Do tanks for a natural-gas combined-cycle power plant qualify for Colorado's renewable-energy or manufacturing-machinery sales tax exemptions?

Plain-English summary

A vendor may furnish and install tanks (a demineralized-water tank and a cooling-tower tank) for a combined-cycle project at a natural-gas power plant in Colorado. A combined cycle captures the waste heat from a natural-gas turbine, turns it into steam, and runs a steam turbine to generate additional electricity. The vendor asked whether the tanks qualify for (1) the exemption for components used to produce AC electricity from a renewable energy source, or (2) the general manufacturing machinery exemption.

The Department's answers:

• Renewable-energy exemption — no. Colorado exempts components used to produce AC electricity from a renewable energy source (§ 39-26-724). But "renewable energy" (§ 40-1-102(11)) means energy from continuous or perpetually replenished resources whose use is sustainable indefinitely — sunlight, wind, geothermal, hydro, biomass, etc. Burning natural gas is not renewable: its supply is limited and not sustainable indefinitely. The fact that a combined cycle recaptures some thermal heat from the natural-gas combustion doesn't make it a renewable source. So the tanks don't qualify.
• Manufacturing machinery exemption — unresolved. Whether generating electricity is "manufacturing" was, at the time, before the courts: the Colorado Court of Appeals in Public Service Co. of Colorado v. Department of Revenue (No. 10CA1026) had concluded that electricity is tangible personal property and that equipment used to generate it is exempt under the manufacturing machinery exemption — but the case was on appeal to the Colorado Supreme Court and pending. The Department said it could not answer whether generation is manufacturing until the Supreme Court issued a final decision.

What this means for you

Power generators and energy businesses

Don't assume a heat-recovery / combined-cycle efficiency play makes a fossil-fuel plant "renewable" for § 39-26-724 — Colorado keys the exemption to the energy source, and natural gas isn't renewable no matter how efficiently waste heat is reused. For genuinely renewable sources (sun, wind, geothermal, hydro, biomass), the component exemption is in play.

Equipment vendors

If you sell tanks, turbines, or other components into a generation project, the renewable-vs-fossil source determines the § 39-26-724 exemption. The separate manufacturing-machinery question for generation equipment was open as of this letter — pending the Colorado Supreme Court's review of Public Service Co. Confirm the current state of that law before relying on it.

Accountants and tax professionals

Two distinct exemptions: § 39-26-724 (renewable-source AC electricity components) defined by § 40-1-102(11) — which excludes natural gas for lack of indefinite sustainability — and the general manufacturing machinery exemption, whose application to electricity generation the Department declined to resolve while Public Service Co. v. Dept. of Revenue (10CA1026) was pending at the Colorado Supreme Court. (Note the manufacturing-machinery exemption itself appears in the cluster at [[gil-15-004-contract-manufacturing]] and [[gil-15-013-asset-acquisition-through-foreclosure-and-manufacturing-machinery-in-a]].)

Common questions

Q: Does a natural-gas combined-cycle plant qualify for Colorado's renewable-energy exemption?
A: No. Natural gas isn't a renewable energy source — its supply is limited and not sustainable indefinitely — and recapturing waste heat doesn't change that, so the components aren't exempt under § 39-26-724.

Q: Why doesn't capturing waste heat count as renewable?
A: The exemption depends on the underlying energy source. The source here is burning natural gas, which is not perpetually replenished, so improved efficiency from heat recovery doesn't make it renewable.

Q: Is electricity-generation equipment exempt as manufacturing machinery?
A: The Department couldn't say. A Court of Appeals decision (Public Service Co.) had found generation equipment exempt, but it was on appeal to the Colorado Supreme Court and unresolved when this letter issued.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, is not binding on the Department, and makes no determination on any specific facts. It also doesn't cover self-collected home-rule city taxes.

