Which parts of a sulfuric-acid and cogeneration complex did the cancelled TAA treat as exempt energy-production equipment?

Subject

Exemption for Machinery and Equipment Used in Production of Electrical or Steam Energy

Plain-English summary

This TAA was cancelled by the taxpayer on September 29, 1993 while more information was being provided, so its determinations should not be treated as a final ruling. The document nevertheless records how the Department analyzed the submitted equipment under the integrated-plant theory and the energy-production exemption.

It treated the reverse-osmosis and demineralizer systems' piping, instrumentation, electrical equipment, pipe racks, foundations, peripheral equipment, and specified treated-water, condensate, and regeneration tankage and pumping systems as exempt because they were necessary to producing electrical or steam energy.

It did not exempt buildings, process chemicals, deep wells, or untreated-water tankage and pumps. It also denied the requested exemption for sulfur handling, sulfuric-plant startup systems, the sulfuric-acid tank farm, and the remaining five-plant equipment because the record did not establish whether the primary economic activity was producing acid for phosphoric-acid manufacturing or producing electrical and steam energy.

What this means for you

The analysis required evidence of equipment function and the facility's primary economic purpose; integration alone was not enough on the submitted record. But the official cancellation means these conclusions are not a final reliance point.

Common questions

Q: Was this TAA left in force? No. The taxpayer cancelled it the next day to provide more information.

Q: Which area did the text treat as exempt? Specified boiler-feedwater treatment and condensate equipment necessary for energy production.

Q: Why were the other major process areas denied? The Department said it could not determine the primary economic activity from the information supplied.

Citations and references

• Fla. Stat. § 212.08(5)(c) — machinery and equipment used to produce electrical or steam energy
• Jacksonville Electric Authority v. Department of Revenue, 486 So. 2d 1350 (Fla. 1st DCA 1986)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-068

Original ruling text

Status: This TAA was cancelled by the taxpayer as of 9-29-93.
More information is being provided by taxpayer.

Sep 28, 1993

RE: Technical Assistance Advisement 93A-068
Sales and Use Tax; Exemption for Machinery and Equipment
Used in Production of Electrical or Steam Energy
Section 212.08(5)(c), F.S.

Dear :

This is in response to your letter of July 22, 1992, in
which you request, on behalf of your client, XXX. (hereinafter
Company), the issuance of a Technical Assistance Advisement on
the exemption from sales and use tax as provided in Section
212.08(5)(c), F.S., for the XXX facility (hereinafter Site W),
based on the facts and circumstances as described below.

FACTS

Your letter provides the following background and overview
of your client's facility.

"[Company] owns and operates a phosphate chemical plant in
XXX, known as [Site W]. Basically, the plant consists of
five sulfuric acid plants, rock handling and grinding
facilities, three phosphoric acid plants, three
diam[m]onium phosphate (DAP) plants, a monoammonium
phosphate (MAP) plant, a granular triple superphosphate
(GTSP) plant, and clarification facilities for producing
merchant grade phosphoric acid. The principal final
products produced at [Site W] and sold by [Company] are
DAP, MAP, GTSP, and merchant grade phosphoric acid which
are used as fertilizers or fertilizer ingredients.
[Company] manages an animal feed ingredients plant for XXX
at its [Site W] facility. [Company] sells some of its
phosphoric acid production and merchant grade phosphoric
acid production to XXX for use in the production of animal

feed products. Sulfuric acid is mixed with phosphate rock
to manufacture phosphoric acid, which is required for the
production of these final products. [Company] also has a
uranium recovery facility at [Site W].

"Sulfuric acid is manufactured by [Company] at the sulfuric
acid complex (the `Complex'), which consists of the five
referenced sulfuric acid plants, a sulfur handling system,
a boiler feedwater treatment system, start-up facilities, a
sulfuric acid tank farm and two turbogenerators. Although
interconnected with other parts of the plant at [Site W],
the components of the Complex are separate and distinct
facilities. The acid is manufactured using molten sulfur
purchased by [Company] and shipped by rail and truck to the
Complex. In the process of producing sulfuric acid, sulfur
is burned to make sulfur dioxide gas which is then
converted to sulfur trioxide gas by passing [the sulfur
dioxide gas] through [a] catalyst. The hot gases are
passed through steam boilers, heat exchangers, superheaters
and economizers, resulting in the generation of significant
amounts of steam energy. Prior to 1983, approximately
two-thirds of the waste heat recovered as steam energy was
used at [Site W] in the production of phosphoric acid. The
balance of the heat was lost to the atmosphere or vented as
waste steam. In 1983, [Company] devised a retrofit energy
enhancement project ("REEP") to capture this lost or vented
energy in the form of high pressure steam, for the express
purpose of producing electricity. As part of REEP,
[Company] installed new superheaters and economizers to
recover the lost heat energy and to convert this energy
into steam. This steam was then used by a 56 megawatt
turbine generator, also part of REEP, to produce
electricity. Thus, the same fuel--sulfur--could be used to
produce steam for industrial purposes, and electricity at
the same industrial facility, i.e., cogeneration of
electricity. In Technical Assistance Advisement 83(A)-012
(March 22, 1983), the Department found that the production
of electrical energy for use in the [Company] complex in
the same manner as purchased electricity would qualify for
the exemption provided under Section 212.08(5)(c), Florida
Statutes.

