Current through Register Vol. 49, No. 18, September 16, 2024
PURPOSE: Section 144.030.2(12), RSMo exempts from tax
certain purchases of electrical energy used in primary or secondary
manufacturing, processing, compounding, mining or producing a product, or
processing of raw materials that contain recovered materials. Section
144.030.2(31), RSMo exempts from tax electricity used in connection with the
manufacturing of cellular glass products or in any material recovery processing
plant. Section 144.030.2(33), RSMo exempts from tax utilities used or consumed
directly or exclusively in the research and development of agricultural
biotechnology products and plant genomics products and prescription
pharmaceuticals consumed by humans or animals. This rule explains when these
exemptions apply and how a taxpayer may claim the exemptions at the time of
purchase of the electrical energy.
(1) In general, electrical energy used in
facilities owned or leased by the taxpayer in the actual primary manufacturing,
processing, compounding, mining or producing of a product is exempt from tax if
the cost of the electrical energy used exceeds ten percent (10%) of the total
cost of the primary manufacturing, processing, compounding, mining or
producing, exclusive of the cost of electrical energy so used. Electrical
energy used in facilities owned or leased by the taxpayer in the actual
secondary manufacturing, processing, compounding, mining or producing of a
product is exempt from tax if the cost of the electrical energy used exceeds
ten percent (10%) of the total cost of the secondary manufacturing, processing,
compounding, mining or producing, exclusive of the cost of electrical energy so
used. Electrical energy used in a material recovery processing plant owned or
leased by the taxpayer or in manufacturing cellular glass products is exempt
from tax. Utilities used or consumed directly or exclusively in the research
and development of agricultural biotechnology products and plant genomics
products and prescription pharmaceuticals consumed by humans or animals are
exempt from tax. Electrical energy used in facilities owned or leased by the
taxpayer in processing raw materials that contain at least twenty-five percent
(25%) recovered materials is exempt from tax.
(2) Definition of Terms.
(A) Compounding-Producing a product by
combining two (2) or more ingredients or parts.
(B) Fabrication-See
12 CSR
10-111.010.
(C) Manufacturing-See 12 CSR
10111.010.
(D) Material recovery
processing plant-
See
12 CSR
10-111.060.
(E) Mining-See
12 CSR
10-111.010.
(F) Primary processing-Manufacturing,
processing, compounding, mining or producing that results in the first
marketable product.
(G)
Producing-See
12 CSR
10-111.010.
(H) Product-An item with a new identity, use
and market value produced by the taxpayer's efforts which is intended at the
time of the production activity to be sold ultimately for final use or
consumption. A product may be tangible personal property or a service, if the
property or service is subject to state or local sales or use taxes, or any tax
that is substantially equivalent thereto, in this state or any other
state.
(I) Production
activity-Manufacturing, processing, compounding, mining, producing or
fabricating.
(J) Raw material-any
ingredient or component that becomes part of, or is made into a finished
product.
(K) Recovered
materials-See 12 CSR 10111.060. In order for an item to be a recovered
material, a facility must recover it from the solid waste stream. An item used
in processing for its original intended purpose is not a recovered
material.
(L) Secondary
processing-Further processing or fabricating of a marketable product that
results in another marketable product.
(M) Solid waste-See
12 CSR
10-111.060.
(N) Total cost-All allocated costs incurred
in producing the product, including all elements of production cost in
accordance with generally accepted accounting principles.
(3) Basic Application of Exemption.
(A) A taxpayer may claim this exemption at
the time of purchase of the electrical energy by presenting the seller with a
direct pay certificate issued by the department. In order to obtain a direct
pay certificate, the taxpayer must submit an electrical energy direct pay
authorization application. The application must demonstrate, by the use of the
previous calendar year's data, a probable entitlement to the electrical energy
exemption for the coming year. The taxpayer must file and remit the appropriate
tax on energy purchases that do not qualify for this exemption on its sales tax
return.
(B) Every transformation of
materials does not constitute a separate production activity. In order to be a
separate production activity, the activity must create a new marketable
product. If a taxpayer produces only one (1) marketable product, there can only
be primary production activity. All production costs must be included in
calculating the total cost of production. Secondary production activity can
only exist when an already marketable product produced by the taxpayer
undergoes subsequent production activity that produces a second marketable
product. When there is secondary production activity, the production costs
attributable to the primary production activity are not included in the total
cost of production of the secondary production activity.
(4) Examples.
(A) A manufacturing firm produces extruded
sheet plastic. The automated production line is a closed system connected
together by use of vacuum feed-pipe. When an order is received, the computer
controlled production line first blends the necessary raw materials. After
blending, the mix is conveyed through vacuum pipe to be dried, and then to the
extruder, where the mix is heated to meltdown and rolled into sheets by the
extruder rollers. These sheets are the end product. The cost of raw materials
is 95% of the total cost of producing the end product. The cost of electrical
energy is 99% of the cost of drying and extruding the blended raw materials.
The plastic sheet is the only marketable product produced by this continuous,
indivisible operation. Because the cost of electricity does not exceed 10% of
the total cost of producing the product, the purchase of the electricity does
not qualify for the exemption.
(B)
A manufacturer produces glass bottles to be used as packaging. The manufacturer
combines raw materials, including recycled glass obtained from recyclers, which
is then melted under extreme heat. The molten glass is then formed into
bottles, which are the manufacturer's only product. The electrical energy costs
exceed 10% of the total cost of production; therefore the manufacturer
qualifies for the exemption. If the manufacturer's raw materials include at
least 25% recovered material, the manufacturer may avoid the time and cost
involved in the calculations necessary to support the exemption under the 10%
threshold and claim the exemption based on its use of recovered
materials.
(C) A business contracts
with manufacturers of frozen food products to receive fresh or partially frozen
food products, reduce the temperature to zero degrees or below, and release the
fully frozen food product back to the manufacturer for distribution. The frozen
food products that the business produces have a new and different identity from
the fresh or partially frozen products that it receives. Frozen foods have a
longer shelf life and a broader distribution system than refrigerated foods.
The business qualifies for the exemption if the electricity used in the
freezing process exceeds 10% of the cost of producing the fully frozen food
products from the fresh or partially frozen food products. The business does
not have to include the cost of its customer's production of the fresh or
partially frozen products because the fresh or partially frozen food is a
separate marketable product from the frozen food.
(D) A frozen food manufacturer uses $100,000
of electricity in manufacturing its products. The manufacturer also uses
$150,000 of electricity in its on-premises, refrigerated warehouse to maintain
its products at the necessary temperature prior to shipping. Total cost of
producing the products, excluding electricity, is $2,000,000. The combined
electricity cost of $250,000 exceeds 10% of the $2,000,000 cost of production.
The manufacturer qualifies for the exemption because processing includes any
treatment by the producer at the production facility that is necessary to
maintain the product.
(E) A paper
manufacturer uses recycled paper in its primary processing of producing rolls
of newsprint. The newsprint includes 50% recovered paper, qualifying the
manufacturer for the electrical energy exemption from state and local taxes.
The newsprint is subsequently cut into sheets during secondary processing for
sale to a book printer. The cost of electricity used during the secondary
processing does not exceed 10% of the total cost of producing the cut sheets.
However, the electrical energy used to produce the final product is also exempt
because the secondary process uses at least 25% recovered materials.
