Iowa Predominant Use Study

Iowa Predominant Use Study for utility sales tax exemption
Call 844-767-0037 for an Iowa Predominant Use Study

Our Iowa Predominant Use Study will determine the percentage, on per-meter basis, allowed to be claimed for the utility sales tax exemption for electricity, natural gas, and water.  For qualified processes, the State, City, and County sales taxes can be removed up to the percentage determined by the predominant use study.  In addition to removing that percentage of sales taxes from the electricity, natural gas, and/or water meters, a refund may also be claimed up to that same exempt percentage limited to the statute of limitations (36 months in Iowa).  Note: the Iowa predominant use studies should be updated every 3 years or you may find sales taxes re-instated on the utility invoices.  If you significantly modify your business, you may want it updated sooner especially if you expect the exempt percentage to increase from those modifications.

See below to view the law as of 02/07/19 pertaining to the predominant use studies required for the sales tax exemptions for electricity and natural gas in Iowa.  If you have questions, see our contact us page for a no-obligation consultation or see our frequently asked questions page.   The law below may also be viewed at the State’s website at the link below by searching for “electricity sales tax exemption” on the State’s website.  Call 346-241-0100 or Toll Free 844-767-0037 with any questions.

Machinery, Equipment, and Computer Exemption

Sales, leases, or rentals of the following are exempt from tax:

a. Machinery, equipment, and computers directly and primarily used in processing by a manufacturer.

b. Machinery, equipment, and computers directly and primarily used to maintain a manufactured product’s integrity or to maintain any unique environmental conditions required for the product.

c. Machinery, equipment and computers directly and primarily used to maintain unique environmental conditions required for other machinery, equipment, or computers used in processing by a manufacturer.

d. Test equipment directly and primarily used by a manufacturer in processing to control the quality and specifications of a product.

e. Machinery, equipment, or computers directly and primarily used in research and development of new products or processes of processing.

f. Computers used in processing or storage of data or information by an insurance company, financial institution, or commercial enterprise.

g. Machinery, equipment, and computers directly and primarily used in recycling or reprocessing of waste products.

h. Pollution control equipment used by a manufacturer. It is not necessary that the equipment be “directly and primarily” used in any kind of processing.

i. Materials used to construct or self-construct any machinery, equipment, or computer, the sale of which is exempted by paragraphs “a” through “h” above.

j. Exempt sales of fuel and electricity. Sales of fuel or electricity consumed by machinery, equipment, or computers used in any exempt manner described in paragraphs “a,” “b,” “c,” “d,” “e,” “g,” and “h” of this subrule are exempt from tax. Sales of electricity consumed by computers used in the manner described in paragraph “f” remain subject to tax.

Manufacturer Defined

A manufacturer is any person, firm, or corporation who purchases, receives, or holds personal property for the purpose of adding to its value by any process of manufacturing, refining, purifying, combining of different materials, or packing of meats with an intent to sell at a gain or profit

Contract manufacturer

A contract manufacturer is considered to be a manufacturer. A contract manufacturer is a manufacturer that
processes tangible personal property on the behalf of other manufacturers. A contract manufacturer does not sell the tangible personal property it processes on the behalf of another manufacturer.

Examples of Businesses that Qualify as Manufacturers:

  • Bookbinders
  • Newspaper publishers
  • Contract manufacturers
  • Printers
  • Those engaged in quarrying or mining; see below
  • Producers of drugs or agricultural supplies
  • Lumber millers

Quarrying and Mining

Quarrying and mining businesses are considered manufacturers with respect to activities performed after raw materials are severed from the ground. These activities can include crushing, washing, sizing, and blending of aggregate materials.

Company A owns and operates a gravel pit. It sells the gravel extracted from the pit to others who use the
gravel for surfacing roads and as an ingredient in concrete. Company A removes overlay and raw gravel from the pit. It then transports the gravel to a plant where washing and sizing of the gravel takes place. Company A is a manufacturer, but only with respect to those activities which occur after it severs the gravel from the ground.

