Sales Tax State Activity Update - October 2004

Utility Tax Used in Manufacturing Nontaxable in New York

Utility charges incurred by a manufacturer, but resold to and used by its affiliated manufacturer (“affiliate”) were ruled nontaxable rent charges. In addition, tax paid to the utility company on utility charges purchased by the manufacturer, but used directly and exclusively, by affiliate or manufacturer, in the production of tangible personal property for sale is eligible for refund or credit.

The manufacturer purchases electricity from the utility company that it subsequently bills to its affiliate based upon usage as estimated by percentage of total floor space at the facility. The affiliate receives an invoice for rent and a separately stated charge for electric and gas usage, which is treated as additional rent per rental agreement. Manufacturer and affiliate both use electricity in the operation of welding machines and large equipment in production activities.

According to sales and use tax law, non-metered electric charges are not considered taxable sales of utilities. In addition, utilities are exempt when used directly and exclusively in the production process. Directly and exclusively means one hundred percent of the utility is used to operate exempt production equipment. In the case of mixed usage (i.e. taxable and exempt) from a single meter, the entire charge is subject to tax. However, a refund claim may be filed for the portion of the utilities used directly and exclusively in the production process.

Since the utility charges billed to the affiliate are based upon usage rather than a separate meter, such charges are properly classified as nontaxable rent and the manufacturer is entitled to a credit or refund of sales tax paid on the purchase of utilities used directly and exclusively in the production process. Adequate records must be maintained to properly substantiate the refund claim.

The full text may be accessed at: http://www.tax.state.ny.us/pdf/Advisory_Opinions/Sales/A04_24s.pdf

(New York Commissioner of Taxation and Finance, Advisory Opinion, TSB-A-04(24)S, September 28, 2004)

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