Did replacement pulp-making equipment qualify for Florida's pollution-control exemption when it also performed an integral production function?

Plain-English summary

Florida exempted the pulp mill's replacement brownstock-washing systems and new oxygen-delignification system as pollution-control equipment. The equipment participated directly in manufacturing, but its primary installation purpose was to meet pollution limits imposed through a DEP-implemented rule, NPDES permit, and administrative order.

The kraft pulp and paper facility needed to comply with the federal EPA “Cluster Rule,” enforced through Florida's environmental permitting system. Instead of only capturing pollution after production, that rule required process changes that reduced the creation of air and water pollutants in the first place.

Production equipment could still be pollution-control equipment

Brownstock washing removed lignin before bleaching, and oxygen delignification assisted that removal. Better lignin removal reduced the amount of chlorine dioxide needed in bleaching; chlorine dioxide could not be reused and had to be discharged to the sewer.

Although those systems were integral parts of producing pulp and paper, section 212.051 focused on whether equipment was used primarily to control or abate pollution and installed to meet a law implemented by, or permit condition issued by, the Department of Environmental Protection.

Florida found that standard satisfied.

Compliance was the project's primary purpose

The existing system functioned, but it did not remove enough lignin to keep pollutants within the newly allowable quantities. Without the new processes, the taxpayer said it would have to close the facility.

The project might reduce chemical costs, but the overall investment had a negative financial return. Those facts supported the finding that environmental compliance—not ordinary operational profit—was the primary purpose.

The exemption was limited to identified systems and certification

The ruling covered the replacement and installation items enumerated in Exhibit B of the request. Section 212.051 also required the purchaser to sign a certificate stating that the exempt property was required to meet the environmental law or permit condition.

What this means for you

Manufacturers

Equipment does not lose pollution-control status merely because it also performs a production function. Document why the project is being installed and which legal or permit requirement drives it.

Environmental and plant-engineering teams

Connect each claimed item to the compliance project, permit language, administrative order, and expected pollutant reduction. Keep the required purchaser certification with procurement records.

Accountants and tax professionals

Evaluate primary purpose, not just physical location in the production stream. Incidental operating savings did not defeat the exemption here, but a primarily productivity-driven project could present different facts.

Common questions

Q: Was the equipment part of the manufacturing process?
A: Yes. Florida still found it exempt because pollution-control compliance was the primary purpose of replacement and installation.

Q: What pollutants did the process changes address?
A: Better lignin removal reduced the need for chlorine dioxide, a regulated chemical discharged from the bleaching process.

Q: Did possible chemical-cost savings defeat the exemption?
A: No. The project had a negative financial return overall, and compliance remained the primary purpose.

Q: Was a purchaser certificate required?
A: Yes. The quoted statute required a signed statement that the property was needed to meet the law or permit condition.

Citations and references

• Fla. Stat. § 212.051(1) — exemption for qualifying pollution-control facilities, equipment, machinery, chemicals, and replacements
• Fla. Stat. § 403.031 — waters of the state referenced by the permit requirements
• Fla. Stat. § 403.088(2)(f) — authority cited for the administrative order
• Fla. Stat. § 403.0885 — NPDES permitting process

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-036

Original ruling text

SUMMARY

QUESTION: Whether the Taxpayer's replacement of brownstock
washing and oxygen delignification equipment, processes,
and systems, as enumerated in Exhibit B of the TAA request,
and required for compliance with the EPA Cluster Rule,
NPDES permit, and DEP administrative order meet the
requirements for exemption.

ANSWER - Based on Facts Below: Although the brownstock
washing systems and the oxygen delignification system are
integral parts of the pulp and paper production process,
the primary purpose of their current replacement or
installation is to meet a law implemented by, or a
condition of a permit issued by, the Florida Department of
Environmental Protection. Accordingly, the replacement and
installation of these systems, as enumerated in Exhibit B
of the TAA request, will qualify for exemption as pollution
control equipment pursuant to s. 212.051(1), F.S.

Jun 09, 2004

Re: Technical Assistance Advisement 04A-036
Sales and Use Tax
Exemption on Equipment for Pollution Control
Section 212.051, F.S.

Dear :

This is in response to your letter of April 8, 2004, which
requests the issuance of a Technical Assistance Advisement
concerning the applicability of an exemption from sales and use
tax pursuant to s. 212.051(1), F.S., to purchases of machinery
and equipment by your company (hereinafter "Taxpayer").

BACKGROUND

Taxpayer operates a bleached and unbleached kraft pulp and

paper facility in Florida. This facility operates under an
Industrial Wastewater Facility Permit XXX issued by the Florida
Department of Environmental Protection (DEP). This permit also
serves as the federal National Pollutant Discharge Elimination
System (NPDES) permit, as that permitting process is described
in s. 403.0885, F.S. The standards, rules, and regulations as
established by the federal Environmental Protection Agency (EPA)
are enforced, implemented, and permitted by DEP.