Examples of Businesses that are NOT Manufacturers:

  • Construction contracting
  • Data processing
  • Medical doctors
  • Restaurants
  • Farmers
  • Those providing transportation for hire
  • Those who remanufacture or rebuild tangible personal property, such as automobile engines

If Manufacturing is Incidental to Principal Business

A manufacturer is not a merchant, dealer, or retailer. To be classified as a manufacturer, the principal business must be manufacturing. A person primarily engaged in selling tangible personal property to earn a profit and only incidentally engaged in creating products from raw materials is not a manufacturer.

Machinery Defined

Machinery is any mechanical, electrical, or electronic device designed and used to perform some function and to produce a certain effect or result.

Machinery Includes:

  • The basic unit of the machinery
  • Any attachment necessary for the basic unit to function
  • All devices used or required to control, regulate, or operate a piece of machinery jigs, dies, tools, and other devices necessary to the operation of or used in conjunction with the
    • Directly connected with or
    • An integral part of the machinery and
    • Used primarily for control, regulation, or operation of machinery
  • Operation of what is ordinarily thought of as machinery

Machinery Does NOT Include:

  • buildings designed specifically to house or support machinery

Equipment Defined

Equipment is any tangible personal property used in an operation or activity by a manufacturer in a
manufacturing environment.

Equipment Includes:

  • Tables on which property is assembled on an assembly line
  • Chairs used by assembly line workers
  • Coolers that do not change the nature of materials stored in them
  • Equipment that eliminates bacteria
  • Palletizers
  • Storage bins
  • Property used to transport raw, semifinished, or finished goods within a manufacturing plant
  • Vehicle-mounted cement mixers if used by a manufacturer, not a contractor (May be subject to a 5%
    one-time registration fee as part of a vehicle subject to registration)
  • Packaging and bagging equipment, including conveyor systems
  • Quality control equipment
  • Core and mold-making equipment and sand-handling equipment directly and primarily used in the mold-making process by a foundry
  • Containers, pallets, packing cases, shipping cases, wrapping materials and similar items used for
    packaging or facilitating the transportation of tangible personal property to be sold at retail or for resale.

Computer Defined

Computer means stored program processing equipment and all devices fastened to it such as:

  • Central processing unit
  • Keyboards
  • Consoles
  • Monitors
  • Display units
  • Memory
  • Disk and tape drives
  • Terminals
  • Printers
  • Plotters
  • Modems
  • Tape readers
  • Card readers
  • Card or tape punchers
  • Document sorters
  • Optical readers
  • Digitizers

Computer Does NOT Include:

  • Canned software
  • Point-of-sale equipment such as:
    • Scanners
    • Cash registers

See Iowa Sales Tax on Computers.

Pollution Control Equipment Defined

  • Any disposal system or apparatus used or placed in operation primarily for the purpose of reducing,
    controlling, or eliminating air or water pollution
  • Any equipment required or certified by a government agency of Iowa or the United States, such as:
    • Wastewater treatment facilities
    • Scrubbers used in smokestacks

Pollution Control Equipment Does NOT Include

  • Noise pollution equipment
  • Equipment used only for worker safety, such as a gas mask

Directly and Primarily Defined

To be exempt, machinery, equipment, and computers must not only be used in processing, but must be used directly and primarily in processing.

Property is directly used only if it is used to initiate, sustain, or terminate the transformation of any activity.

To determine if property is directly and primarily used, consider the following:

  • Physical proximity of the property in question to the activity in which it is used
  • Proximity of the time of use of the property in question to the time of use of other property used before and after it in the activity involved
  • Active causal relationship between the use of the property in question and the activity involved.

Just because a particular piece of property may be essential to the activity because its use is required by law or practical necessity does not, of itself, mean that the property is directly used.

The following examples are not directly and primarily used in manufacturing and processing; machinery and
equipment is taxable when used:

  • Exclusively for the comfort of workers, such as air cooling, air conditioning, and exhaust systems
  • In support operations, such as a machine shop in which production machinery is assembled,
    maintained, or repaired
  • By administrative, accounting, and personnel departments
  • By plant security, fire prevention, first aid, and hospital stations
  • In plant cleaning, disposal of scrap and waste, plant communications,lighting, safety, or heating

Processing Defined

In general, processing begins with receiving or producing raw materials and ends at the point the products are delivered for shipment or transferred from the manufacturer. This is sometimes referred to as “door-to-door processing.”

