Sales Tax Slice: When Does the Provision of Utility Service Become Manufacturing?


In an apparent effort to test the limits of state manufacturing exemptions, public utility companies have been increasing their claims under these exemptions in recent years.

Earlier this month, Utah rejected such an attempt by a distributor of natural gas.  That taxpayer sought to have Utah’s manufacturing exemption applied to machinery and equipment used by it in the compression and distribution of natural gas.  Finding that neither the compression nor the distribution resulted in a new product, the Utah State Tax Commission concluded that the company was not engaged in the business of manufacturing.

The Utah ruling may indicate the beginning of a losing streak for such claims this year. Maryland rejected a similar claim by an electric utility last month, holding that the transmission and distribution of electricity is not manufacturing. Coming to the opposite conclusion, the Michigan Court of Appeals ruled in favor of an electric utility’s claim to Michigan’s manufacturing exemption early last year.  However, declining to be too generous, the Michigan Court of Appeals later in the year rejected a claim by the same plaintiff in which it sought to have the exemption applied to electricity used to generate telecommunications signals.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Was the Utah State Tax Commission correct to conclude that natural gas compression does not result in a new product? Might the Commission have ruled differently if the compression were performed by a taxpayer more traditionally regarded as a manufacturer?    

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By Ernst Hunter