Alabama Utility Sales Tax Exemption
Alabama provides manufacturers and industrial processors with a utility sales tax exemption that helps reduce the cost of electricity, natural gas, and water used in qualifying production activities. This exemption removes state utility gross receipts tax and utility service use tax on utilities that are directly used in manufacturing or processing operations. It is authorized under Alabama Code § 40-21-83 and §40-21-103.
Qualifying Uses
Utilities are exempt when used directly in the following industrial processes:
- Electricity used in electrolytic or electrothermal manufacturing or compounding processes
- Natural gas used as a raw material in the production of tangible personal property
- Water used at least 50% in manufacturing or industrial processing activities
The exemption does not apply to utility use for general building operations such as heating, lighting, or air conditioning, unless those uses are part of the qualifying process.
Utility Study Requirement
To substantiate the exemption, a utility study is required to determine how much of the utility is directly used in qualifying production activities. This typically involves listing all utility-consuming equipment, allocating usage between production and non-production functions, and calculating the exempt percentage. If utilities are not separately metered, the study helps apportion use to determine the exempt share.
Filing Requirements
To claim the exemption, eligible businesses must complete and submit Alabama Form STE-3 (State Utility Tax Certificate of Exemption) to their utility provider. This form certifies that the utility usage qualifies under state law. The utility company, upon receiving the certificate, will stop charging utility gross receipts and service use tax on the qualifying portion.
The utility provider is generally held responsible for collecting tax unless a valid exemption certificate is received. A properly completed STE-3 form protects the provider from liability if the state later determines the exemption was incorrectly applied.
If a business has paid tax on utility usage that qualifies for exemption, it may request a refund for up to three years from the date the tax was paid. Refunds may be claimed either through the utility provider or directly from the Alabama Department of Revenue, depending on the circumstances and timing.
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