Receiving or producing raw materials means activities performed on tangible personal property only. Activities performed on real property are not exempt for manufacturing purposes.

Processing Includes:

  • Refinement or purification of materials
  • Treatment of materials to change their form, context, or condition
  • Maintenance of the quality or integrity of materials, components, or products
  • Maintenance of environmental conditions necessary for materials, components, or products
  • Quality control activities
  • Construction of packaging and shipping devices
  • Placement into shipping containers or any type of shipping device or medium
  • Movement of materials, components, or products until shipment from the manufacturer

Example 1 – processing begins
Company A manufactures fine furniture. It owns a grove of walnut trees which it uses as raw material. Employees cut the trees, transport the logs to the factory, offload them, and store the logs in a warehouse to begin curing the wood before taking it to the sawmill.

Processing begins when the logs are loaded at the grove for transport to the factory.

The same company also buys mahogany logs from a supplier in Honduras. Company A uses its own equipment to offload the logs from railroad cars at its manufacturing facility. It then transports, stores, and saws the logs.

Processing begins when Company A offloads the logs from the railroad cars.

Example 2 – middle stages of processing

Company C is a microbrewery. It uses a variety of kettles, vats, tanks, tubs, and other containers to mix, cook, ferment, settle, age, and store the beer it brews. It also uses a variety of pipes and pumps to move the beer among the various containers involved in brewing.

All stages of this brewing are part of processing. Transforming the raw materials from one state to another, such as fermenting and aging, is part of processing. Simply holding the materials in an existing state, such as storage of hops in a bin or storage of beer prior to bottling, is also a part of processing. Any movement of the beer between containers is an activity which is a part of processing, whether this movement is an integral part of the production of beer or not.

Example 3 – end of processing

After the brewing process is complete, Company C places its beer in various containers, stores it, and moves it to its customers by a common carrier that picks up the beer at the brewery. The following are still part of processing: C’s activities of placing the beer into bottles, cans, and kegs; storing it after packaging; and moving the beer by use of a forklift to the common carrier’s pickup site.

Replacement Parts and Supplies

NOTE: The information below is only applicable to replacement parts and supplies purchased prior to July 1, 2016. 

For information on replacement parts and supplies purchased on or after July 1, 2016, please reference Iowa Sales/Use Tax Changes Effective July 1, 2016 on Certain Computers, Machinery, Equipment, Replacement Parts, and Supplies.

Replacement Parts – Exempt

A part that meets the requirements below is exempt from tax.

A replacement part is any machinery or equipment part substituted for another part that is:

  • Broken
  • Worn out
  • Obsolete
  • Unable to perform its intended function.

The part must:

  • Materially add to the value of industrial machinery and equipment
  • Appreciably prolong the lives of industrial machinery and equipment
  • Keep them in their ordinarily efficient operating condition
  • Have a useful life of one year or more

Supplies – Taxable

Supplies are not replacement parts.

Examples of taxable supplies:

  • Drill bits
  • Grinding wheels
  • Punches
  • Taps
  • Reamers
  • Saw blades
  • Lubricants
  • Coolants
  • Sanding discs
  • Sanding belts
  • Air filters

Fuel Used in Processing

Fuel Defined

Fuel includes heat, steam, electricity, gas, water, or any other tangible personal property consumed in creating heat, power, steam, or for generating electric current.

Fuel Consumed in Processing – Exempt

Fuel consumed in processing is exempt from Iowa sales and use tax.

Fuel consumed in processing means fuel that is directly applied in the actual processing of tangible personal property.

Fuel to Operate Exempt Machinery, Equipment, and Computers – Exempt

If the machinery, equipment, or computer is exempt to a manufacturer, the fuel used to operate or run the machinery, equipment, or computer is also exempt.

Fuel for General Purposes – Taxable

Fuel used for the purpose of general heating, ventilating or lighting of buildings – even if the buildings are warehouses, processing plants, or offices – and any use other than that of direct processing is taxable.

Exempt and Taxable Fuel

When practical, electricity consumed as power or used directly in processing must be separately metered and separately billed by the supplier.

