Indiana Restaurants May Be Missing a Valuable Sales Tax Exemption
Published on by Chaleise Fleming in Restaurants, Tax Services
- Indiana restaurants may qualify for a sales tax exemption on utilities used directly in food production, potentially reducing costs for electricity, gas, water, and steam.
- A simplified exemption allows qualifying businesses to claim a flat 50% exemption on electricity when at least 50% of the electricity from a single meter is used for qualifying food preparation.
- The traditional utility usage study may result in greater savings for some restaurants by supporting a higher exemption percentage and covering utilities beyond electricity.
- Qualifying businesses may be able to recover sales tax paid during the prior 36 months, creating an opportunity for refunds in addition to future savings.
In Indiana, utilities such as electricity, gas, water, and steam are generally subject to sales tax. However, many restaurants and food preparation businesses may qualify for an Indiana utility sales tax exemption. For businesses with significant utility costs, the savings can be substantial.
There are two options for Indiana restaurants seeking a utility sales tax exemption:
The traditional use exemption
Indiana provides a utility sales tax exemption for utilities used directly in the production of food. That means utilities that power food preparation equipment may qualify. Examples include ovens, grills, stovetops, mixers, and other food preparation equipment.
Utilities used for storing or preserving food do not qualify. For example, refrigerators, freezers, and other storage equipment would be excluded.
To claim this exemption, a business must complete a utility usage study to determine what portion of its utility usage is related to food production.
This exemption is claimed by filing Form ST-200 with the Indiana Department of Revenue.
Simplified 50% electricity exemption
Effective January 1, 2025, Indiana introduced a simplified exemption option for qualifying businesses. If a business’s electricity goes through a single meter and at least 50% is used for qualifying food preparation, the business can take a flat 50% sales tax exemption on the metered electricity.
Unlike the traditional exemption, this option applies only to electricity. Gas, water, and steam are not eligible under the simplified method.
To qualify, a business must receive at least 75% of its receipts from the sale of prepared food. Many traditional restaurants will meet this threshold. Bakeries, cafes, and food trucks may also qualify if at least 75% of their gross receipts come from prepared food.
This exemption is claimed using Form ST-200R.
Which option is best?
Both utility exemptions can offer significant benefits to qualifying businesses. The best option depends on the business’s specific operations and utility usage. While the simplified exemption offers an easier path to a 50% electricity exemption, some restaurants may benefit from conducting a full utility usage study. A study may support a larger exemption percentage and exemptions for utilities beyond electricity.
Both sales tax exemptions may also provide a refund opportunity. Businesses can generally request refunds of sales tax paid on qualifying utilities during the prior 36 months if they qualify for the exemption.
Many restaurants are unaware that this utility sales tax exemption exists or assume it’s applied automatically. If you’re unsure whether your food preparation business qualifies or whether the exemption has already been applied to your utility bills, it’s worth a second look. The savings can add up quickly, but only if the proper forms are in place.
If you have questions about whether your business qualifies or which exemption may be the best fit, we’re here to help. Contact us today for a free consultation with one of our top sales tax compliance pros.
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