Many states have a sales tax exemption for businesses that use gas, water, and electricity for the express purpose of production or manufacturing. If your company has been paying taxes on these utilities, not only is there the possibility that you can receive an exemption on a percentage of future sales tax, but you may be entitled to a full or partial refund of previous sales tax paid on utilities.
Understanding the law on utility sales tax exemptions in Indiana can have a huge impact on your operating costs. Sales and use taxes apply to retail purchases and Indiana law specifies that utilities purchased for use in production, manufacturing, agriculture, and several other specific types of businesses, are not retail purchases and thus exempt from the sales tax. In order for your gas, electric, and other utility purchases to be exempt from sales tax, it needs to be purchased from a public utility or power company and either metered separately from your other utility use or otherwise separated from your non-exempted utility use.
The law in Indiana provides for only public utilities to be exempted for production, manufacturing, and other appropriate use, so for example, propane, gasoline, coal, etc., are not exempted from sales tax and still qualify as retail purchases. Examples of utilities that are exempted from sales tax include electricity, gas, water, and steam.
Not sure if your company’s utility use is exempt from sales tax? If the utility use is specific to the product your company produces, it is exempt. On the other hand, if the utility use is for the comfort of the employees, it is not exempt. For example, keeping a room at a specific humidity level because otherwise the product would fail would be utility use that might qualify as exempt. Determining what utility use is exempt and what is not is complicated and the help of a professional might be necessary in your application process.
Determining and proving the percentage of utility use that qualifies for the sales tax exemption is the burden of the tax payer. You will need appropriate documentation to prove the percentage of utilities used for the production or manufacturing in your business and fill out the necessary paperwork required for the exemption to be approved. This process can take anywhere from several weeks up to several months to complete.
The complex nature of determining your company’s sales tax exemption often requires the use of a law firm that specializes in sales tax exemptions as an appropriate expenditure. Companies that specialize in areas like this can analyze all necessary data and determine your percentage of exemption for you. Often they will fill out the necessary paperwork and file the application for you as well.
Hiring a company to assist in filing your sales tax exemption for you is also worth the cost because they can help determine if you qualify for a full or partial refund of taxes already paid. There is a limit on how far back you can receive a refund on your utility sales tax, but any amount refunded can be a huge help in your company’s financial accounts. Additionally, having the proper sales tax exemptions set up will potentially save your company a significant amount of money over the years.
Understanding the law regarding utility sales tax exemption in Indiana is important to saving you the most money and you may wish for an updated study to validate that you are still receiving the greatest exemption possible. Many of the companies that will help you set up your exemptions will also audit your utility usage and ensure that you are utilizing this law to the greatest extent.