Beginning July 1, 2007, sales of electricity and natural gas to a manufacturer for direct use in the manufacturing process will be taxed at a reduced rate of four and one-half percent (4.5%) through June 30, 2008 (Act 185 of 2007). Beginning July 1, 2008, the state tax rate will be four percent (4%). Local tax rates will remain as levied by the local governments and are not subject to any reductions.
Pursuant to Emergency Rule 2007-5, a manufacturer [North American Industry Classification System (NAICS) Codes 31–33] must register with the Arkansas Department of Finance (“Department”) using Form ET185A and provide the manufacturing use of each electricity or natural gas meter. The Department will issue a certificate (Form ET185RR) to the manufacturer with the approved percentages that qualify the meter for the reduced rate.
The manufacturer must provide the following information:
- A listing of meters that are solely used in the manufacturing process.
- A listing of “mixed-use meters” where only a portion of the electricity or natural gas is subject to the reduced rate. The Department requires that the manufacturer use a reasonable formula to apportion the percentage of utilities that are eligible for the reduced rate and the percentage that is not eligible. A narrative explaining the methodology used to determine the manufacturing percentage must be included with the application. This formula need not be approved by the Department; however, the documentation and methodology, such as a utility usage study, used to substantiate the reduced rate are subject to audit and assessment of any unpaid sales tax that results from inaccurate calculations.
Manufacturers holding direct-pay permits may choose to remit tax directly on purchases of electricity and natural gas, calculating the appropriate tax as determined by the meter certification.
Manufacturers should also determine if the seller of the electricity or natural gas is capable of apportioning the utility bill for mixed-use meters. If not, the manufacturer can obtain a direct-pay permit or pay the full sales tax rate of six percent (6%) on all meters and file a request for refund to the Department for the overpayment.
Recertification of the reduced rates is required every 36 months or whenever there is a substantial change in the manufacturer’s operations that would affect the energy consumption for any of the meters “resulting in greater than a twenty-percent (20%) change in the percentage of total energy usage that results from additions or replacement of machinery or equipment, taking machinery or equipment out of service, or changes in business processes altering the usage percentages.”