Arkansas: Contractor May Purchase Exempt Solar Farm Equipment Without Sales Tax

August 29, 2019

Sales tax rules for manufacturing businesses differ among the states, particularly with regard to the exemption for manufacturing equipment, and as this Arkansas Revenue Legal Opinion highlights, the specific function of each piece of machinery and equipment can impact whether it qualifies for an exemption.

By Tina M. Chunn, SALT Senior Manager

Most states provide some form of sales tax exemption for the purchase of manufacturing equipment. In connection with manufacturing, state rules differ on a variety of sales tax issues such as: (1) What activities constitute manufacturing, and when does that process begin and end; (2) What type of equipment is considered exempt manufacturing equipment; and (3) Can a contractor building or expanding a manufacturing facility purchase qualifying equipment on behalf of the manufacturer without paying sales tax (i.e., as if the manufacturer purchased such qualifying equipment itself)?

Recently, a company requested an Arkansas Revenue Legal Opinion regarding the applicability of the manufacturing exemption for the construction of a Solar Energy Generation Facility.  Specifically, the company wanted clarification regarding the sales tax treatment of the facility and if the solar equipment and materials installed at the Solar Farm would qualify for the manufacturing exemption.  Additionally, the request asked for clarification of whether a construction contractor could also use the exemption for their purchase of the materials used for the project.[1]

Arkansas currently provides a sales/use tax exemption for machinery and equipment used directly in producing, manufacturing, fabricating, assembling, processing, finishing, or packaging of articles of commerce purchased for new manufacturing or processing plants within the state.  The exemption is limited, however, to the machinery and equipment used directly in the actual production of property.  Computers and related peripheral equipment that directly control or measure the manufacturing process are also included in the exemption.

Specifically excluded from this exemption is machinery and equipment that handle property before the manufacturing process begins or that are necessary for purposes of storing finished product.  Additionally, buildings, maintenance equipment, tools and office equipment are not included in the exemption.

Finally, Arkansas provides that this exemption can be claimed by a contractor with a construction contract for a manufacturing facility but not including items used for installation or construction work.[2]

The opinion notes first that Arkansas courts have recognized that electricity generation is a manufacturing process since it converts sunlight (the raw material) into marketable AC electricity.  That process begins with the harvesting of solar energy by the solar panels, and the process ends with the delivery of marketable high voltage AC electricity to the power grid.

Therefore, equipment such as the solar panels, piles/panel supports, trackers, inverters, collection system – electrical cables/conduit/accessories, substation equipment, main power transformer, transmission line, and switchyard and interconnection qualifies for the exemption since these items are used directly in the manufacturing process.

The opinion explains that operations and management (O&M) control equipment, and supervisory control and data acquisition software (SCADA), which consist of computers/software used to monitor and operate the solar farm may qualify depending on whether these items directly control or measure the manufacturing process (there was not enough information provided in the request for the state to make a definitive conclusion).  However, foundations, construction materials, and security systems do not qualify because they do not act directly in the manufacture of electricity.

Finally, the ruling concludes that, pursuant to Arkansas Gross Receipts Tax Rule GR-55(G), a contractor that purchases exempt machinery and equipment may claim the exemption if the contractor purchases the machinery and equipment in connection with a construction contract with a manufacturer who will use the machinery and equipment to generate electricity.

State sales tax rules regarding manufacturing and related exemptions are not uniform.  As such, it is important to review these exemption provisions to determine what will qualify and whether a contractor can claim the exemption on behalf of the manufacturer (including any required documentation).  Aprio’s SALT team is experienced with understanding these types of construction contracts and the application of specific exemptions.  We can assist your business by analyzing the applicable rules in order to make sure that you obtain all the exemptions to which you are entitled.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the August 2019 SALT Newsletter.

[1] Arkansas Revenue Legal Opinion 20190510, June 17, 2019.

[2] Ark. Code Ann. § 26-52-402; Ark. Code Ann. § 26-53-114.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

Stay informed with Aprio.
Get industry news and leading insights delivered straight to your inbox.

Recent Articles

About the Author

Tina Chunn

Tina is a senior manager with Aprio’s State & Local Tax group. She has over 24 years of experience assisting companies and their owners to minimize their tax liability and maximize their profitability. Some of the industries Tina serves include professional services, manufacturing, warehousing and distribution, telecommunications, real estate, retailers and wholesalers. Tina has extensive experience dealing with corporate tax issues, including state and local tax returns; state and federal tax credits; state and local sales; and use, income, escheat, business licenses and property tax issues.