"Phase 1 of the REEP project, involving the retrofit of
four of the five sulfuric acid plants in the Complex, as
well as the construction and installation of electrical
generating and transmission equipment, was completed by
early 1985. At that time, [Company] requested a technical
assistance advisement regarding Phase 2 and Phase 3 of the
project. Phase 2 involved the retrofit of the fifth and
final sulfuric acid plant and some electrical work. Phase
3 involved the installation of additional heat recovery
equipment in connection with all five sulfuric acid plants
in the Complex. Phase 3 was designed to increase the
temperature of the steam produced, thus increasing the
amount of electricity produced. Both phases were, in
essence, retrofit operations.

"In Technical Assistance Advisement 86A-009 (April 16,
1986), the Department found that the following aspects of
Phase 2 and Phase 3 qualified for the exemption provided by
Section 212.08(5)(c), Florida Statutes: the retrofit of the
remaining sulfuric acid plant; the addition of a third cell
to the two cell cooling tower built in Phase 1; the
conversion of boiler feedwater pumps from turbine drives to
electric motor drives and the addition of Coldwell pumps
and piping to support the approved retrofit; and the Phase
3 installation of additional superheaters.

"The following aspects were found by the Department not to
qualify at that time for the exemption provided by Section
212.08(5)(c), Florida Statutes: the installation of
additional electrical switchgear, protective relays, power
wiring and related items required to handle the generator's
full output, because this modification did not actually
produce electrical or steam energy; the addition of
catalyst to the sulfuric acid plant converters to make more
steam available for cogeneration, because the Department
determined catalyst is not machinery or equipment;
additional electrical modifications, primarily capacitors,
for voltage regulation during generator upsets, because
these did not actually produce electrical or steam energy;
and the conversion of ammonia vaporization in the MAP plant

from medium to low pressure steam to provide more high
pressure steam to the cogeneration turbine, because this
modification only enhanced the use of the available steam.

"[Company] requested a clarification of Technical
Assistance Advisement 86A-009 on July 1, 1986, and the
Department issued its letter of clarification on September
18, 1986. In this letter, the Department revisited three
components of the Phase 2 and Phase 3 projects it had
earlier found not exempt: the electrical system; the
catalyst; and the ammonia vaporization conversion of the
MAP plant. The Department continued to hold that the
catalyst and the ammonia vaporization components were not
exempt. However, the Department did find that three
aspects of the electrical modifications qualified for the
exemption provided by Section 212.08(5)(c), Florida
Statutes.

"The first item found exempt was interconnection equipment
required by the Florida Public Service Commission. The
second item was the purchase and installation of equipment
necessary to connect the turbogenerator with the electrical
distribution center, without which the turbogenerator could
not generate or distribute electricity. The third
electrical item exempted by Section 212.08(5)(c), Florida
Statutes, was the purchase and installation of equipment
necessary to supply electrical power to the boiler
feedwater pumps and the cooling towers. The pumps and
cooling towers are part of the sulfuric acid plants and an
integral part of the generation of steam, and had
previously been found exempt by the Department.

"Read together, these technical assistance advisements
establish that the following aspects of the [Company]
Complex are currently exempt under Section 212.08(5)(c),
Florida Statutes: retrofit of all five sulfuric acid
plants, including superheaters, economizers, and
installation of 56 megawatts of electrical energy capacity;
a three cell cooling tower; the conversion of boiler
feedwater pumps and the addition of Coldwell pumps and
piping to support the retrofit; interconnection equipment

required by the Florida Public Service Commission; the
purchase and installation of equipment necessary to connect
the exempt turbogenerator with the electrical distribution
center; and the purchase and installation of equipment
necessary to supply electrical power to the exempt boiler
feedwater pumps and the cooling tower. Spare and
replacement parts for the turbogenerator facility and the
retrofitted portions of the five sulfuric acid plants at
the Complex would thus be exempt under the provisions of
Section 212.08(5)(c), Florida Statutes.

