How an Energy Use Tax Analysis can put money in your pocket

By Aarne Haas, Manufacturing-Works
http://www.manufacturing-works.com/

Wyoming, like many other states, has programs and incentives to make sure that businesses don’t incur penalties for being located here.  One of these is a series of sales tax exemptions for businesses. These range from many purchases made by agricultural producers or various exempt organizations to purchase of power and fuel used by manufacturers in their processes. The latter is the focus of this short note.

The Wyoming Department of Revenue allows the purchase of power for manufacturing and processing to be exempt from excise (sales) tax. This power or fuel must be ‘separately accounted for, by separate metering, storage, or engineered calculations…’ .  What does this mean? It’s easy enough with fuel, you buy it in a separate container, you store it where it cannot be mixed with non-manufacturing fuel and you don’t pay sales tax on it. For a new facility, you might put in separate meters for the office (taxable) and the plant floor (generally tax exempt) power distribution, but this is expensive and almost impossible to retrofit in an existing facility. The ‘engineered calculations’ option is the third way to make use of this exemption and save on operating expenses.

Having a qualified engineer analyze and report on the power uses in a manufacturing or processing facility provides the documentation that ‘separates’ taxable from tax exempt power uses. This process is straightforward:

1. First, historical power usage records are analyzed to determine long term usage and usage patterns. Seasonal variations are accommodated and any long term trends are noted.
2. Second, a series of measurements are made on power usage of different equipment, systems and areas of the facility. Here also inventories of installed equipment and their power usage patterns are determined.
3. Third, the various power uses are categorized by whether they are ‘consumed directly in (the) manufacturing…’  . This can be a bit tricky as the determination is a combination of court rulings, Department of Revenue procedures and the expert opinion of the engineer.
4. Fourth, a report of the findings is prepared which generally gives a percentage of tax exempt usage for electricity, for gas  and any other power input to the facility.

This is where the money goes in your pocket. By filing an exemption form with your power supplier, all state sales tax on the purchase is removed. You are obligated to pay the tax on that percentage of power found to be taxable. This is done as a line item on your monthly or quarterly sales tax filings. And the frosting on this saving is the ability to go back in your records and reclaim the overpaid taxes for the last 36 months. In many cases this alone more than pays for the engineering analysis and the savings will continue month to month.

NB: The term ‘power’ is used throughout this article to be consistent with the state statutes, but you and I know it is really ‘energy’ we are paying for and talking about.