Utility costs are a major expense for manufacturers, yet many overlook available sales tax exemptions that can reduce those costs. Understanding how these exemptions apply across states can create meaningful savings without changing production processes.
Sales tax exemptions for manufacturing often extend beyond raw materials and equipment to include certain utility usage. Electricity, gas, steam and water are essential to power production and maintain conditions required for product integrity. While these utilities are generally subject to sales tax, many states offer exemptions or reduced rates when they are used in qualifying manufacturing activities. For manufacturers operating at scale, even partial exemptions can translate into substantial cost reductions.
Why Utilities Matter
Utilities represent a significant share of manufacturing costs and are embedded in day-to-day operations. Even small changes in how utilities are taxed can have a meaningful financial impact. Identifying where exemptions apply allows manufacturers to reduce ongoing expenses without altering production processes or output.
State Variations in Utility Exemptions
Sales tax treatment of utilities varies widely by state and, in some cases, by locality. Some states provide full exemptions for qualifying usage, while others offer reduced rates or partial exemptions.
For example, Tennessee applies a reduced state tax rate of 1.5% on qualifying utilities, compared to the standard 7% rate. Georgia provides a full exemption from state and local sales tax on qualifying utilities, though most counties still impose a 1% special local option education tax. These differences can significantly affect the amount of tax paid on utilities across locations, making it important to evaluate both state and local requirements.
What Qualifies and What Does Not
States distinguish between qualifying and non-qualifying utility usage based on how the utilities are used in the production process. Utilities that directly power production machinery such as compressors, boilers and processing equipment typically qualify for exemption.
In contrast, utilities used for activities such as raw material handling, warehousing finished goods, general lighting and climate control for employee comfort generally do not qualify. Clearly identifying these categories is essential when determining eligibility and capturing available savings.
Determining Manufacturing Utility Sales Tax Eligibility
States use different methods to determine whether utility usage qualifies for exemption. Many apply predominant use thresholds based on the percentage of utility consumption dedicated to manufacturing. Arizona and Georgia allow a full exemption if more than 50% of a utility is used in production, while Connecticut and Florida require at least 75%.
Other states evaluate eligibility using a cost-based approach. Kentucky requires electricity used in manufacturing to exceed 3% of total production costs, while Missouri sets the threshold at 10%. Both approaches require careful analysis and accurate data to support exemption claims.
Metering and Utility Studies
In states such as Michigan, Pennsylvania and Texas, utilities used in manufacturing must be separately metered from non-qualifying uses. When separate metering is not available, manufacturers need to calculate the portion of utility usage tied to production activities.
Utility studies, often referred to as predominant use studies, are commonly used to analyze how utilities are consumed across operations. Some states require the study to be completed by an engineer, while others allow it to be performed by someone with a strong understanding of the production process. Proper documentation supports exemption claims and helps manufacturers align with state requirements.
Your Guide Forward
Cherry Bekaert’s Sales & Use Tax team is here to help with evaluating state-specific utility exemption rules, identifying qualifying usage and supporting utility studies so manufacturers can reduce costs and navigate requirements across jurisdictions.