"Since 1986, the Department has changed somewhat its
interpretation of the exemption provided by Section
212.08(5)(c), Florida Statutes. In particular, the
Department has explicitly adopted the `integrated plant
theory' in the technical assistance advisements issued
subsequent to Jacksonville Electric Authority v. Department
of Revenue, 486 So.2d 1350 (Fla. 1st DCA 1986). In light
of these changes, [Company] requests a technical assistance
advisement concluding that the purchase and installation of
spare and replacement parts as well as material for
modifications and additions for the entire Complex are
exempted from taxation by Section 212.08(5)(c), Florida
Statutes."

Your letter further provides the following details about
specific operations within your client's facility and makes
certain specific requests for exemption.

"As noted above, the Complex consists generally of the
sulfuric acid plants, a sulfur handling system, boiler
feedwater treatment, a sulfuric acid tank farm, and the
exempt turbogenerators. This section details these
component parts, and lists those components that [Company]
contends should be exempt and those components for which
[Company] does not seek exemption.

"1. Sulfur handling

"Molten sulfur is received at the Complex by rail and
truck. Sulfur from trucks is dumped directly into heated

sulfur pits, then is pumped either into storage tanks or
directly to the sulfuric acid plants. Sulfur received by
rail must be steam heated for 36 hours before it can be
unloaded. This sulfur is dumped into a pit from where it is
pumped to storage tanks and then pumped to the sulfur
furnaces in the sulfuric acid plants.

"[Company] seeks exemption for sulfur handling equipment
consisting of steaming systems, pits, tanks, pumps,
heaters, piping, instrumentation, electrical equipment,
insulation, pipe racks and foundations. [Company]
understands that non-exempt equipment includes rail cars,
rail trackage, and paving.

"2. Boiler feedwater treatment/condensate

"To prevent corrosion and scaling in the steam lines and
equipment of the sulfuric acid plants and the
turbogenerators, make-up feedwater to the boilers in the
sulfuric acid plants must be treated to remove all
minerals. Removal of the minerals also improves steam
production efficiency. The minerals are removed with a
reverse osmosis system and a series of demineralizers.

"Condensate accounts for approximately 50% of the boiler
feedwater. Because condensate has already been treated and
need not be retreated before being used as boiler
feedwater, it is collected and stored in the condensate
tank in the water treatment area. Also in this area is a
fin fan condenser for waste low pressure steam. A local
condensate collection system collects condensate at the
phosphoric acid plants and at the animal feed ingredients
plant, then pumps it to the Complex for reuse. The local
condensate collection system consists of piping, tankage,
and pumps. Condensate from the 56 megawatt turbine
generator is returned to the condensate tank in the water
treatment area. All condensate is used exclusively in the
Complex operations.

"[Company] seeks exemption for equipment and machinery
including piping, instrumentation, electrical equipment,

pipe racks, and foundations for the reverse osmosis and
demineralizer systems and their peripheral equipment. Also
included are tankage and pumping systems for the following:
treated water, the local condensate collection system,
caustic for regenerating the demineralizer anion units, and
condensate. [Company] understands that non-exempt items
are the buildings and the chemicals used in this process.
[Company] also seeks no exemption for its deep wells or the
tankage and pumps for untreated water.

"3. Sulfuric plant start-up

"Fuel oil is required to start sulfur burning in the
furnace. After the sulfur starts burning, the fuel oil is
no longer required. Fuel oil would also be required to
fire an auxiliary package boiler in the unlikely event of
all 5 sulfuric plants being shut down at the same time.
Equipment in plant start-up includes the package boiler,
fuel tank and pumps, piping, instrumentation and
electrical. [Company] seeks exemption of all of this
equipment.

"4. Sulfuric acid tank farm

"This facility consists of four tanks, each with a capacity
of 13,000 tons of sulfuric acid or one day of production.
[Company] seeks exemption for these tanks. The sulfuric
acid is pumped from these tanks to the phosphoric acid
plants. The pumps are excluded from the exemption.

"5. Five sulfuric acid plants

"The five sulfuric acid plants at the Complex produce
approximately 13,000 tons per day of sulfuric acid. In so
doing, they generate enough steam to operate a 10 megawatt
and a 56 megawatt turbogenerator, as well as enough steam
to fulfill the requirements of [Site W].

