DIRECTIVE


Subject: Sales of Electricity to Manufacturers
Tax: Sales and Use Tax
Law: G.S. 105-164.13(8)
Issued By: Sales and Use Tax Division
Date: February 16, 2000
Number: SD-00-1

This Directive informs taxpayers of a final hearing decision made on February 14, 2000, by the Secretary of Revenue in the case numbered 97-1058, and explains the effect of that decision. A "sanitized" copy of the decision can be obtained by calling the Sales and Use Tax Division. The sanitized copy removes the taxpayer's name and other identifying information.

The issue addressed in the decision is whether electricity sold to a manufacturer and used in an induction furnace is exempt from sales tax under G.S. 105-164.13(8). That exemption applies to tangible personal property that is sold to a manufacturer and enters into or becomes an ingredient or component part of tangible personal property made by the manufacturer. An induction furnace is used to melt materials so they can be shaped into various products.

In the decision, the Secretary reviews expert testimony on the subject of electricity and finds that electricity is energy rather than matter. The Secretary then reviews how electricity is used in an induction furnace and an arc furnace and the purpose of the exemption in G.S. 105-164.13(8). The Secretary concludes that the exemption applies to forms of matter and not forms of energy. Consequently, the exemption does not apply to electricity used in either an induction furnace or an arc furnace.

Prior to this decision, the Department issued a few private letter rulings advising manufacturers that electricity used by them is exempt under G.S. 105-164.13(8). These letter rulings were issued in error based on an incomplete understanding of electricity. This decision nullifies those prior letter rulings effective March 1, 2000.

Sales of electricity made on or after March 1, 2000, to a manufacturer to whom an erroneous letter ruling was issued are subject to tax at the appropriate rate set in G.S. 105-164.4(a). Under subpart (a)(1f) of that section, the appropriate rate is 2.83% if the electricity is sold to the manufacturer for use at the manufacturing plant and is measured by a separate meter or another device. Otherwise, the appropriate rate is 3% under subpart (a)(4a) of that section.

The prior letter rulings constitute erroneous written advice under G.S. 105-264. The manufacturers to whom they were issued can therefore rely on them to exempt purchases of electricity made before March 1, 2000.

If you have questions about this Directive, you may contact the Sales and Use Tax Division, North Carolina Department of Revenue, P. O. Box 871, Raleigh, N. C. 27602. You may also telephone the Division at (919) 733-2151.