Did Florida's electrical-generation machinery exemption cover qualifying equipment leased with an entire cogeneration plant?

Subject

Machinery and Equipment for Generation of Electrical Energy

Plain-English summary

The lease could preserve the sales-tax exemption for qualifying electrical- and steam-generation machinery, but only if those assets and their lease charges were separately described and itemized and the lessee completed the required notarized use affidavit. The exemption followed qualifying use rather than requiring the equipment owner to operate it directly.

The rest of the plant lease remained taxable. Real property was taxable as a real-estate lease, and machinery used to provide water-heating service had no exemption. If qualifying machinery was not separately itemized or the affidavit procedure was not followed, tax applied to the lease's gross proceeds.

What this means for you

An exempt-use component inside a mixed plant lease did not exempt the whole transaction. The contract and affidavit had to isolate the qualifying generation equipment from taxable real estate and nonqualifying machinery.

Common questions

Q: Could a lessee claim the generation-equipment exemption? Yes. The ruling treated a lease as a purchase-like interest and said the exemption was based on use, not owner identity.

Q: Was water-heating machinery exempt? No.

Q: What happened if the lease did not itemize the exempt equipment? The entire gross lease proceeds were taxable.

Citations and references

• Fla. Stat. §§ 212.02(16)(a), 212.031(1)(a), 212.05, 212.08(5)(c) — sales, leases, and energy machinery
• Fla. Stat. §§ 212.085, 212.21(2) — affidavit penalties and exemption conditions
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-006

Original ruling text

Jan 29, 1993

RE: Technical Assistance Advisement 93A-006
Sales and Use Tax
Machinery and Equipment for Generation of Electrical Energy
Section 212.08(5)(c), F.S.

Dear :

This is in response to your letter of November 3, 1992,
wherein you requested a supplemental technical assistance
advisement regarding the Florida sales and use tax consequence
of the transactions described in your letter. Your letter
states in pertinent part:

"FACTS

"XXX (`Owner') is a Florida limited partnership. Owner
previously obtained a Technical Assistance Advisement (TAA

91A-012R) dated July 16, 1991, a copy of which is attached for

your reference (the 1991 TAA'). As stated in the 1991 TAA, Owner will own a coal fired cogeneration power facility (thePlant') located in the XXX.

"The Owner's general partner is (XXX'). All of the issued and outstanding stock of XXX is currently owned by XXX. A prospective purchaser (Buyer') proposes to acquire all of the
issued and outstanding stock of XXX. In connection with the
revised ownership structure, Buyer may cause Owner to enter into
a lease agreement (the Lease') under which the Plant would be leased to a third party to be determined (Y').

"Under the revised ownership structure and Lease, Y would
be assigned the electricity purchase and sale contract with
(XXX') and the water heating service contract with XXX (Corporation'), both of which are described in the 1991 TAA.
Upon termination of the Lease, possession and operation of the
Plant would revert to Owner. Y's operation of the Plant would
be done through a management and operating agreement with an

affiliate of Buyer (`Affiliate') or a third party. Y's
agreement with Affiliate would terminate on termination of the
Lease.

"The factual statements and information that formed the
basis for the 1991 TAA remain accurate with the exception of the
revised ownership and lease structure as described above. Under
the revised ownership structure, although Owner would not
purchase the machinery and equipment for its direct use in the
production of electricity, Owner would purchase the machinery
and equipment for this purpose indirectly through the Lease and
related operating agreement with Affiliate. Notwithstanding
these ownership changes, the primary purpose for the purchase of
the machinery and equipment in connection with the construction
of the Plant continues to be for the production of electrical
energy at a fixed location for sale in Florida.

"REQUESTED ADVICE

"The taxpayer hereby requests the issuance of a technical
advisement finding that the exemption provided under Section
212.08(5)(c), Fla. Stat., will apply to both the purchases and
lease of the machinery and equipment for the production of
electrical energy as described above so that such purchases and
lease will not be subject to tax under Chapter 212, Fla. Stat.

"ANALYSIS

"As stated above and in the 1991 TAA, the machinery and
equipment purchased for the construction of the Plant will be
used primarily for the production of steam or electrical energy
for sale in Florida with the exception of the machinery and
equipment purchased solely for use in connection with returning
the steam to the Corporation.

"The fact that Owner will produce electrical energy
indirectly through a lease and operating agreement as described
above should not alter the conclusion in the 1991 TAA that the
purchases will be exempt under Section 212.08(5)(c). The
machinery and equipment remain necessary for the production of
electrical or steam energy from the burning of coal for sale in

Florida. The revised ownership structure and Lease do not
change these factors in any way.

