Did a 14.4-mile pipeline connecting two desalination facilities qualify for Florida's industrial machinery and equipment exemption?

Plain-English summary

The 14.4-mile desalination pipeline qualified as exempt industrial machinery and equipment. It connected two processing facilities and transported partially treated seawater, but it also mixed required chemicals into the water during transit.

That mixing was a significant, indispensable production function, so the pipeline was integral to converting seawater into potable water for sale. Although it extended beyond a conventional plant parcel, it was permanent rather than portable and had its own fixed linear location.

What this means for you

Long-distance transport equipment can qualify when it performs an essential processing function within one continuous production line. A pipeline used only to move finished or untreated product could present a different case.

Common questions

Q: Was the pipeline exempt? Yes.

Q: Why was it integral? It mixed required treatment chemicals and production could not finish without it.

Q: Did its 14.4-mile length prevent fixed-location treatment? No.

Q: What product was produced for sale? Potable water.

Citations and references

• Fla. Stat. § 212.08(5)(b) — industrial machinery and equipment exemption
• Fla. Admin. Code r. 12A-1.096(1)(a), (b), (c) — fixed location, industrial equipment, and integral function
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01A-070

Original ruling text

SUMMARY

QUESTION: A water desalination company has been approved
for an exemption from sales and use tax on purchases of
machinery and equipment pursuant to s. 212.08(5)(b), F.S.
The water company will produce potable (drinkable) water
from seawater for sale to a local water authority. Due to
space constraints, the entire desalination process cannot
take place at a single facility. Partially treated water

must be piped to a second facility 14.4 miles away for
completion of the desalination process. Will the pipeline
connecting the two processing facilities qualify for

exemption as machinery and equipment under the provisions
of s. 212.08(5)(b), F.S.?

ANSWER - Based on Facts Below: Machinery and equipment

qualifying for exemption under s. 212.08(5)(b), F.S., must
be integral to the production process, used at a fixed
location, and used to produce tangible personal property
for sale. In addition to the function of transporting the
partially treated water from the first to the second

facilities, the pipeline is used to mix in certain

chemicals that are required for the treatment process.
This is a "significant function within the production
process" and potable water could not be produced without
the mixing in of the chemicals. Accordingly, the pipeline
is "integral to" the production process as that phrase is
defined by Rule 12A-1.096(1)(c), F.A.C. Notwithstanding its
linear nature, the pipeline is used at a fixed location.

The finished (potable) water is tangible personal property
that is sold. Therefore, the pipeline qualifies for
exemption under s. 212.08(5)(b), F.S., since it fulfills

the general criteria for that exemption.

Nov 19, 2001

Re: Technical Assistance Advisement 01A-070

Sales and Use Tax

Water Pipeline
Section 212.08(5)(b), F.S.
Rule 12A-1.096, F.A.C.

Dear :

This is in response to your request for a Technical
Assistance Advisement (TAA) regarding the construction of a
water pipeline by your company, hereinafter referred to as

"Water Company."

BACKGROUND

Water Company has applied for and been granted an exemption
under the provisions of s. 212.08(5)(b), F.S. The exemption
will allow Water Company to make tax exempt purchases of
machinery and equipment for the construction of a water
desalination plant. The department has previously determined in
TAA 97A-072, dated November 7, 1997, that the exemption pursuant
to s. 212.08(5)(b), F.S., is available to a business engaged in
the desalination of water. In that advisement, it was
determined that the exemption for a desalination plant would
generally begin at the point where the seawater intake equipment
was located and would continue on through to the finished
product water storage tank. The pipeline, which transfers the
finished (potable) water from the finished product water storage
tank to the local water authority, occurs after the production

process and does not qualify for exemption.

The activities at Water Company's first facility begin with
the seawater intake. From the intake, the seawater proceeds
through a pretreatment process. Essentially, this part of the
filtration process removes organic matter and other larger sized
material from the seawater. Next, the seawater enters a reverse
osmosis process that uses high pressure to force the water
through semi-permeable membranes leaving the salt and other

minerals behind in a seawater concentrate.

Due to space constraints, Water Company's entire
desalination process cannot take place at a single location.

Following the reverse osmosis process at the first facility,

Water Company must pipe the partially treated water to a distant
second facility for completion of the water treatment process.
The pipeline connecting the first and second treatment
facilities is 42 inches in diameter and extends for a distance
of 14.4 miles. However, this pipeline does more than just
transport the partially treated water. Prior to entering the
pipeline, water quality stabilizers and pH adjusters, such as
lime, chlorine, and soda ash, are added to the water. The
interior walls and joint connections of the pipeline cause
turbulence in the water flow. As a result of this turbulence,
the additive chemicals are thoroughly mixed with the water by
the time the water reaches the second facility. If the
desalination process could take place at a single facility, the
water quality stabilizers and pH adjusters would still have to

be added in another processing step.

At the end of the 14.4-mile pipeline, the water enters
another processing tank, which is also owned by Water Company,
where the water is brought up to the quality standards
established by the local water authority. From this final
processing tank, the now potable water travels by a short

pipeline for delivery to the local water authority.

