Current through Register Vol. 49, No. 9, September, 2024
This rule is promulgated by the Director of the Department of
Finance and Administration to administer the provisions of Act 185 of 2007
pursuant to the authority of Ark. Code Ann. §
26-52-319(e)
as enacted by Act 185 of 2007. This rule is promulgated pursuant to the
provisions of § 25-14-204 of the Administrative Procedure Act regarding
rules.
A.
General
Information:
1. Beginning July 1,
2007, sales of natural gas and electricity to a manufacturer for use directly
in the manufacturing process will be taxed as follows:
a. From July 1, 2007 through June 30, 2008
the state tax rate will be four and one-half percent (4.5%).
b. Beginning July 1, 2008, and continuing
thereafter, the state tax rate will be four percent (4%).
1
2. Natural gas and electricity that is sold
for any purpose other than for use directly in manufacturing will continue to
be taxed at the state tax rate of six percent (6%).
3. Although Act 185 of 2007 reduced the state
tax rate on natural gas and electricity used directly in manufacturing, Act 185
did not affect the local tax rate on natural gas and electricity used in
manufacturing. The collection of local tax on sales of natural gas and
electricity for all purposes should continue at the rate levied by the local
government.
B.
Definitions: For purposes of this rule, the following definitions apply:
1. "DFA" shall mean the Sales and Use Tax
section of the Department of Finance and Administration.
2. "Manufacturer" shall mean a person or
entity classified within sectors 31 through 33 of the North American Industry
Classification System, as in effect on January 1, 2007.
3. "Meter certification" shall mean the
process for a manufacturer to register with DFA, provide information regarding
each natural gas and electricity meter, and obtain a certificate from DFA that
lists each meter and the percentage of each meter's billing that may be
purchased at the reduced rate.
4.
"Mixed use meter" shall mean a meter that supplies natural gas or electricity,
part of which is used directly in the manufacturing process (taxed at reduced
rate) and part of which is used for other purposes (taxed at full state
rate).
5. "Reduced rate" shall mean
the rate of state tax that is levied on sales of natural gas or electricity
that is sold to a manufacturer for use directly in the actual manufacturing
process.
6. "Separately metered" or
"separate meter" shall mean that each meter used to purchase natural gas or
electricity shall be used solely to purchase either (i) natural gas or
electricity used directly in the manufacturing process, or (ii) natural gas or
electricity used for other purposes.
7. "Used directly in the actual manufacturing
process" shall mean that the natural gas or electricity is used either:
a. to power machinery and equipment or
provide energy used in the actual production or assembly of the manufactured
product, or
b. to power machinery
and equipment or provide energy that supports the actual production or assembly
of the finished product, including heating or air conditioning the
manufacturing facility where production and assembling occur; temporary
cooling/chilling areas at the beginning or at the end of the process which are
needed to enhance, maintain, and protect the integrity of the product;
providing lighting for the manufacturing process that occurs either inside or
outside a building or other structure including parking lots and grounds;
providing restroom facilities, maintenance facilities, break facilities,
pollution control equipment, and offices for personnel of the manufacturing
facility whose activities directly support the manufacturing operations; and
other functions in support of the production and assembly of the finished
product. "Personnel whose activities directly support the manufacturing
operations" include plant manager(s), plant maintenance personnel, work place
safety personnel, human resources personnel, and engineering personnel.
Personnel whose activities do not directly support the manufacturing operations
include sales personnel, general accounting, payroll, and legal personnel, and
warehousing personnel.
For purposes of the "used directly" requirement, the
manufacturing process shall include processes beginning at the point where raw
materials are first moved from raw material storage to begin manufacturing or
processing of those materials into items of tangible personal property and
ending when production and packaging of the finished manufactured goods is
completed.
Natural gas or electricity used in storage and warehousing
facilities, material handling facilities used before raw materials are moved
toward the point of manufacturing, and general office facilities, are not used
directly in the actual manufacturing process.
C.