If it is impractical to separately meter and bill the fuel, the manufacturer must give the supplier an exemption certificate that shows what percentage of the fuel is exempt. The exemption certificate must be supported by a study showing how the percentage was developed. The study must show the taxable use and the nontaxable use to correctly report the exempt percentage.

Fuel Exemption Certificate

A Sales Tax Exemption Certificate for Energy used in Processing and Agriculture (pdf) is given by a buyer to a seller when making tax free purchases. The seller has the right to demand additional documentation be attached to the certificate, as long as it is reasonably necessary to support the claim of exemption. This could be an electrical consultant’s study or a document prepared by the purchaser.

The purchaser does not have to file a certificate or attach documentation every time a transaction takes place unless a substantial change in the operation has occurred.

A buyer who makes tax-free purchases and then uses or otherwise disposes of the fuel in a taxable manner is liable for the sales tax and must remit that tax directly to the Department.

See Appendix A for information on how to calculate a fuel exemption.

Recycling or Reprocessing Waste Products

Recycling Defined

Recycling means any process by which waste – or materials which would otherwise become waste – are collected, separated, or processed and revised or returned for use in the form of raw materials or products. The term includes the composting of yard waste.

Recycling does not include any form of reprocessing or energy recycling.

Recycling or reprocessing ends when waste or a material which would become waste is in the form of a raw material or in the form of a product.

Machinery, Equipment, and Computers Used in Recycling

The sale or rental of machinery, equipment, computers, and their replacement parts are exempt from tax if they are used directly and primarily in the recycling or reprocessing of waste products. This includes equipment used in the movement of property which is integral to recycling or reprocessing.

Exempt if used directly and primarily in the recycling or reprocessing of waste products:

  • Compactors
  • Grinders
  • Forklifts
  • Balers
  • Cutters
  • Trucks
  • Crushers
  • Shears
  • Endloaders
  • Other moving devices


  • Bin used only for storage

Recycling or Reprocessing – Examples

Equipment used when recycling or reprocessing begins is exempt.

Example – collecting waste

A vehicle used directly and primarily for collecting waste is exempt if the truck is directly and primarily used in recycling and not, for instance, in hauling garbage to a landfill.

Example – separating waste

Machinery or equipment used to separate waste from material to be recycled or reprocessed or used to separate various forms of materials which will be reprocessed, such as glass and aluminum, may be exempt as the first step in processing.

Equipment used in an operation or series of operations that do not actually recycle or reprocess waste may be exempt.


An endless belt which moves aluminum cans from a machine where they are shredded to a machine where the shredded aluminum is crushed into blocks is exempt.

Equipment used after recycling or reprocessing ends is taxable.


A corporation purchases a machine that grinds logs, stumps, pallets, crates, and other waste wood into wood chips. After grinding, the wood chips are sold and transported to purchasers to various sites where the chips are dumped and spread out over the ground for use in erosion control. The machine that grinds the wood chips is used in recycling. The truck that transports the wood chips from the machine to the sites is not used in reprocessing. Recycling ends at the time the chips are placed in the truck because they are in the form in which they will be sold for use other than as a raw material in manufacturing.

Research and Development

The sale or rental of machinery, equipment, and computers used in research and development is exempt from tax.

Machinery, equipment, and computers are used directly in research and development only if they are used in actual experimental or laboratory activity that qualifies as research and development.

Research and Development Defined

Research and development means experimental or laboratory activity whose ultimate goal must be the development of new products or processes of processing.

Research and Development does NOT Include:

  • Testing or inspection for quality control purposes
  • Efficiency surveys
  • Management studies
  • Consumer surveys
  • Advertising
  • Promotions
  • Research in connection with literary, historical, or similar projects


Frontier Hybrid, Inc., maintains a research and development laboratory to develop a corn plant. It purchases the following items: a computer which will process data relating to the genetic structure of the various corn plants which Frontier Hybrid is testing, an electron microscope for examining the structure of corn plant genes, a steam cleaner for cleaning rugs in the laboratory offices, and a calculator for use by the laboratory director’s secretary. The computer and the microscope are directly used in the research; the steam cleaner and the calculator only indirectly used. Therefore, purchase of the computer and microscope is exempt from tax; purchase of the steam cleaner and calculator is taxable.