ISSUE

Whether the 14.4 mile long pipeline between the first and
second treatment facilities qualifies for exemption from Florida

sales and use tax pursuant to s. 212.08(5)(b), F. S.

RELEVANT AUTHORITY

The following passages from the Florida Statutes (F.S.) and
the Florida Administrative Code (F.A.C.) are pertinent to your

request for a Technical Assistance Advisement.

Section 212.08(5)(b), F.S., provides in part:

1. Industrial machinery and equipment purchased... for use
   in new businesses which manufacture, process, compound, or
   produce for sale items of tangible personal property at

fixed locations are exempt from the tax imposed by this

chapter...

6. For the purpose of the exemptions provided in
   subparagraphs 1. and 2., these terms have the following

meanings:

a. "Industrial machinery and equipment" ... shall be
construed by regulations adopted by the Department of
Revenue to mean tangible property used as an integral
part... of the manufacturing, processing, compounding, or

producing for sale of items of tangible personal

property...

Rule 12A-1.096, F.A.C., provides in part:

(1) Definitions - The following terms and phrases when used
in this rule shall have the meaning ascribed to them except

where the context clearly indicates a different meaning:

(a) "Fixed location" means being permanently affixed to one
location or plant site. The term also includes any

portable plant which is set up for a period of not less

than six months in a stationary manner so as to perform the
same industrial manufacturing, processing, compounding, or
production process that could be performed at a permanent
location or plant site. The geographical limits of the

fixed location for purposes of this rule are limited to the
immediate permanent location or plant site. Facilities or
plant units that are within the same building, or that are

on the same parcel of land if not contained in a building,

are considered to be one fixed location.

(b) "Industrial machinery and equipment" means tangible
personal property or other property with a depreciable life
of 3 years or more that is used as an integral part in the
manufacturing, processing, compounding, or production of

tangible personal property for sale....

(c) “Integral to" means that the machinery and equipment
provides a significant function within the production

process, such that the production process could not be

complete without that machinery and equipment.

DETERMINATION

The exemption provided under s. 212.08(5)(b), F.S., is
generally applicable to that machinery and equipment, which is
integral to the production process, beginning at the point where
the raw material (seawater) is received by the fixed location
and ending at the point where the tangible personal property is
in saleable form (potable water). The 14.4-mile pipeline is
located well within those general beginning and ending points.
In addition to the function of transporting the partially
treated water from the first to the second facilities, the
pipeline is used to mix in certain chemicals that are required
for the treatment process. This is a "significant function
within the production process" and potable water could not be
produced without the mixing in of the chemicals. It is
immaterial that the mixing occurs within a pipeline instead of a
standard processing tank. Accordingly, the pipeline is
"integral to" the production process as that phrase is defined
by Rule 12A-1.096(1)(c), F.A.C.

Both the exemption statute and the administrative rule
require the machinery and equipment to be used at a "fixed
location." The term fixed location is traditionally construed
to mean a single, specific building location or parcel of land.

In other words, someplace with an address. Machinery and
equipment that leave that fixed location, such as portable
equipment, usually do not qualify for the exemption. However,
portable equipment can qualify for exemption if it is set up for
a period of not less than six months in a stationary manner so
as to perform the same industrial manufacturing, processing,
compounding, or production process that could be performed at a
permanent location or plant site. The pipeline does leave the
traditional fixed location; however, it is obviously not

portable. The pipeline does have its own distinct fixed
location and it will not be removed anytime in the foreseeable
future. There is no specific requirement that machinery and
equipment must be located at a formal address, only that it is
used at a fixed location. Although the exemption statute and

the administrative rule do not contemplate linear fixed

locations like Water Company's pipeline site, there is no

express prohibition of a linear fixed location either.

In review, Water Company's pipeline performs an integral
function within the production process of turning seawater into
potable water. This production process is continuous and
unbroken from the first facility through the pipeline to the
second facility. Notwithstanding its linear nature, the
pipeline is used at a fixed location. Therefore, Water
Company's 14.4-mile pipeline is machinery and equipment that

qualifies for exemption pursuant to s. 212.08(5)(b), F.S.

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the Department
only under the facts and circumstances described in the request
for this advice as specified in Section 213.22, F.S. Our
response is predicated on those facts and the specific situation
summarized above. You are advised that subsequent statutory or
administrative rule changes, or judicial interpretations of the
statutes or rules, upon which this advice is based, may subject
similar future transactions to a different treatment than

expressed in this response.

You are further advised that this response, your request
and related documents are public records under Chapter 119,
F.S., which are subject to disclosure to the public under the
conditions of Section 213.22, F.S. Your name, address, and any
other details, which might lead to identification of the
taxpayer, must be deleted before disclosure. In an effort to
protect the confidentiality of such information, we request you
provide the undersigned with an edited copy of your request for
Technical Assistance Advisement, backup material and response

within fifteen days of the date of this advisement.

Sincerely,

Jeffery L. Soff
Tax Law Specialist
Technical Assistance and

Dispute Resolution

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