Registration and
Certification:
1. A manufacturer must
register with DFA to purchase natural gas or electricity at the reduced rate
using Form ET185A and provide information to DFA at that time regarding each
manufacturing use of natural gas or electricity at each meter (see section
(C)(2) for information required). A manufacturer who operates manufacturing
facilities at more than one physical location must make a separate application
for each location. The signature on the application (Form ET185A) will certify
that all the information provided is true and correct information regarding
qualification for the reduced rate. DFA will issue a certificate to the
manufacturer that will certify the percentage available for reduced rate at
each meter (Form ET185RR).
2.
Information Required.
a. Separate Meters. The
manufacturer shall prepare a list that includes each separate meter that
supplies natural gas or electricity that is used solely in the manufacturing
process.
b. Mixed use meters. When
gas or electricity is furnished through one meter, and a portion of the gas or
electricity is subject to the full tax rate while another portion of the gas or
electricity is eligible for the reduced tax rate, a reasonable formula shall be
used by the manufacturer to apportion the gas or electricity between that
eligible for the reduced rate and that not eligible. The formula or method used
in determining the percentage eligible for the reduced rate does not have to be
pre-approved by DFA. However, the formula or method used does have to
reasonably reflect the percentage of manufacturing use to total use. The
manufacturer shall provide with the application a narrative explanation of the
formula or method employed to determine the percentage of manufacturing use.
The manufacturer may calculate the apportionment through the use of the
manufacturer's own knowledgeable employees or the use of an outside firm. The
manufacturer shall prepare a list that includes each mixed use meter and the
percentage that is subject to the reduced rate at each meter. The manufacturer
shall maintain all records necessary to support the apportionment percentages
for review upon audit by DFA.
3. DFA will accept the certification provided
by the manufacturer and issue a certificate to the manufacturer that lists each
meter for which the reduced rate is available and the percentage of that
meter's billing that is taxed at the reduced rate (Form ET185RR).
4. The manufacturer shall maintain the
supporting documents (worksheets) used to calculate the percentage for mixed
use meters for the period of time that tax records are required to be kept. The
worksheets and the calculation of the percentage subject to the reduced rate
are subject to audit and assessment of any unpaid tax resulting from incorrect
calculation or certification of the percentage.
5. Purchases made after July 1, 2007 but
before the manufacturer registers and obtains a meter certification from DFA
are taxable at the full state tax rate of six percent (6%). If the manufacturer
subsequently registers and obtains a meter certification, the manufacturer may
file a request for refund with DFA for the overpayment that includes
documentation regarding the calculation of the overpayment (see section
F).
D.
Recertification.
1. Recertification is
required at each location:
a. When there is a
substantial change in the manufacturer's operation that would affect energy
usage at any, or all, meters. A substantial change is a change resulting in
greater than a twenty percent (20%) change in the percentage of total energy
usage that results from additions or replacement of machinery or equipment,
taking machinery or equipment out of service, or changes in business processes
altering the usage percentages.
For purposes of this requirement, a twenty percent (20%) change
means that the current percentage of natural gas used directly in
manufacturing, or the current percentage of electricity used directly in
manufacturing, is 20% greater or less than the percentage of natural gas or
electricity, respectively, that was used directly in manufacturing at the time
of the original certification.
Example: At the time of the original certification,
manufacturer used 60% of the natural gas it purchases directly in
manufacturing. Due to a change in its operations, manufacturer's use of natural
gas directly in manufacturing increases to 72% or greater, or decreases to 48%
or less [60 x .20 = 12; 60 + 12 = 72; 60 - 12 = 48]. This represents a 20% or
greater change and manufacturer is required to recertify.
b. At the end of any thirty-six (36) months
in which no recertification has occurred. Each certificate will contain an
expiration date that is thirty-six months from the date of the certificate. If,
during the effective period of the certificate, the manufacturer recertifies
due to a substantial change in operation or usage, a replacement certificate
will be issued that expires thirty-six (36) months from the date of the
replacement certificate. DFA will notify each manufacturer prior to the end of
any thirty-six month period for which recertification is required. If
applicable, recertification can be accomplished by a statement that no changes
have occurred since the date of the last certification. 2. A manufacturer may
adjust any portion, or all, of its certification percentage at any
time.
