United States

Wyoming: Chemicals used in Generating Electricity Not Exempt under Manufacturing Exemption

Sep 25, 2017
From KPMG TaxWatch

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Recently, the Wyoming Supreme Court addressed whether generating electricity qualified as “manufacturing,” and if so, whether certain chemicals were used “directly” in manufacturing so that they were exempt from sales and use taxes.  The taxpayer, an electric utility company operating four coal-fired electric generation facilities in Wyoming, used certain chemicals to aid in pollution control and in cooling and heating the water used to generate electricity. Under Wyoming law, sales of tangible personal property that become an ingredient or component of tangible personal property manufactured or processed for sale, are exempt from sales and use tax. The exemption extends to chemicals used directly in manufacturing or processing if they become an ingredient or component of the tangible personal property. This applies even if the chemicals are consumed or destroyed during that process. The taxpayer at issue requested a ruling from the Department of Revenue that the chemicals at issue qualified for the exemption. The taxpayer also filed a sales tax refund based on the same claim. After the Department denied both the ruling and refund request, the taxpayer appealed both denials to the Board of Equalization. The Board ruled in favor of the Department. The taxpayer subsequently appealed.

The court first considered whether the Board erred when it ruled that generating electricity did not qualify as “manufacturing.” Under Wyoming law, the term manufacturing is defined as “the operation of producing a new product, article, substance or commodity different from and having a distinctive nature, character or use from the raw or prepared material.” The taxpayer argued that generating electricity is manufacturing because it is an operation that produces electricity as a new product. The Department argued that “the raw or prepared material must be produced into a final form of the same material.” Accordingly, the Department asserted that, because the electricity produced contained no coal, the taxpayer could not be considered a manufacturer. The Department also asserted that the taxpayer could not be classified as a manufacturer because its relevant NAICS code was that of a utility. The court, disagreeing with the Department, held that the plain language of the statute required only that the new product be “different from” and have a “distinctive nature, character or use from the raw or prepared material.” The court declined to read into the law a requirement that the raw material must exist in the new product. Thus, the court concluded that the taxpayer was a manufacturer under the statutory definition, which made no reference to NAICS codes.

Next, the court addressed whether the purchase of the chemicals necessary to treat water and sulfur dioxide for the generation of electricity qualified for the exemption. The key question was whether chemicals became an “ingredient or component” of the electricity, and whether they were “used directly” in the manufacturing of electricity. The court concluded that the chemicals at issue were not ingredients of the electricity and did not enter or become a component part of the electricity. The court also rejected the taxpayer’s argument that the chemicals were purchased for resale. For more information on PacifiCorp Inc. v. Wyoming Dep’t of Revenue, please contact Stephen Metz at 303-382-7177.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.