In order for Taxpayer to continue discharging treated
wastewater into "waters" of the state as defined in s. 403.031,
F.S., Taxpayer is required to make certain changes to its
production process as specified in the NPDES permit and the
accompanying administrative order (039-NE) that has been issued
pursuant to s. 403.088(2)(f), F.S. The current NPDES permit
that has been issued to Taxpayer by DEP specifically states that
"[t]he Permittee [Taxpayer] shall comply with the Cluster Rule
discharge requirements for bleached kraft mills...."

Traditional "end-of-pipe" pollution control functions focus
on capturing and recycling or destroying pollutants that have
been formed in the production process. Rules have now been
introduced by the EPA that depart from the traditional pollution
control methods. These rules are commonly referred to as the
"Cluster Rule." The term "cluster" refers to the two areas
regulated by the rules, specifically, air and water. The
Cluster Rule mandates significant, broad-scale changes to the
paper making process, including new production methods,
equipment, and chemicals. Instead of just regulating the types
and quantities of pollutants that may be discharged by a
manufacturing facility, the goal of the Cluster Rule is to
reduce the generation or initial creation of pollutants in the
manufacturing process itself. Accordingly, Taxpayer must make
changes to the way that it produces pulp and paper.

Required changes to Taxpayer's manufacturing processes have
previously affected the bleach plant operations. That issue has
already been addressed for Taxpayer in TAA 00A-031, dated June
15, 2000. The current NPDES permit and administrative order now
affect the processes immediately prior to the bleaching stage of
the pulping cycle. These processes are the brownstock washing

and oxygen delignification systems.

Brownstock refers to the lignin, which is brown in color,
that has separated from the wood chips during the cooking
process. Brownstock washing is a multistage process to remove
the lignin before the cellulose pulp is sent to the bleaching
stage. As a part of the brownstock washing system, oxygen
delignification also helps in the removal of lignin. The better
the removal of the lignin, the lesser the amount of chemicals
that will have to be used in the bleaching process. One of the
chemicals used in the bleaching process, chlorine dioxide,
cannot be reused and must be discharged to the sewer. Chlorine
dioxide is a pollutant that is regulated by the EPA and DEP.

ISSUE

Whether the replacement brownstock washing and oxygen
delignification equipment, processes, and systems, as enumerated
in Exhibit B of the TAA request, required for compliance with
the EPA Cluster Rule, NPDES permit, and administrative order
meet the requirements for exemption under the provisions of s.
212.051, F.S.

RELEVANT AUTHORITY

The following passage from the Florida Statutes (F.S.) is
pertinent to the exemption issue in this advisement.

Section 212.051, F.S., provides in part:

Equipment, machinery, and other materials for pollution
control; not subject to sales or use tax. -

(1) Notwithstanding any provision to the contrary, sales,
use, or privilege taxes shall not be collected with respect
to any facility, device, fixture, equipment, machinery,
specialty chemical, or bioaugmentation product used
primarily for the control or abatement of pollution or
contaminants in manufacturing, processing, compounding, or
producing for sale items of tangible personal property at a
fixed location, or any structure, machinery, or equipment

installed in the reconstruction or replacement of such
facility, device, fixture, equipment, or machinery. To
qualify, such facility, device, fixture, equipment,
structure, specialty chemical, or bioaugmentation product
must be used, installed, or constructed to meet a law
implemented by, or a condition of a permit issued by, the
Department of Environmental Protection; however, such
exemption shall not be allowed unless the purchaser signs a
certificate stating that the facility, device, fixture,
equipment, structure, specialty chemical, or
bioaugmentation product to be exempted is required to meet
such law or condition.

DETERMINATION

Taxpayer will be spending millions of dollars to install
the replacement brownstock washing systems and the new oxygen
delignification system. Although these systems may result in
some operational cost savings due to a reduction in chemical
costs, the projects will have a negative financial return.
While functioning adequately at this time, the current
brownstock washing system does not remove as much lignin as a
modern system. This results in the use and discharge of
polluting chemicals, which exceed currently allowable
quantities. The quantity of pollutants must be reduced in order
to be in compliance with the Cluster Rule, NPDES permit, and
administrative order as mandated by DEP. Without the new
processes and systems, Taxpayer would be forced to close the
facility.

Although the brownstock washing systems and the oxygen
delignification system are integral parts of the pulp and paper
production process, the primary purpose of their current
replacement or installation is to meet a law implemented by, or
a condition of a permit issued by, the Department of
Environmental Protection. Accordingly, the replacement and
installation of these systems, as enumerated in Exhibit B of the
TAA request, will qualify for exemption as pollution control
equipment pursuant to s. 212.051(1), 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 upon 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 from that which is 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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