Design and Installation

The services of design and installation of new industrial machinery and equipment for sale or rent are exempt from sales tax if industrial machinery and equipment are:

  • New, not used, AND
  • Used in processing by a manufacturer

New means never having been used or consumed by anyone and does not include reconstructed, rebuilt, repaired, or previously-owned machinery or equipment.

The charges for design or installation must be separately identified, charged separately, and reasonable in amount.

Food Manufacturers

The exemptions listed for industrial machinery, equipment, and computers also apply to manufacturers that create food products for human consumption.

Bakeries, grocery stores, and restaurants are not manufacturers.

Fuel Exemptions Specific to Food Manufacturers

Food manufacturers are also entitled to certain exemptions that may not be available to other manufacturers.

Fuel is exempt when used in:

    • Treatment of material to change its form, context, or condition in order to produce a marketable food product; for example:
      • Washing, sorting, and grading of fruits, vegetables, and eggs
      • Mixing and agitation of liquids
      • Sterilization
    • Cooling or heating to:
      • Maintain the quality or integrity of the food
      • Avoid spoilage of the food
      • Keep the food in marketable condition
      • Maintain environmental conditions necessary for safe or efficient use of machinery or material to produce the food.

Example: electricity used to air condition a room in which meat is stored to maintain the meat in a condition in which it is easy to slice.

  • Sanitation and quality control activities; for example:Formation of packaging
    • Fuel used in pH meters, microbiology counters, and incubators to test the purity or sanitary nature of a food product.
    • Electricity used in egg-candling lights.
    • Electricity used to power refrigerators used to store food samples for testing.
    • Electricity used to power “bug lights” or other insect-killing equipment used where food is manufactured or stored
  • For example, electricity used by a food manufacturer in plastic-bottle-forming machines is exempt if the bottles will be used to hold a marketable food product such as milk.
  • Placement of food into shipping containersFor instance, electricity used by a food manufacturer to run machines that place food products into packing cases, pallets, crates, shipping cases, or other similar receptacles.
  • Manufacturing ice
  • Refrigerating cheese to age it from “green” to edible
  • Refrigerating eggs to change their flavor
  • Pasteurizing and subsequent refrigeration of milk
  • “Hard” freezing of meat and butter for aging
  • Canning vegetables
  • Cooking foodstuffs
  • Moving material or food product by conveyors, forklifts, and freight elevators
  • Moving material or food products to a loading dock

See Appendix A for information on how to calculate a fuel exemption.

Chemicals Used in Processing and Used to Treat Water

The chemical, solvent, sorbent, and reagent exemption only applies during processing. The definition of processing is limited for this exemption. Processing means a change to the form, context, or condition of tangible personal property. There must be a change occurring during the chemical activity before this exemption applies. The “door-to-door” definition of processing for a manufacturer under the machinery, equipment, and computer exemption does not apply.

Chemicals, solvents, sorbents, and reagents are exempt from tax if the following apply:

  • It must be directly used and consumed, dissipated, or depleted during processing.
  • The processing must be performed on tangible personal property intended to be sold ultimately at retail.

The chemical, solvent, sorbent, or reagent does not need to become an integral or component part of the processed tangible personal property.

Chemical compounds placed in water are exempt from tax if the water is:

  • Ultimately sold at retail, or
  • Directly used in processing, or
  • Consumed during processing

Special boiler compounds used when live steam is injected into mash or another substance are exempt from tax because it liquefies and becomes an integral part of the product. The product must be ultimately sold at retail.

Chemical Defined

Chemical means a substance primarily used for producing a chemical effect. A chemical effect results from a chemical process wherein the number and kind of atoms in a molecule are changed in form; for example, when oxygen and hydrogen are combined to make water. A chemical process is distinct from a physical process wherein only the state of matter changes; for example, when water is frozen into ice or heated into steam.

Solvent Defined

Solvent means a substance, usually liquid, primarily used in dissolving something. For example, water is a solvent of most salts; alcohol of resins; ether of fats.

