Wyoming Concludes that Electricity Generation Does Not Constitute Manufacturing

A recent Wyoming case illustrates how differences in state definitions of manufacturing can cause confusion around whether certain processes constitute manufacturing for sales tax purposes.

By Tina Chunn, SALT senior manager

In order to claim exemptions from sales tax for manufacturing machinery or equipment, or any other exemptions related to manufacturing, the taxpayer must first be considered a manufacturer or engaged in manufacturing. However, state definitions and interpretations of manufacturing are not consistent, leading to splits among the states regarding whether a particular process constitutes manufacturing. This issue was recently highlighted by a Wyoming State Board of Equalization (the “Board”) ruling issued on Jan. 8, 2016, addressing whether or not the generation of electricity constitutes manufacturing. [1]

The taxpayer in that case, PacifiCorp, Inc. (“PacifiCorp”), an electric utility company that operates four coal-fired electric generation facilities in Wyoming, sought a refund claiming that certain chemicals and catalysts were exempt since they were used and consumed in the treatment of emissions in the manufacture of electricity.

Under Wyoming law, “manufacturing” is defined as “the operation of producing a new product, article, substance or commodity different from and having a distinctive nature, character or use from the raw or prepared material.” [2] An exemption is provided for “chemicals and catalysts used directly in manufacturing, processing or compounding which are consumed or destroyed during that process.” [3]

The Board concluded that PacifiCorp was not engaged in manufacturing for sales and use tax purposes. The Board reasoned that raw materials are not transformed into electricity; rather, coal and steam fuel the turbine that spins the magnets within the coil of the generator. Therefore, the coal used in the process to generate electricity is merely a fuel for the operation and not a raw material as required under the definition of manufacturing. Accordingly, PacifiCorp had not created a new product, article, substance or commodity from raw materials in order to be eligible for the manufacturing exemptions.

Additionally, Wyoming requires a machinery purchaser to be classified under NAICS code 31 through 33 to qualify for the manufacturing exemption. [4] Electrical generation is classified as a utility and not as manufacturing under these specific NAICS codes.

The Board recognized that there is a split among the states as to whether electricity generation constitutes manufacturing, with 10 states in favor and four states opposed. However, in dismissing the importance of other states’ authority, the Board stated that “these cases all rely, however, on case specific evidence, state-specific statutory tax schemes, and specific language defining the relevant terms. These cases are, consequently, of limited applicability.”

It is worth noting that the Board also concluded that (i) PacifiCorp was also not engaged in processing, since it did not transform property (i.e., coal) into a different form (i.e., electricity), and (ii) even if PacifiCorp was a manufacturer or processor, it would still not be entitled to the exemption since the catalysts and chemicals are not used directly in the manufacturing process nor are they consumed or destroyed during that process.

The SALT Services Team at Aprio is experienced with sales and use tax manufacturing exemptions and varying interpretation of qualifying activities between the states. We are here to assist you in reviewing your transactions to make determinations regarding the applicability of these and other exemptions that are available to your transactions. We constantly strive to keep our clients advised of important issues and developments in state and local taxes in order to help them address their specific tax situations. We will continue to monitor these and other significant state tax developments and include any updates in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn, SALT senior manager, at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the March 2016 SALT Newsletter. To view the newsletter, click here.

[1] PacifiCorp, Inc., Wyoming State Board of Equalization, Docket Nos. 2012-51 & 2013-03, Jan. 8, 2016.

[2] Wyo. Stat. §39-15-101(a)(xxi).

[3] Wyo. Stat. §39-15-105(a)(iii)(A).

[4] Wyo. Stat. §39-15-105(a)(viii)(O).

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 this matter.