Was renewable natural gas produced by processing biogas from organic decomposition subject to Florida's gas severance tax?

Plain-English summary

Producing and processing the described renewable natural gas was not subject to Florida's gas severance tax.

The Department explained that the tax applies when natural gas is extracted or withdrawn from geological formations below Florida's surface. The renewable gas here began as biogas created by the decomposition of organic material, including processes associated with landfills, livestock operations, and wastewater treatment, and was then processed to pipeline-quality standards.

Because that product was manufactured through decomposition and processing rather than severed from a geological formation, it was outside the tax imposed by section 211.025.

What this means for you

Chemical similarity to conventional natural gas was not enough to trigger the severance tax. The source and production method mattered: gas recovered from the described organic-waste processes was not treated as subsurface gas extraction.

Common questions

Was the renewable natural gas subject to Florida severance tax? No.

Why not? The Department said Florida's statute taxes gas severed from geological formations, while the described gas came from organic decomposition and technological processing.

Did the ruling decide sales tax on renewable-gas machinery? No. The facts mention a separate machinery exemption, but the requested ruling and conclusion concern severance tax.

Citations and references

• Fla. Stat. § 211.01(7) and (19).
• Fla. Stat. § 211.025.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 24A-005

Original ruling text

a 2 . .-
s Florida Department of Revenue Jim Zingale
E Technical Assistance and Dispute Resolution Executive Director
&

FLORIDA

5050 West Tennessee Street, Tallahassee, FL 32399 floridarevenue.com

QUESTION: Whether the production and processing of renewable natural gas is subject to
Florida’s severance tax.

ANSWER: The production and processing of renewable natural gas is not subject to Florida’s
severance tax.

January 10, 2024

Re: Technical Assistance Advisement — TAA #: 24A-005

. ‘i — (“Taxpayer”)
Severance Tax — Renewable Natural Gas

Sections 211.01, 211.025 - Florida Statutes (“F.S.”)

BP +:

This is in response to your letter dated PY requesting this Department’s
issuance of a Technical Assistance Advisement (“TAA”) pursuant to Section(s.) 213.22, F.S., and
Rule Chapter 12-11 F.A.C, Florida Administrative Code, regarding the matter discussed below.
Your request has been carefully examined, and the Department finds it to be in compliance with
the requisite criteria set forth in Chapter 12-11, F.A.C. This response to your request constitutes
a TAA and is issued to you under the authority of s. 213.22, F.S.

REQUESTED ADVISEMENT

Whether the production and processing of renewable natural gas is subject to Florida’s severance
tax.

FACTS

‘On a. Taxpayer submitted the revised TAA request via email.

Technical Assistance Advisement
January 10, 2024
Page 2

Taxpayer, a taxpayer association as defined in rule 12-11.002, F.A.C., was established in in
order to promote, protect and encourage the growth of the natural gas industry in the State of
a specific sales tax exemption for renewable natural gas (“RNG”) machinery and equipment. See
Section 24, Chapter 2023-157, Laws of Florida. This exemption applies to the purchase of
machinery and equipment primarily used in the production, storage, transportation,
compression or blending of RNG refined to a methane content of ninety percent or greater.

RNG is a pipeline-quality gas that is fully interchangeable with conventional natural gas and thus
can be used in natural gas vehicles. RNG is essentially biogas (the gaseous product of the
decomposition of organic matter) that has been processed to purity standards. Like conventional
natural gas, RNG can be used as a transportation fuel in the form of compressed natural gas or
liquefied natural gas. RNG can also be used to generate electricity and heat and is used as a
replacement for traditional natural gas to generate combined electricity and heating for power
plants. Currently, biogas is produced from three traditional sources:

Biogas from Landfills

Landfills are designated locations for disposal of waste collected from residential, industrial, and
commercial entities. Landfills are the third-largest source of human-related methane emissions
in the United States, according to the U.S. Environmental Protection Agency. In a landfill, the
digestion process takes place in the ground rather than in an anaerobic digester. As of August
2022, there were 538 operational LFG projects in the United States, according to the EPA.

GAS-EXTRACTION & 10 GRID
CLEANING EQUIPMENT
= \ TRANSFORMER

LANDFILL = GAS COLLECTION

| WELLS

GAS-EXTRACTION &
CLEANING EQUIPMENT

LANDFILL GAS COLLECTION

TRANSFORMER

| WELLS

Biogas from Livestock Operations
Biogas recovery systems at livestock operations can be used to produce RNG. Animal manure is

Technical Assistance Advisement
January 10, 2024
Page 3

collected and delivered to an anaerobic digester to stabilize and optimize methane production.
The resulting biogas can be processed into RNG and used to fuel natural gas vehicles or produce
electricity.

