Cost and Details of a Predominant Use Study
There are currently 30 states throughout the country which offer a tax exemption on electricity, gas, and water when used by a business in the manufacturing process (visit our Qualified Industries page to find other industries that may qualify for the exemption besides manufacturing). Each state requires the business to perform a predominant use study on its facility to identify the exact amount of utility that qualifies for exemption. This article outlines the cost and details of a predominant use study.
What is a Predominant Use Study?
A predominant use study identifies the exact amount of utility used for production purposes within a facility. In some states, the portion of utility a facility uses for production purposes will be exempt from sales tax.
Some states use the term “predominant” because they require the majority of utility to go toward manufacturing to claim exemption. States with such a requirement apply the exemption as all or nothing. For example, if less than 50% of utility goes toward manufacturing, the entire meter is taxable. Whereas, if more than 50% of utility goes toward manufacturing, the entire meter is exempt. However, not all states have this requirement. In Kansas for example, the exact percentage of utility used for manufacturing will qualify for exemption, regardless of whether it is greater or less than 50%. While many states use the term “predominant,” it does not necessarily mean the exemption is all or nothing.
Requirements of a Predominant Use Study
Each state has different guidelines for a predominant use study. Texas is currently the only state which requires that an engineer perform the predominant use study. Most companies choose to hire a third-party to conduct the predominant use study because of the complexity involved.
Nearly every state requires that the predominant use study be very detailed and encompass all utility consuming devices within the facility – from small items like light bulbs and computers, to larger items such as HVAC systems and manufacturing equipment. Each device must be recorded and an annual usage estimated, incorporating the device’s rating, load factor, and operation time. After this is done, the devices must be separated into a “Taxable Devices” category and an “Exempt Devices” category.
Devices some states consider exempt, other states may consider taxable. For example, Texas considers lighting on the manufacturing floor exempt, while Kansas treats lighting as taxable. Even within a single state, there are a variety of factors which may make a device taxable when used a particular way in one facility, but exempt when used in a different way in another facility.
Cost of a Predominant Use Study
Industry averages for the cost of a predominant use study can range from $2,000 to $50,000. Cost depends upon the provider, size of the facility, and how involved the provider is in the exemption process. If you would like to receive a quote from SmartSave for a predominant use study, simply visit our Get in Touch form and tell us about your company’s utility tax situation.
Is it Worth Hiring a Third-Party to Conduct the Predominant Use Study?
In most cases, yes. This is due to the complex energy calculations, categorizing of exempt devices and taxable devices, follow up questions your state may have, and additional materials you may need to prove your claim.
Typically, a company will obtain a tax refund which will recoup the cost of the predominant use study. However, when a tax refund is not possible, the company will still recoup costs through future savings. For example, savings realized from 6 to 18 months of exempt utility bills will typically recoup the full cost of the predominant use study.
State Specific Utility Tax Exemption Information
Click on your state below to be directed toward specific state statute regarding the utility exemption. For a brief overview of how your state handles the exemption, visit our Qualified States page and click on your state.
To schedule a consultation or receive a quote from SmartSave for your predominant use study, simply send us a message and we will get you the information you need.