Ohio Utility Sales Tax Exemption
Ohio’s manufacturing exemption (R.C. 5739.02(B)(42)(g) and 5739.011) removes sales and use tax from the portion of taxable fuels and energy (for example, natural gas bought from a marketer, propane, fuel oil, coal and coke) that is used in a manufacturing operation. Because fuels and utilities are fungibles, the exemption is proportional to qualifying use, not all-or-nothing (R.C. 5739.011(D)).
Electricity delivered through wires, natural gas, water and steam delivered through pipes by a natural gas company, municipal gas utility, water-works company or heating company, are not subject to Ohio sales tax (R.C. 5739.02(B)(7)). Electricity instead bears the kilowatt-hour tax (R.C. 5727.81) and utility-distributed gas bears the MCF tax (R.C. 5727.811); neither has a general manufacturing exemption.
Natural gas sold by a retail natural gas supplier (marketer) is not a natural gas company sale (R.C. 5727.01(D)(4)), so it is subject to sales tax unless an exemption such as R.C. 5739.02(B)(42)(g) applies. That marketer-gas line item, along with propane, fuel oil, coal and coke, is where the manufacturing exemption produces savings.
For fuels and utilities, the taxable portion is the proportion used in a taxable manner, and the remainder is exempt (R.C. 5739.011(D); Ohio Adm.Code 5703-9-21(E)). The all-or-nothing “quantified primary use” test applies to machines and other non-fungible property, not to the fuel or energy itself. Other activities fall under separate exemptions with their own tests. Examples are mining and public utility service (“directly,” R.C. 5739.02(B)(42)(a)), farming (“primarily,” (B)(42)(n)) and crude oil and natural gas production (“directly,” (B)(42)(q)). R.C. 5739.02(B)(42)(g) covers manufacturing only. This exemption is authorized under Ohio Revised Code § 5739.02(B)(42)(g) and defined further in § 5739.011.
Tax rate
Ohio’s state sales and use tax rate is 5.75% (R.C. 5739.02(A)(1)).
Local taxes
County and transit authority sales and use taxes follow the same state exemptions, so the exemption reaches the full combined rate, not just the state rate (R.C. 5739.021(A), (E); 5739.023(G); 5739.026(F); 5741.021(A)(2)).
Electricity and on-site power
For sales and use tax purposes, electricity, water, gas and steam are tangible personal property (R.C. 5739.01(WW)). Fuel consumed in producing electricity for use in the manufacturing operation, and the equipment that carries electricity, gas, water or steam from the point where it enters the facility to the manufacturing operation, also qualify (R.C. 5739.011(B)(8), (B)(9); Ohio Adm.Code 5703-9-21(C)(8)).
Kilowatt-hour tax
Electricity bears the kWh tax at tiered rates instead of sales tax, and it has no general manufacturing exemption. Relief is limited to qualified end users (an electrochemical process using more than 3 million kWh per day, or a chlor-alkali process), qualifying on-site self-generation, and self-assessing purchasers using more than 45 million kWh per year, who pay lower rates plus a $500 annual fee per meter (R.C. 5727.80(F), (I); R.C. 5727.81(A), (C)(2), (C)(6), (D)).
Natural gas (MCF) tax
Utility-distributed gas bears the MCF tax at tiered rates, with a $.02 per MCF rate for flex customers, and there is no manufacturing exemption (R.C. 5727.811(A), (D), (F)).
Utility Study Requirement
No Ohio statute or rule requires a formal utility study. However, all sales are presumed taxable until the contrary is established (R.C. 5739.02(C)), and a refund claim based on use must include a detailed description of how the property was used (Ohio Adm.Code 5703-9-07(A)(4)(d)). A usage study is the practical way to meet that burden. The study should:
- List every meter and all equipment or systems consuming the utility
- Classify each use as either in the manufacturing operation (R.C. 5739.011(B)) or excluded (R.C. 5739.011(C)). Excluded uses include administrative functions, storage of raw materials or finished goods, packaging (R.C. 5739.01(S)), and general lighting, heating, ventilation and air conditioning. The exception is equipment that totally regulates the environment in a special and limited area where that regulation is essential for production.
- Measure or estimate annual consumption for each category
- Calculate the percentage of each fuel or utility used in the manufacturing operation. That percentage is the exempt portion (R.C. 5739.011(D)), and no minimum threshold applies.
- Maintain records, studies, and calculations for audit preparedness
Ohio does not apply a per-meter predominant-use rule. Fuels and utilities are taxed on the proportion used in a taxable manner (R.C. 5739.011(D)). For example, where 85% of boiler steam is used in manufacturing, 85% of the coal is exempt (Ohio Adm.Code 5703-9-21, Example 25). In every case, the exemption for fuels and utilities is prorated to the qualifying-use percentage and must be supported.
Exemption Requirement
To buy a taxable fuel or utility exempt (for example, marketer-supplied natural gas or propane), give the vendor a fully completed exemption certificate in the form the Tax Commissioner prescribes (R.C. 5739.03(B)(1)(a)). Ohio Adm.Code 5703-9-03(D) lists the required data elements and allows substitute certificates. No certificate is needed for electricity delivered through wires, or for gas, water or steam sold by a utility through pipes, because those sales are not subject to sales tax (R.C. 5739.02(B)(7); 5739.03(B)(1)(a)). The certificate must state the reason for the exemption: R.C. 5739.02(B)(42)(g), use primarily in a manufacturing operation to produce tangible personal property for sale. Because the exemption is proportional, it should also give the exempt percentage the vendor is to apply. Sales or use tax paid on exempt usage can be recovered in two ways: file form “ST AR Application for Sales/Use Tax Refund” with the Tax Commissioner (Ohio Adm.Code 5703-9-07(A)(1)), or ask the vendor to refund it (5703-9-07(B)). The Commissioner refunds a consumer directly only if the vendor has not refunded the tax (R.C. 5739.07(C)). The kWh and MCF taxes are refunded only on application by the distribution company or a self-assessing purchaser (R.C. 5727.91(A)). File within four years from the date of the illegal or erroneous payment (R.C. 5739.07(D); use tax, R.C. 5741.10). Tax is treated as paid on the date the vendor remits it to the state, not the date it collected it from you (Ohio Adm.Code 5703-9-07(A)(5)). The period is extended by any waiver of the assessment time limit, and a six-month window applies after certain assessments (R.C. 5739.07(E)). A consumer’s refund application must include copies of the invoices, proof that the invoices (including tax) were paid, an electronic spreadsheet listing every invoice if there are 25 or more, and a detailed description of how the property was used. Citations to the Revised Code alone are insufficient (Ohio Adm.Code 5703-9-07(A)(4)). A usage study is the usual support for the description of use.
Certificate timing and liability
All sales are presumed taxable until shown otherwise. If no certificate is provided within 90 days of the sale, the tax is presumed to apply, and if an exemption is improperly claimed, the buyer, not the vendor, owes the tax (R.C. 5739.02(C); R.C. 5739.03(B)(1)(b), (B)(4)).
Direct payment permit
Large purchasers that buy from many vendors can apply to the Tax Commissioner for a direct payment permit, which lets them pay the tax directly to the state instead of having vendors collect it (R.C. 5739.031(A)).