As of May 2022, there were about 330 anaerobic digester systems operating at commercial
livestock farms in the United States. Most of these facilities use biogas for electricity generation.

An anaerobic digester breaks down organic matter in the absence of oxygen. Anaerobic digestion
for biogas production takes place in a sealed vessel called a reactor, which is designed and
constructed in various shapes and sizes specific to the site and feedstock conditions. These
reactors contain complex microbial communities that break down (or digest) the waste and
produce resultant biogas and digestate (the solid and liquid material end-products of the AD
process) which is discharged from the digester. The reactor also contains a fluid zone as shown
in the following diagram.

Anaerobic Digestion Process

=>
Ly

Substrate
inflow
Ground Ground
sludge ejection
pipe

pipe

Technical Assistance Advisement
January 10, 2024
Page 4

Biogas from Wastewater Treatment

Biogas can be produced by digesting the solids removed in the wastewater treatment process.
According to EPA estimates, this biogas potential is about 1 cubic foot of digester gas per 100
gallons of wastewater. Energy generated at U.S. wastewater treatment plants could potentially
meet 12% of the national electricity demand, according to a study released by the National
Association of Clean Water Agencies, the Water Environment Research Foundation, and the
Water Environment Federation.

There are more than 16,000 WWTPs in the United States, but only about 1,200 have anaerobic
digesters and of those, 860 have the equipment to use their biogas on site.

LAW AND DISCUSSION

Section 211.025, F.S., provides in part:

An excise tax is hereby levied upon every person who severs gas in the state for sale,
transport, profit, or commercial use. Except as otherwise provided in this part, the tax
shall be levied on the basis of the entire production of gas in this state, including any
royalty interest. Such tax shall accrue at the time the gas is severed and shall be a lien on
production regardless of the place of sale, to whom sold, or by whom used and regardless

of the fact that delivery of the gas may be made outside the state.
KK KK

“Gas” means all natural gas, including casinghead gas, and all hydrocarbons not defined as oil,
but excludes any hydrogen sulfide gas or sulfur contained, produced, or recovered from such
hydrogen sulfide gas. “Sever” means to extract or withdraw any taxable oil, gas, or sulfur product
from below the surface of the soil or water of this state by natural or mechanically enforced flow;
to produce or recover sulfur from hydrogen sulfide gas; to withdraw from any natural or artificial
surface reservoir or water surface, by any means whatsoever, any taxable product upon which
tax imposed under this part has not been paid; or to recover any escaped taxable product upon
which tax imposed under this part has not been paid. See s. 211.01(7) and (19), F.S.

The natural gas the severance or production of which the Legislature sought to tax is that brought
to the surface in the usual sense, that is, from a geological formation wherein gas is entrapped
beneath the surface of the earth. The excise tax on gas is levied upon those engaged in the
business of severing or producing natural gas from such formations.

Florida law doesn’t impose an excise tax on products merely because they are composed of the
same chemical structure and elements as those naturally occurring. Section 211, Part 1, F.S.,

Technical Assistance Advisement
January 10, 2024
Page 5

imposes the tax on producers? of natural gas who sever the gas from geological formations, and
does not impose the tax on persons who essentially manufacture the product using technology
to take advantage of the natural decomposition of refuse placed in man-made containment cells.

Based on the above, the renewable natural gas produced by the process described in your
request is not deemed to be severed or produced within the meaning of s. 211, Part 1, F.S., and
the producer would not be subject to the severance tax levied under s. 211.025. F.S.

CONCLUSION
The production and processing of renewable natural gas is not subject to Florida’s severance tax.

This response constitutes a TAA under s. 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 s.
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 backup documents are
public records under Chapter 119, F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be deleted before public disclosure. In
an effort to protect confidentiality, we request you provide the undersigned with an edited copy
of your request for TAA, the backup material and this response, deleting names, addresses and
any other details which might lead to identification of the Taxpayer. Your response should be
received by the Department within ten (10) days of the date of this letter.

If you have any further questions with regard to this matter and wish to discuss them, you may
contact me directly at (850)717-6839.

Sincerely,

Xiaoxi Miao

Tax Law Specialist

Technical Assistance & Dispute Resolution
(850)717-6839

• “Producer” means any person who owns, controls, manages, or leases any oil or gas property or oil or gas well or
  any person who produces in any manner any taxable product, including any person owning any royalty or other interest
  in any taxable product or its value, whether the taxable product is produced by, or on behalf of, such person under a
  lease contract or otherwise. See s. 211.01(16) F.S.

Technical Assistance Advisement
January 10, 2024
Page 6

Record ID: 7001069104

Technical Assistance Advisement
January 10, 2024
Page 7
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Notification number: 7001069104

Respondent code: 44

Tax type: Severance Tax - Gas & Sulfur
Correspondence type: Technical Assistance

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Thank you.