Sorbent Defined

Sorbent means a substance which takes up and holds either by adsorption or absorption. To be exempt, the sorbent must be a substance that is primarily used as a sorbent.

Reagent Defined

Reagent means a substance used for various purposes which takes part in one or more chemical reactions or biological processes. Examples include using a reagent in detecting, examining, or measuring other substances, in preparing materials, and in developing photographs. A reagent is also a substance used to convert one substance into another by means of the reaction it causes. To be exempt, the reagent must be a substance that is primarily used as a reagent.

Catalyst Defined

A catalyst is considered to be a chemical, solvent, sorbent, or reagent. A catalyst is a substance which promotes or initiates a chemical reaction. It is exempt if it is consumed, dissipated, or depleted during processing of tangible personal property which is intended to be ultimately sold at retail.

Gases Used in the Manufacturing Process

Argon and other inert gases used in the manufacturing process are exempt from tax. An inert gas is any gas which is normally chemically inactive. It will not support combustion and cannot be used as either a fuel or as an oxidizer. Argon, helium, neon, krypton, radon, and xenon are inert gases. Oxygen, hydrogen, and methane are nonexclusive examples of gases which are not inert.

Warranties and Maintenance Contracts

Mandatory Warranty

A warranty is mandatory when the buyer, as a condition of the sale, is required to purchase the warranty or guarantee contract from the seller. The cost of the warranty is part of the cost of the item. Therefore, the sale of a mandatory warranty is taxable only if the item is taxable.

Sales of replacement parts and materials to the seller furnishing them under a mandatory warranty is a sale for resale and not taxable.

Labor performed under a mandatory warranty is exempt.

Optional Warranty

A warranty is optional when the buyer is not required to purchase the warranty or guarantee contract from the seller. The price of the optional warranty is taxable.

Preventive Maintenance Contract

A preventive maintenance contract is a contract that requires only the visual inspection of equipment; repair is not included. The sale of a preventive maintenance contract is not subject to tax.

Additional Parts and Labor

Additional charges for parts (except qualifying replacement parts) and labor furnished in addition to what is covered by a warranty or maintenance contract are taxable if the service is taxable.

Only parts (not labor) are subject to tax when a nontaxable service is performed, but the labor charge must be separately stated.

Sales Tax Exemption Certificates

A manufacturer does not need a sales tax permit to claim exemption. See more details about sales tax exemption certificates.

Purchasing Exempt Machinery, Equipment, and Computers

A manufacturer must give a Sales Tax Exemption Certificate (pdf) to the seller when purchasing exempt machinery, equipment, computers, and other materials used in the manufacturing process.

Manufacturers who repeatedly make the same purchase from the same supplier may give the supplier a single exemption certificate to cover multiple transactions. Called a “blanket certificate,” it should be updated every three years or sooner if needed so that it remains accurate and complete.

Selling Product for Resale

Manufacturers who sell the tangible personal property they produce must ask for exemption certificates when selling their products to other businesses that will then resell them.

Using Tax Free Items from Inventory

When a manufacturer buys an item tax free and then removes it from inventory for uses other than resale and processing, the manufacturer is responsible for reporting and paying the tax to the Department.

Urban Revitalization

Urban revitalization property and industrial machinery may also be exempt from tax. This property must meet other requirements in order to be exempt. Contact the Iowa Department of Economic Development at 1-800-532-1216 for more information about the type of property and the qualifications. For tax information, contact the Iowa Department of Revenue.

Items That Do Not Qualify for Exemption

Other examples of taxable items can be found in the sections above.


Taxable: Supplies purchased prior to July 1, 2016

See Replacement Parts and Supplies.

Property Tax Purposes


Machinery, equipment, and computers purchased by a business that is centrally assessed by the Department for property tax purposes are taxable.

Examples of this type of business include electric, gas, and water companies, railroad, telephone, pipeline, and electric transmission line companies.

Hand Tools


Tools that can be held in the hand or hands and are powered by human efforts.

Point-of-Sale Equipment


Input, output, and processing equipment used to conclude a sale and to record or process information about a sale transaction at the time the sale takes place. The equipment is normally located at a counter, desk, or other specific point where a sale transaction occurs.