Citations and references

Statutes:
- § 39-26-104(1)(a), C.R.S. (sales tax on tangible personal property, not services)
- § 39-26-724, C.R.S. (exemption for components producing AC electricity from a renewable energy source)
- § 40-1-102(11), C.R.S. (definition of "renewable energy")

Cases and rules:
- Public Service Co. of Colorado v. Department of Revenue, No. 10CA1026 (Colo. App.; then pending before the Colorado Supreme Court)
- Department Rule 24-35-103.5 (GIL / PLR procedure)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-14-006.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-14-006
April 28, 2014
XXXXXXXXXXXXXXX
Attn: XXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: Alternating Current Electricity
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXXXXXX (“Company”) a request for guidance
regarding the applicability of sales and use tax on components used in creating alternating
current electricity at a power plant in Colorado.
The Colorado Department of Revenue (“Department”) issues general information letters and private
letter rulings. A general information letter provides a general overview of the relevant tax issues
and is not binding on the Department. A private letter ruling provides a specific determination for a
specific set of facts, is binding on the Department but not on the taxpayer, and requires payment of
a fee. For more information about general information letters and private letter rulings, please see
Department Rule 24-35-103.5 at www.colorado.gov/revenue/tax > Tax Library > Rulings.
The Department initially treats your request as one of a general information letter. If you would like
the Department to issue a private letter ruling on the issues you raise, you can resubmit a request
and fee in compliance with Department Rule 24-35-103.5. It is important to remember that general
information letters, such as this one, are general discussions of tax law and are not a determination
of the tax consequence of any particular action or inaction.
Issue
1. Is certain equipment used in a natural gas power plant in Colorado eligible for the exemption
to components used in the production of alternating current electricity from a renewable
energy source?
2. Are components used in creating alternating current electricity at a power plant in Colorado
eligible for the general manufacturing machinery exemption?
Background
Company may furnish and install tanks to be part of a combined cycle project at a power plant in

Colorado. A combined cycle is an assembly of heat engines that work in tandem from the same
source of heat. More specifically, the excess waste heat from the first natural gas turbine engine is
captured and converted to steam, which powers a steam turbine to generate additional electricity.
The overall net efficiency of the system may be increased by 50 to 60 percent. The tanks furnished
by Company will only be used in the steam turbine generation. The two tanks Company will furnish
to the power plat include a demineralized water tank and a cooling tower tank, which are integral to
combined cycle process.
Discussion
Colorado levies sales tax on the sale, use, storage or rental of tangible personal property, but
does not generally levy sales tax on the sale of services.1 However, Colorado exempts from
sales tax components used in the production of alternating current electricity from a renewable
energy source.2
"Renewable energy" means useful electrical, thermal, or mechanical energy
converted directly or indirectly from resources of continuous energy flow or that
are perpetually replenished and whose utilization is sustainable indefinitely. The
term includes, without limitation, sunlight, the wind, geothermal energy,
hydrodynamic forces, and organic matter available on a renewable basis such as
forest residues, agricultural crops and wastes, wood and wood wastes, animal
wastes, livestock operation residue, aquatic plants, and municipal wastes.3
The definition of “renewable energy” does not include burning of natural gas. Natural gas
is not perpetually replenished and the use of the natural gas is not sustainable indefinitely
because its supply is limited. The fact that a combined cycle is able to capture some of
the thermal heat from the combustion of natural gas does not, itself, make it a renewable
energy source.
Company also asks whether the tanks Company sells for the combined cycle system
qualify for the manufacturing machinery exemption. The Public Service Company of
Colorado v Department of Revenue of the State of Colorado, No. 10CA1026, in which the
Colorado Court of Appeals concluded that the sale of electricity is tangible personal
property and equipment used to generate the electricity is exempt under the
manufacturing machinery exemption. The court of appeals decision was appealed to the
Colorado Supreme Court where it is pending. The Department is unable to provide an
answer as to whether the generation of electricity is manufacturing until the Colorado
Supreme Court has made a final decision.
Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on
state taxes issues. However, the Department does not make a specific determination here on any
of the issues raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter
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§39-26-104(1)(a), C.R.S. You can view statutes on the Department’s website at www.colorado.gov/revenue/tax

tax library > statutes.
§39-26-724, C.R.S.
§40-1-102 (11), C.R.S.

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does not address sales and use taxes administered by home-rule cities and home-rule counties.
You may wish to consult with local governments which administer their own sales or use taxes
about the applicability of those taxes. Visit our web site at www.colorado.gov/revenue/tax for more
information about state and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter
will be made public within 60 days of the date of this letter. Please let me know in writing within that
60 day period whether you have any suggestions or concerns about this redacted letter.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

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