machinery or material to produce the food
• Electricity used to air condition a room in which meat is stored to maintain the meat in a condition in which it is easy to slice
• Sanitation and quality control activities
  • Fuel used in pH meters, microbiology counters, and incubators to test the purity or sanitary nature of a food product.
  • Electricity used in egg-candling lights.
  • Electricity used to power refrigerators used to store food samples for testing.
  • Electricity used to power “bug lights” or other insect-killing equipment used where food is manufactured or stored
• Electricity used by a food manufacturer in plastic-bottle-forming machines is exempt if the bottles will be used to hold a marketable food product such as milk.
• Formation of packaging
• Placement of food products into packing cases, pallets, crates, shipping cases, or other similar receptacles.
• Manufacturing ice
• Refrigerating cheese to age it from “green” to edible
• Refrigerating eggs to change their flavor
• Pasteurizing and subsequent refrigeration of milk
• “Hard” freezing of meat and butter for aging
• Canning vegetables
• Cooking foodstuffs
• Moving material or food product by conveyors, forklifts, and freight elevators
• Moving material or food products to a loading dock

See Appendix A for information on how to calculate a fuel exemption.

Iowa Code section 423.3(51) provides an exemption for chemicals, solvents, sorbents, and reagents used in processing.

Chemicals, solvents, sorbents, and reagents are exempt from tax if both of the following apply:

• The substance must be directly used and consumed, dissipated, or depleted during processing.
• The processing must be performed on tangible personal property intended to be sold ultimately at retail.

The chemical, solvent, sorbent, or reagent does not need to become an integral or component part of the processed tangible personal property.

Chemical compounds placed in water are exempt from tax if the water is used in any of the following ways:

• Ultimately sold at retail
• Directly used in processing
• Consumed during processing

Special boiler compounds used when live steam is injected into mash or another substance are exempt from tax because it liquefies and becomes an integral part of the product. The product must be ultimately sold at retail.

The terms “chemical,” “solvent,” “sorbent,” and “reagent” are defined in rule 701—200.1.

Chemical Defined

“Chemical” means a substance primarily used for producing a chemical effect. A chemical effect results from a chemical process wherein the number and kind of atoms in a molecule are changed in form; for example, when oxygen and hydrogen are combined to make water. A chemical process is distinct from a physical process wherein only the state of matter changes; for example, when water is frozen into ice or heated into steam.

Solvent Defined

“Solvent” means a substance, usually liquid, primarily used in dissolving something. For example, water is a solvent of most salts; alcohol of resins; ether of fats.

Sorbent Defined

"Sorbent” means a substance which takes up and holds either by adsorption or absorption. In order to be exempt, the substance must be primarily used as a sorbent.

Reagent Defined

"Reagent” means a substance used for various purposes which takes part in one or more chemical reactions or biological processes. A reagent is also a substance used to convert one substance into another by means of the reaction it causes.

Examples include using a reagent in detecting, examining, or measuring other substances, in preparing materials, and in developing photographs.  To be exempt, the substance must be primarily used as a reagent.

Catalysts

Per rule 701—215.4, a catalyst is considered to be a chemical, solvent, sorbent, or reagent. A catalyst is a substance which promotes or initiates a chemical reaction. It is exempt if it is consumed, dissipated, or depleted during processing of tangible personal property which is intended to be ultimately sold at retail.

Argon and other inert gases used in the manufacturing process are exempt from tax under Iowa Code section 423.3(52) and implemented by rule 701—215.5. An inert gas is any gas which is normally chemically inactive. It will not support combustion and cannot be used as either a fuel or as an oxidizer. Argon, helium, neon, krypton, radon, and xenon are inert gases. Oxygen, hydrogen, and methane are nonexclusive examples of gases which are not inert.

Iowa Code section 423.3(50) exempts taxable services used in processing. To be exempt, the services must still be used in processing and not merely a service furnished to an entity engaged in processing. Per rule 701—215.3, “any taxable service is used in processing only if the service is used in any operation which subjects raw material to some special treatment which changes, by artificial or natural means, the form, context, or condition of the raw material and results in a change of the raw material into marketable tangible personal property intended to be sold ultimately at retail.” This means certain taxable services, such as machine repair, electrical repair and installation, janitorial services, and building maintenance, are not likely exempt as services used in processing since they are not used in some operation that transforms raw materials into a finished product intended to be sold at retail.

It is not unusual for manufacturers to purchase warranties or maintenance contracts related to machinery, equipment, computers, or other items. See the Iowa Sales and Use Tax Guide or rule 701—285.25 for additional discussion of warranties and maintenance contracts.

To purchase an item exempt from sales tax, the purchaser must present a valid sales tax exemption certificate. You can find the current copy of the certificate Iowa Sales/Use/Excise Tax Exemption Certificate (31-014). The seller must retain this certificate as proof that exemption has been properly claimed. A person does not need a sales tax permit to claim an exemption. This includes manufacturers when purchasing exempt machinery, equipment, computers, computer peripherals, replacement parts, supplies, and other materials used in the manufacturing process.

Purchasers who repeatedly make the same purchase from the same seller may give the seller a single exemption certificate to cover multiple transactions. In these circumstances, the same certificate may be used but an updated copy should be provided to the seller every three years (or sooner if needed) so it remains accurate and complete.

Selling Product for Resale

Manufacturers who sell the tangible personal property they produce must ask for exemption certificates when selling their products to other businesses for resale.