E.
Calculating and Remitting Tax.
1. The tax on all sales of natural gas or
electricity to manufacturers shall be calculated and remitted as follows:
a. Apply the four and one-half percent (4.5%)
[four percent (4%) after July 1, 2008] state tax rate to:
i. Sales of natural gas or electricity from
separate meters certified for use solely in manufacturing; and
ii. Sales of the percentage of natural gas or
electricity sold from each mixed use meter that is certified for the reduced
rate on the certificate issued to the manufacturer by DFA.
b. Apply the six percent (6%) state tax rate
to sales of natural gas and electricity from separate meters not used in
manufacturing and to the percentage of natural gas or electricity from mixed
use meters that is not taxed at the reduced rate.
c. Apply the local tax to all sales from all
meters.
2. Direct Pay
Permit Holders. Manufacturers who have direct pay permits and wish to remit tax
directly on purchases of natural gas or electricity should calculate and remit
the tax according to the method in section E(1).
3. Seller Collects Tax. Manufacturers who
either do not have direct pay permits or do not wish to remit tax on utilities
on their direct pay report must determine whether each seller of natural gas or
electricity is able to apportion the billing for each mixed use meter by
applying the two different state tax rates to sales from each mixed use meter.
a. The manufacturer must provide any seller
of natural gas or electricity who is able to apportion the billing for mixed
use meters with the certificate that lists the percentage of the sale from each
meter that is subject to the reduced rate (Form ET185RR).
b. The manufacturer has the following options
regarding purchases of natural gas or electricity from a seller who is not able
to apportion the billing:
i. Obtain (or use if
already permitted) a direct pay permit (that can be used to remit the tax due
on all purchases or only on purchases of natural gas or electricity used
directly in manufacturing) and remit the tax directly to DFA; or
ii. Pay the full state tax rate of six
percent (6%) to the seller and file a request for refund with DFA for the
overpayment that includes documentation regarding the calculation of the
overpayment.
F.
Refund Process.
1. Manufacturers who pay tax at the full
state rate on natural gas or electricity used directly in manufacturing may
request a refund of the overpayment directly from DFA (Form ET185F). The refund
cannot be obtained from the seller. The following documentation must be
included with the request for refund:
a. The
name and address of the manufacturer, and permit number if manufacturer has a
permit;
b. The time period for
which the refund is claimed, including the date(s) the tax was paid to the
seller;
c. The type of utility
purchased - natural gas or electricity;
d. Schedules or worksheets used to calculate
the amount of the refund; and
e.
Any other information relative to the payment as may be required by
DFA.
2. DFA shall
determine the amount of the refund, if any, and shall issue the refund to the
manufacturer.
3. Any manufacturer
whose claim for refund is denied, in whole or in part, shall be entitled to the
remedies available under the Arkansas Tax Procedure Act, Ark. Code Ann.§
26-18-101 et
seq., to contest the denial of the refund.
G.
Existing Exemptions.
All existing statutory exemptions from sales and use tax for
natural gas or electricity used in manufacturing or other purposes continue to
apply.
1 Act 185 of 2007 reduced the
statutory state tax rate on natural gas and electricity used directly in
manufacturing to the rate of 4.375% beginning July 1, 2007 and to the rate of
3.875 beginning July 1, 2008. Act 185 of 2007 did not affect the constitutional
levy (by Amendment 75 to the Arkansas Constitution) of state tax at the rate of
one-eighth of one percent (0.125%) on all taxable sales of property and
services. The aggregate of the state tax rate levied by Act 185 of 2007 and the
constitutional rate result in the 4.5% and the 4% rates, respectively.
