Indiana – Predominant Use Exemption for Utilities

SALT Report 1446 – The Indiana Department of Revenue conducted a sales/use tax audit on an Indiana taxpayer who manufactures asphalt for the construction of roads, parking lots, and driveways. During the audit, the Department found that the taxpayer had not paid sales or use tax on their purchases of electricity.

The taxpayer protested the Department’s findings claiming that they were eligible for the “predominant use exemption” on their purchases of electricity. IC § 6-2.5-5-5.1 states that, “tangible personal property includes electrical energy, natural or artificial gas, water, steam, and steam heat” and that “transactions involving tangible personal property are exempt from the state gross retail tax if the person acquiring the property acquires it for direct consumption as a material to be consumed in the direct production of other tangible personal property…”

To prove they were eligible for the exemption, the taxpayer conducted a private utility study that determined that the business used an average of 9 hours per week of electricity on the machinery used in the manufacturing process and an average of 50 hours per week on their air compressors. The Department reviewed the taxpayer’s results and concluded that the taxpayer consumed an average of 59% of the electricity it purchased during the manufacturing process and qualified for the predominant use exemption under 45 IAC 2.2-4-13.

For Further Information:

Indiana Department of Revenue – Letter of Findings # 04-20110292