When Do Electricity Generation Activities Qualify as “Manufacturing” for PA Sales and Use Tax Purposes?


The Pennsylvania Department of Revenue has issued a series of rulings that machinery and equipment used in the generation of electricity qualify for the Sales and Use Tax manufacturing exclusion. See Ruling No. SUT-10-001 (April 7, 2010) (machinery, equipment, parts and supplies for a solar energy facility, for which the electricity output will be transferred to a public utility through a high voltage transmission system, qualifies for the manufacturing exclusion); Ruling No. SUT-03-032 (July 1, 2003, reissued July 2, 2008) (machinery, equipment, parts and supplies used to generate electricity through “combined cycle technology,” using generators driven by both fuel-fired combustion and steam turbines, qualifies for the manufacturing exclusion); Ruling No. SUT-00-190 (December 12, 2000, reissued October 7, 2008) (production of electricity through the use of wind turbines qualifies as manufacturing). These rulings are based on the Department’s determination that the production of electricity constitutes the “manufacture of tangible personal property” because the sales tax statute defines “tangible personal property” to include “electricity for non-residential use.” See 72 P.S. § 7201(m).

The Department of Revenue recently issued Sales and Use Tax Bulletin 2010-01 (July 28, 2010), which is intended to further “clarify when a person’s activities rise to the level of being engaged in the business of manufacturing electricity,” in order to be eligible to claim the manufacturing exclusion on the purchase of equipment, machinery, parts and supplies used directly in the generation operations. The Bulletin states five requirements for being engaged in the “business” of manufacturing electricity, which are similar to the requirements for eligibility to claim the in-house printing exemption (e.g., conducting the activities in a distinct location, providing separate accounting or interdepartmental billing, and conducting electricity production activities that are “of sufficient size, scope and character that they could be conducted on a commercially viable basis separate and distinct from any other business activities”).

The Bulletin specifically states that (1) back-up or emergency generators and (2) residential electric systems such as solar panels/photovoltaic systems and windmills (regardless of whether some of the electricity is sold) do not qualify for the manufacturing exclusion.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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