Natural Gas & Electricity
If the taxpayer is a manufacturer and has claimed exemption on natural gas or electricity, a predominant usage study must be made available to the auditor for review. If the study is found to be invalid, the non-taxed billings should be scheduled as well as any amounts refunded to the taxpayer during the audit period by either the utility company or the Comptroller. Even if the refunded amount applies to periods outside of the audit period, the total refunded amount should be scheduled. If the refund is after the audit period, a subsequent audit should be generated.
A predominant usage study is not needed when 100% of the natural gas or electricity on a meter is used in an exempt manner. However, the exemption certificate should state the specific use. (8903L0926E05)
Many times, a taxpayer is paying tax at the beginning of an audit period but not at the end of the audit period or vice versa. Without reviewing the actual utility bills as well as the utility expense accounts for any unusual debit entries for various periods throughout the audit, the auditor will not notice this change.
A study must contain the following essential elements:
- A list of every item that uses electricity separated by processing items and non-processing items;
- A detailed description of what each such item does;
- If a piece of equipment has both a processing and a non-processing function, it should be included in both lists with appropriate hours listed for each function;
- Identification of all heating and air conditioning in terms of type (gas or electric) and size (tons for air conditioning, BTUs for heating);
- Amperage, voltage (or kilowatt rating) and hours of operation for each piece of equipment;
- Any cycling equipment must reflect real "on" hours with a separately stated duty factor. CA variance from 50 percent must be proven out for all cycling equipment and certified by a registered engineer or a person with an engineering degree from an accredited engineering college;
- Hours per day and days per week the location is open to the public;
- Hours the location is occupied by employees prior to opening and after closing to the public;
- Copies of the last twelve months' electricity bills; and
- Certification of both the engineer and the owner must appear on the face of the study.
(9302091P and 9612056L)
Any changes in equipment, business activities, or square footage being served by the utility meter should be taken into account by the study.
The auditor should perform the following steps when verifying a utility study:
- Obtain a depreciation schedule from the taxpayer and cross-reference the listed equipment to equipment on the study and observed during a tour at the taxpayer's location. Any changes in the depreciation schedule throughout the audit period should be noted.
- Review the study for reasonable hours for each piece of equipment.
- Identify pieces of equipment that may have a dual purpose. For example, if a lathe is used to manufacture items for resale but is also used to repair tangible personal property belonging to another, the study should identify the repair hours as taxable use. Likewise, any lighting, heating, or cooling hours should also be split for taxable and non-taxable use. In other words, if processing is not actually occurring, hours for lighting should not be classified as exempt. (200002085L)
Examples:
- Taxpayer submitted a study showing 1,200 hours per year for manufacturing equipment. However, the study showed approximately 3,600 hours per year for lighting used in the manufacturing area and classified all of these as exempt. The lighting hours should have approximated the hours for the manufacturing equipment for exempt usage and also should have been allocated to a taxable usage category when processing was not occurring.
- A bakery produces donuts sold for immediate consumption and not sold for immediate consumption. If the utility study showed that 80% of the electricity was used to produce donuts and that 3,000 donuts were sold for immediate consumption and 7,000 were not sold for immediate consumption, the exemption certificate should be accepted based on the following multiplication. 80% x 7000/10,000 = 56%. Therefore, 56% of the electricity used would be exempt. (9504197L)
- Verify the amperage and voltage (or kilowatt rating) listed in the study by reviewing the decal or plate typically located on the equipment, by reviewing purchase invoices or owner's manuals for the equipment specifications, or searching the internet for the maker of the equipment which may provide detailed information.
Example:
Electricity used for storing produce or maintaining an already marketable product is taxable. (200101051H)
