SALT Report 1725 – The Tennessee Department of Revenue issued a letter ruling regarding a Taxpayer’s purchases of natural gas. The natural gas is used in ovens at the Taxpayer’s food production facility where he produces tangible personal property for resale. The ovens in question are metered separately from the rest of the facility, and the natural gas is used directly and exclusively in the manufacturing process.
Tennessee Code § 67-6-206(b)(3) states that “retail sales of natural gas, electricity, fuel oil, coal, and other fuels will be exempt from the sales and use tax whenever it may be established to the satisfaction of the commissioner, by separate metering or otherwise, that they are exclusively used directly in the manufacturing process, coming into direct contact with the article being fabricated, or processed by the manufacturer, and being expended in the course of the contact.”
For the exemption to apply to the Taxpayer’s purchases of natural gas for use in a particular oven, the following requirements must be met:
- The Taxpayer must be a manufacturer,
- The oven must be metered,
- The natural gas must be exclusively used directly in the manufacturing process,
- The natural gas must come into direct contact with the products being fabricated or processed by the Taxpayer, and
- The natural gas must be expended in the course of the contact with the products
The Department determined that the gas satisfies the requirement of direct contact with the products because each of the Taxpayer’s products is directly exposed to the chemical energy created by the gas. The gas also satisfies the consumed/expended requirement because the gas is directly expended during the manufacturing process. Finally, the gas met the metered oven requirement because the taxpayer was able to establish the precise amount of gas used in the ovens. Therefore, the Taxpayer’s purchases of natural gas satisfy all of the requirements noted above and are exempt from sales and use tax.
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