How to commission a predominant-use study for sales tax exemption
Many states exempt or reduce sales tax on electricity, gas or water used in manufacturing, processing, agriculture or certain other activities. Where a single meter serves both exempt and taxable uses, some states apply the exemption to the whole meter if the exempt use is the predominant one, and others require an allocation of the portion used in exempt activity. The tests, thresholds, and documentation differ by state, so this guide is a general process. Confirm the rules with your state revenue department or a tax advisor before relying on any step.
For tax directors, plant controllers and manufacturing finance leads · 8 min read
- 1
Identify the governing rule
Find the statute, regulation or published guidance for the state on utilities used in exempt production. Note whether it uses a predominant-use test, a percentage threshold, an allocation method or an exempt-certificate requirement.
- 2
Define the exempt activity
Document what the facility makes or does and which processes qualify under the state's definition. Define where the exempt process begins and ends, since boundaries often decide what is taxable.
- 3
Map the meters and loads
Obtain single-line diagrams and meter lists. Identify which meters serve exempt processes, which serve non-exempt areas such as offices, warehousing and lighting, and which serve both.
- 4
Engage an engineer
A qualified engineer should perform the study, using nameplate data, operating hours, sub-metering and interval data to allocate energy to each end use. The work should be repeatable and signed.
- 5
Compute the exempt share
Divide annual energy used in exempt processes by total energy for each meter. Compare it to the state's threshold or use it as the allocation percentage, as the rule requires.
- 6
Document assumptions
State load factors, operating schedules, seasonal effects and any estimates. Keep the supporting data. State auditors will ask how each figure was derived.
- 7
File the exemption
Provide the exemption certificate to the utility or follow the state's process so that the utility stops charging tax on the exempt portion. Some states require the claim to be made directly to the revenue department.
- 8
Claim refunds for past periods
Where tax was paid on exempt usage in the past, the refund process, time limit and form are set by the state. Check whether refunds go through the utility, the state or both.
- 9
Re-run on change
Update the study when equipment, production lines or operating hours change materially, and on any cycle the state requires.
Why this is state-specific
There is no federal rule. States differ on whether the test is predominant use, an allocation, or a defined list of exempt equipment, and on the threshold when a percentage is used. They differ on what counts as production, whether packaging, storage and quality control are included, and on which fuels and utilities are covered.
Read the state's own guidance and any published rulings, and ask for a written opinion if the facts are unusual. A study that applies the wrong test can be technically careful and still fail.
Where sales tax audits find the problems
Common exposure points include applying an exemption to a whole facility without a study, relying on an old certificate after a change in operations, and claiming a refund outside the statutory period. Another is the mixed-use meter, where tax is paid on all of it because nobody did the allocation.
Trace Global checks bills for tax charged on usage that appears to qualify, and can include the study and the exemption filing in a claim. It does not give tax advice, and a tax professional should confirm the position for each state.
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