Nebraska Gov. Pete Ricketts recently signed into law Legislative Bill 595, enacting a new sales and use tax exemption for ethanol (ethyl alcohol) producers located in the state. The new law broadly exempts the sale, lease, or rental of and the storage, use or other consumption in the state of all catalysts, chemicals and materials used in the process of manufacturing ethyl alcohol and the production of coproducts. There are a large number of chemicals and other inputs used in ethanol manufacturing presumably included in the exemption such as yeasts, enzymes, demulsifies, corrosion inhibitors, sulfuric acid, and antibiotics, among others. The exemption is effective Oct. 1, 2021.
Legislative Bill 595 had widespread industry and legislative support. Many states provide sales and use tax exemptions for raw materials, ingredients, chemicals and other consumables used in manufacturing. However, manufacturing input exemptions in Nebraska are more narrow across many industries. Eliminating tax on manufacturing inputs is generally considered good tax policy as it avoids ‘tax pyramiding’ which occurs when sales tax is charged on the inputs and then also on sale of the final product. According to the fiscal notes of the bill, approximately $4.5 million in sales and use taxes was collected from ethyl alcohol manufacturing in 2019, with 20% of the tax collected attributable to enzymes, yeast and related products.
Nebraska ethanol producers should analyze their input purchases currently subject to sales and use tax to determine whether this exemption will apply beginning October 1. Taxpayers with questions should consult with their state and local tax adviser.