Using Tax Free Items from Inventory

When a manufacturer buys an item tax free and then removes it from inventory for uses other than resale and processing, the manufacturer is responsible for reporting and paying the tax to the Department. See rule 701—205.6(7) for further discussion of this issue.

Other examples of taxable items can be found in the sections above.

Property Tax Purposes

Taxable:

Machinery, equipment, computers, computer peripherals, replacement parts, and supplies purchased by a business that is centrally assessed by the Department for property tax purposes are taxable.

Examples of this type of business include electric, gas, and water companies, railroad, telephone, pipeline, and electric transmission line companies.

Hand Tools

Taxable:

Tools that can be held in the hand or hands and are powered by human efforts.

Point-of-Sale Equipment, Computers, and Computer Peripherals

Taxable:

As defined in rule 701—215.14(2), “point-of-sale equipment, computers, and computer peripherals” are input, output, and processing equipment used to conclude a sale and to record or process information about a sale transaction at the time the sale takes place. The equipment is normally located at a counter, desk, or other specific point where a sale transaction occurs.

Vehicles Subject to Registration

Taxable:

Vehicles are subject to a one-time registration fee at the rate of 5% on the purchase price unless directly and primarily used in recycling or reprocessing of waste products.

Determine the percentage used in processing

Use Iowa Sales Tax Exemption Certificate (31-113) to help determine the percentage of electricity used in processing for purposes of claiming an exemption on the electricity. The following method may be used to determine the percentage of electricity used in processing.

First, the base period for the calculations must be selected.

Ordinarily, 12 prior months are used as the base period. However, individual circumstances can dictate that a shorter or longer period be used or that some 12-month period other than that immediately prior should be used.

Example 1:

Company A manufactures its product in a factory that has no windows and is heavily insulated. The factory always runs 40 hours per week, 52 weeks per year. Because of these and other circumstances, Company A’s electrical usage does not vary significantly from month to month, and it is easy to document this. Company A can calculate its percentage of exempt use based on a 1-month period rather than a 12-month period.

Example 2:

Company B manufactures widgets. The “economic cycle” for widget production averages 36 months. There are times when the plant will operate three shifts. At other times, the entire factory will shut down and its personnel will be laid off. To accurately determine the exempt percentage of electricity used, Company B calculates that use over the entire economic cycle. As a result, 36 months, rather than 12 months, were used as the base period.

Second, calculate kilowatts used per hour by each electrical device.

Kilowatts consumed per hour may be listed on the device itself. If not, formulas can be used to determine this information.

Lights

If using energy efficient lights, appropriate adjustments to calculations should be made.

For incandescent bulbs, add rated wattages and divide by 1,000. Multiply by the total number of hours the light is used during the base period.

Watts divided by 1,000 = Kilowatts. Multiply by the hours operated in the base period to arrive at the total kilowatt hours used.

For fluorescent lights, add rated wattages plus an additional 20% of rated wattages and divide by 1,000. Multiply by the total number of hours the light is used during the base period.

Watts + 20% of Watts divided by 1,000 = Kilowatts. Multiply by the hours operated in the base period to arrive at the total kilowatt hours used.

Devices other than lights

For these devices, use the wattage rating given by the manufacturer and divide by 1,000. Multiply by the total number of hours which the device is used during the base period.

Watts divided by 1,000 = Kilowatts. Multiply by the hours operated in the base period to arrive at the total kilowatt hours used.

Example 1

A machine used in processing consumes 20,000 watts per hour of operation. It is operated 40 hours per week for 50 weeks during a 12-month period. The machine does not operate when the factory closes for two weeks for employee vacation.

(1) 20,000 watts ÷ 1,000 = 20 kilowatts
(2) 20 x 40 hours per week = 800 kilowatts per week
(3) 800 x 50 weeks per 12 months = 40,000 kilowatts per 12-month period
(4) 40,000 kilowatts are exempt for the 12-month period for this machine

Example 2

A machine uses 30 kilowatts per hour of operation. During a 12-month base period, the machine is used in processing 200 hours per month for three months. The calculation for a 12-month period is as follows:

(1) 30,000 watts ÷ 1,000 = 30 kilowatts
(2) 30 x 200 hours per month = 6,000 kilowatts per month
(3) 6,000 x 3 months per 12 months = 18,000 kilowatts per 12-month period
(4) 18,000 kilowatts are exempt for the 12-month period for this machine

Example 3

The following is a simplified example of a worksheet for determining the percentage of exempt electricity when a single meter records both exempt and taxable use.

Assume that all items (except air conditioners and space heaters) are active 100 hours a week for 50 weeks in a 12-month period. Assume air conditioners and space heaters are active 100 hours a week for 20 weeks in a 12-month period.

To determine the exempt percentage of total usage, divide 200,000 by 405,000, which equals 49.38%.

Once the percentage of exemption has been calculated, it must be applied during any period for which a purchaser is requesting exemption. The percentage should be recomputed if a substantial and permanent change in the amount of electricity consumed occurs or if the proportion of exempt to nonexempt usage changes.

Alternatives to the previous method of determining exempt usage of electricity

Rather than using only one meter for both exempt and nonexempt use of electricity, a manufacturer could use separate meters. This is especially practical if all exempt use results from the activities of one machine.

It may be helpful to contact the manufacturer of machines used in processing. The manufacturer may be able to provide information to more accurately measure the machines’s use of electricity.