On April 11, 2014, Governor Brewer signed into law Senate Bill 1413, exempting from transaction privilege and use taxes sales of electricity and natural gas to businesses engaged in manufacturing or smelting. The effective date of the exemption depends on the date the legislature adjourns, but will not be before August 1, 2014. Although intended to attract new manufacturing businesses to Arizona, the exemption also applies to existing uses.
This new exemption applies to both state and county transaction privilege taxes and use taxes. The tax is imposed on the gross income or gross proceeds of sales of Arizona utility companies. The utility companies typically pass through the costs of these taxes to their customers. Under this new exemption, manufacturing and smelting businesses meeting the qualifications of the statute may avoid having these taxes added to the cost of their natural gas and electricity bills by providing their utility companies with an exemption certificate certifying that this exemption applies. Manufacturing and smelting business meeting the qualifications of the statute may similarly avoid the use tax directly imposed on their purchases of natural gas and electricity from out-of-state suppliers.
To qualify for this exemption, the purchaser of the electricity or natural gas must be “principally engaged in manufacturing or smelting operations” and use “at least fifty-one percent of the electricity or natural gas” in such operations. The “principally engaged” requirement means that at least fifty-one percent of the purchaser’s business must involve manufacturing or smelting operations.
“Manufacturing” and “smelting” are both defined in SB 1413. Simply stated, manufacturing, for purposes of this exemption, means a process of transforming tangible property into a different product with a distinctive name, character, or use. The term does not, however, include “processing, fabricating, job printing, mining, generating electricity, or operating a restaurant.” “Smelting” means “melt[ing] or fus[ing] a metalliferous mineral, often with an accompanying chemical change, usually to separate the metal.”
Manufacturing and smelting businesses taking advantage of this exemption should experience significant savings on their purchases of natural gas and electricity by avoiding these state and county taxes.
At the municipal level, SB 1413 requires cities and towns to either tax or exempt in whole the gross proceeds of sales or gross income from sales of natural gas and electricity to businesses that use at least 51% of such natural gas or electricity in manufacturing or smelting operations in that city or town. Businesses should review local laws or consult with their tax advisors to determine how the cities and towns in which they operate will implement these new statutory requirements.