Vehicles Subject to Registration


Vehicles are subject to a one-time registration fee at the rate of 5% on the purchase price unless directly and primarily used in recycling or reprocessing of waste products.

Not a Manufacturer


A business may be engaged in processing, but is not a manufacturer. Examples include restaurants, retail bakeries, food stores, and blacksmith shops.



See Replacement Parts and Supplies.

Repair – Labor


  • Repair of machines of all kinds
  • Labor charges

There is no exemption for labor used to repair machines. If there is a lump sum billing for both labor and material, the entire amount is subject to tax.

Electricity – Appendix A

Determine the percentage used in processing

The following method may be used to determine the percentage of electricity used in processing. We suggest that conservative exempt estimates be made to avoid future liability for sales tax. To calculate use for a new business, an existing similar business may be willing to share its information if not in direct competition with your business.

First, the base period for the calculations must be selected.

Ordinarily, 12 prior months are used as the base period. However, individual circumstances can dictate that a shorter or longer period be used or that some 12-month period other than that immediately prior should be used.


Company A manufactures its product in a factory that has no windows and is heavily insulated. The factory always runs 40 hours per week, 52 weeks per year. Because of these and other circumstances, Company A’s electrical usage does not vary significantly from month to month, and it is easy to document this. Company A can calculate its percentage of exempt use based on a 1-month period rather than a 12-month period.

Company B manufactures widgets. The “economic cycle” for widget production is, on the average, 36 months long. During this time there are times when, for months at a time, the plant will operate three shifts. At other times, for weeks at a time, the entire factory will shut down and its personnel will be laid off. The only accurate way to determine the exempt percentage of electricity used is to calculate the use over the entire economic cycle. Therefore, 36 months, rather than 12 months, is the base period.

Second, calculate kilowatts used per hour by each electrical device.

Kilowatts consumed per hour may be listed on the device itself. If not, formulas can be used to determine this information.


If using energy efficient lights, appropriate adjustments to calculations should be made.

For incandescent bulbs, add rated wattages and divide by 1,000. Multiply by the total number of hours which the light is used during the base period.

Watts divided by 1,000 = Kilowatts per hour x hours operated in base period = Total

For fluorescent lights, add rated wattages plus an additional 20% of rated wattages and divide by 1,000. Multiply by the total number of hours which the light is used during the base period.

Watts + 20% of Watts divided by 1,000 = Kilowatts per hour x hours operated in base period = Total

Devices other than lights

For these devices, use the wattage rating given by the manufacturer and divide by 1,000. Multiply by the total number of hours which the device is used during the base period.

Watts divided by 1,000 = Kilowatts per hour x  hours operated in base period  =  Total

Example 1

A machine used in processing consumes 20,000 watts per hour of operation. It is operated 40 hours per week for 50 weeks during a 12-month period. The machine does not operate when the factory closes for two weeks for employee vacation.

(1) 20,000 watts ÷ 1,000 = 20 kilowatts

(2) 20 x 40 hours per week = 800 kilowatts per week

(3) 800 x 50 weeks per 12 months = 40,000 kilowatts per 12-month period

(4) 40,000 kilowatts are exempt for the 12-month period for this machine

Example 2

A machine uses 30 kilowatts per hour of operation. During a 12-month base period, the machine is used in processing 200 hours per month for three months. The calculation for a 12-month period is as follows:

(1) 30,000 watts ÷ 1,000 = 30 kilowatts per hour

(2) 30 x 200 hours per month = 6,000 kilowatts per month

(3) 6,000 x 3 months per 12 months = 18,000 kilowatts per 12-month period

(4) 18,000 kilowatts are exempt for the 12-month period for this machine

Example 3- Chart failed to load

Alternatives to the previous method of determining exempt usage of electricity

If only one meter measures both exempt and nonexempt use of electricity, the manufacturer should seriously consider separate meters. This choice is especially practical if all exempt use results from the activities of one machine.

It may be helpful to contact the manufacturer of the machine used in processing. Often, the manufacturer has a study available which gives a more accurate measure of the machine’s use of electricity than the formulas. This is especially true about large electric motors.