"Furthermore, the exemptions provided by Section 212.08(5),
Fla. Stat. (1991), are exemptions on `account of use.' There is
no requirement in the statute that the person purchasing the
exempt items also use the items, so long as their use is exempt.
The machinery and equipment purchased in connection with the
construction of the Plant is being purchased for the use
specified for exemption under Section 212.08(5)(c), Fla. Stat.
(1991).

"Regarding the application of exemption under Section
212.08(5)(c), Fla. Stat., to the payments pursuant to the Lease,
Section 212.05(1), Fla. Stat., levies a sales tax on the sale,
lease or rental of tangible personal property at retail in this
state. Sales and leases are therefore treated synonymously for
the purposes of the imposition of the sales tax under Chapter
212, Fla. Stat.

"The exemption provided in Section 212.08(5)(c) does not
expressly refer to leases of machinery and equipment for the
production of electrical energy but exempts purchases of such
items from the tax imposed by this chapter' [Chapter 212, Fla. Stat.]. The termpurchases' is not defined in Chapter 212, Fla.
Stat. However, since the tax imposed by Chapter 212 would
otherwise apply to both the sale and lease of such machinery and
equipment, the exemption provided for purchases of machinery and
equipment for generation of electrical energy should likewise
exempt the lease of such machinery and equipment. Accordingly,
the lease of the machinery and equipment as described above
should not be subject to the tax imposed by Chapter 212, Fla.
Stat., due to the exemption provided in Section 212.08(5)(c).

"For the reasons stated, the machinery and equipment
purchased and leased for the generation of electrical energy as
described above should be exempt under Section 212.08(5)(c),
Fla. Stat., from the tax imposed by Chapter 212, Fla. Stat."

RELEVANT AUTHORITY

The following passages from the Florida Statutes (F.S.) are
pertinent to the issues raised in your letter.

Section 212.02(16)(a), F.S., provides:

"(16) `Sale' means and includes:
"(a) Any transfer of title or possession, or both,
exchange, barter, license, lease, or rental, conditional or
otherwise, in any manner or by any means whatsoever, of
tangible personal property for a consideration."

Section 212.031(1)(a), F.S., provides in part:

"It is declared to be the legislative intent that every
person is exercising a taxable privilege who engages in the
business of renting, leasing, letting, or granting a
license for the use of any real property...."

Section 212.05, F.S., provides in part:

"It is hereby declared to be the legislative intent that
every person is exercising a taxable privilege who engages
in the business of selling tangible personal property at
retail in this state, including the business of making mail
order sales, or who rents or furnishes any of the things or
services taxable under this chapter, or who stores for use
or consumption in this state any item or article of
tangible personal property as defined herein and who leases
or rents such property within this state."

Section 212.08(5)(c), F.S., provides:

"Machinery and equipment used in production of electrical
or steam energy. - The purchase of machinery and equipment
for use at a fixed location which equipment and machinery
are necessary in the production of electrical or steam
energy resulting from the burning of boiler fuels other
than residual oil is exempt from the tax imposed by this
chapter. Such electrical or steam energy must be primarily
for use in manufacturing, processing, compounding, or
producing for sale items of tangible personal property in

this state. However, the exemption provided for in this
paragraph shall not be allowed unless the purchaser signs
an affidavit stating that the item or items to be exempted
are for the exclusive use designated herein. Any person
furnishing a false affidavit to the vendor for the purpose
of evading payment of any tax imposed under this chapter
shall be subject to the penalty set forth in s. 212.085 and
as otherwise provided by law."

Section 212.21(2), F.S., provides in part:

"It is hereby declared to be the specific legislative
intent to tax each and every sale, admission, use, storage,
consumption, or rental levied and set forth in this
chapter, except as to such sale, admission, use, storage,
consumption, or rental as shall be specifically exempted
therefrom by this chapter subject to the conditions
appertaining to such exemption...."

Black's Law Dictionary, 6th ed., defines "purchase" in part as:

"Includes taking by sale, discount, negotiation, mortgage,
pledge, lien, issue or re-issue, gift or any other
voluntary transaction creating an interest in property."

REVIEW OF TECHNICAL ASSISTANCE ADVISEMENT 91A-012R

It was previously determined in the 1991 TAA that Owner
would derive 90 percent of its revenues from the sale of
electricity to XXX, hereinafter "Utility", and 10 percent of its
revenues from the water heating service for Corporation. Based
on the facts and circumstances as presented in the 1991 TAA, the
Department's previous determination provided in part:

"Therefore, pursuant to Section 212.08(5)(c), F.S., quoted
above, and due to the fact that the [Owner] anticipates that 90
percent of the revenue generated at the plant will be from the
sale of tangible personal property (electrical energy), the
machinery and equipment purchased for use at the [Owner's]
Cogeneration Plant, more particularly described in Exhibit `A'
which was enclosed with your Request for Technical Assistance

Advisement, where such machinery and equipment will be used to
generate electrical and steam energy at a new fixed location and
which are necessary in the production of electrical or steam
energy will be exempt from Florida Sales and Use Tax.

"However, the exemption provided by section 212.08(5)(c),
F.S., will not apply to the machinery and equipment which is
used to return the steam to the Corporation for use in the
Corporation's mill operations."

DETERMINATION

Your request for a Technical Assistance Advisement
describes eight parties and the existing or potential
relationships or transactions between those parties. However,
the crux of this request concerns the potential operating lease
transaction between Owner and third party Y, and the subsequent
transactions between Y and Utility and Corporation.

The exemption provided by Section 212.08(5)(c), F.S.,
applies to the "purchase" of machinery and equipment which are
necessary in the production of electrical or steam energy.
Although the ordinary use of the term "purchase" implies a sale
and transfer of title, the term "purchase" also includes "any
other voluntary transaction creating an interest in property."
Further, the definition of "sale" as provided in Section
212.02(16)(a), F.S., includes the term "lease." Therefore, the
exemption provided by Section 212.08(5)(c), F.S., applies to
lease as well as the sale of machinery and equipment used in the
production of electrical or steam energy. This exemption is
based on account of use and not on the status or identity of the
owner of the tangible personal property. Therefore, persons
other than an owner may be eligible for the exemption.

Pursuant to s. 212.21(2), F.S., all sales and use
transactions are taxable unless specifically exempted and are
subject to the conditions for such exemption. One specific
condition of the exemption for machinery and equipment used in
the production of electrical or steam energy is that the
exemption will not be allowed unless the purchaser (or lessee in
this instance) signs an affidavit stating that the item or items

to be exempted are for the exclusive use provided in the
exemption. In order for an affidavit to meet the requirements
of the exemption, it is the Department of Revenue's position
that a statement which would have the following effect must be
incorporated into the affidavit:

"I understand any person furnishing a false affidavit to a
vendor for the purpose of any tax imposed under Chapter 212,
Florida Statutes, shall be subject to the penalty set forth in
section 212.085, Florida Statutes, and as otherwise provided by
law."

The affidavit may be a separate document attached to the
lease or it may be incorporated within the lease itself. If the
affidavit is incorporated within the lease, a statement which
would have the same effect as the statement regarding a false
affidavit must be incorporated within the lease. Further, it is
the position of the Department that the affidavit must be
notarized regardless of whether the affidavit is incorporated
within the lease or is an independent affidavit which is
attached to the lease.

However, the transaction as presented in your request
states that the Plant would be leased to Y, a third party yet to
be determined. Such a transaction would conceivably encompass
the use of all real property at the facility as well as the
machinery and equipment. The leasing of real property is
specifically taxable pursuant to Section 212.031, F.S.

Further, Y would also be leasing the machinery and
equipment necessary to heat water for Corporation. There are no
exemptions which exist for machinery and equipment used for
water heating purposes. Since Y would be providing a water
heating service to Corporation and not subleasing the machinery
and equipment necessary to heat the water, Y would be the
ultimate user of that machinery and equipment and subject to tax
on any lease payments made to Owner.

Therefore, it is the position of the Department that the
leasing of the Plant by Owner to Y would be taxable, except for
the machinery and equipment specifically exempt pursuant to

Section 212.08(5)(c), F.S., provided that the lease is
structured in such a way so that the amount paid for the leasing
of the machinery and equipment qualifying for exemption under
Section 212.08(5)(c), F.S., is separately described and itemized
and the required affidavit procedures are followed. If the
exempt machinery and equipment is not, as a class, separately
described and itemized, or the affidavit procedures not
followed, then tax would apply to the gross proceeds of the
lease.

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 advise 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 advise is based, may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request
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 by the
Department before disclosure. In an effort to protect the
confidentiality of such information, we request you notify the
undersigned in writing within 15 days of any deletions you wish
made to the request or response.

Sincerely,

JEFFERY L. SOFF
Technical Assistant
Statutory Compliance

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