"As noted in the previous section, spare and replacement
parts for the economizers and superheaters in these plants
are exempt under Section 212.08(5)(c), Florida Statutes,

because they were installed as items of the exempted REEP
projects. A heat recovery system was recently added to
Sulfuric Acid Plant #3 as an extension of these retrofit
projects. This heat recovery system is also exempt.

"[Company] seeks an advisement that the balance of the
machinery and equipment in its sulfuric acid plants is
exempt under the provisions of Section 212.08(5)(c),
Florida Statutes, and thus that all spare and replacement
parts as well as material for modifications and additions
involving the sulfuric acid plants are also exempt. This
equipment consists of sulfur furnaces, waste heat boilers,
towers, converters, heat exchangers, pump tanks, pumps,
stacks, ductwork, piping, instrumentation, electrical
equipment, insulation, pipe racks, structural steel and
foundations.

"[Company] understands that all buildings and sheds
including the buildings housing the control rooms and motor
control centers are not considered exempt machinery or
equipment. [Company] also understands that catalyst,
chemicals, small tools, and consumable supplies that do not
become a part of machinery or equipment are not exempt."

RELEVANT AUTHORITY

The following passage from the Florida Statutes (F.S.) is
pertinent to the issues raised in your request.

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."

FPL/JEA COURT CASE

The scope of Section 212.08(5)(c), F.S., was reviewed by
the First District Court of Appeal of Florida in Jacksonville
Electric Authority v. Department of Revenue, 486 So.2d 1350
(Fla. App. 1 Dist. 1986). The case involved the taxable status
of certain machinery and equipment purchased by the Jacksonville
Electric Authority to be used in the burning of coal to produce
electrical energy. The Court determined that it was the
legislative intent to embrace the "integrated plant theory" as a
basis for interpreting the exemption for machinery and equipment
provided in Section 212.08(5)(c), F.S. Under the "integrated
plant theory", machinery and equipment used in the process of
generating electrical energy, regardless of the fact that such
machinery and equipment was not intrinsically necessary to
generate electrical energy or the sole purpose of such machinery
and equipment was to make the plant function more practically,
would be considered a component part of the manufacturing
process and would qualify for the exemption.

DETERMINATION

When determining whether machinery and equipment qualifies
for the exemption provided in section 212.08(5)(c), F.S., the
Department of Revenue is guided by the Jacksonville Electric
Authority v. Department of Revenue, supra, court case which
instructed the Department to embrace the "Integrated Plant
Theory." The Department implemented the court's instructions by
amending "Exhibit B" of the Jacksonville Electric Authority and
Florida Power and Light Company, Declaratory Statement, DOR 842. "Exhibit B" now serves as a guide for the Department when
embracing the "Integrated Plant Theory." The Department is also
guided by prior decisions in technical assistance advisements

that it has issued and are pertinent to the issues at hand.

Technical Assistance Advisement 90A-030 (March 30, 1990)
considered the exemption for the construction of a new sulfuric
acid plant pursuant to Section 212.08(5)(c), F.S. That new
plant would replace two existing acid plants and generate
electrical energy. As a result of that project, there would be
a minimal increase in the amount of sulfuric acid produced,
however, the total electrical power needs of the facility would
be fulfilled. The stated rationale for the project was that the
economic value of the electricity outweighed the economic value
of the acid that was produced. The Department granted the
exemption and stated in the determination section of TAA 90A030:

"... the fact that `the economics are such that the primary
purpose of the [Corporation] project is the generation of
power with the sulfuric acid production being a secondary
item,' were of critical importance in the Department
reaching this determination."

No economic information of this or a similar nature has been
provided with respect to the exemption sought for Site W.
Therefore, pursuant to Section 212.08(5)(c), F.S., "Exhibit B",
and TAA 90A-030, the Department's position with respect to the
Complex is as follows:

1. Sulfur Handling

The systems and equipment within this operational area will
not qualify for the exemption since it cannot be determined
whether the primary economic activity is to produce sulfuric
acid as a phase in the production of phosphoric acid or to
produce electrical or steam energy.

2. Boiler feedwater treatment/condensate

The following items are necessary in the production of
electrical or steam energy and not in the production of sulfuric
acid. Therefore, these items will qualify for the exemption:
piping, instrumentation, electrical equipment, pipe racks,

foundations for the reverse osmosis and demineralizer systems
and their peripheral equipment; and tankage and pumping systems
for treated water, the local condensate collection system,
caustic for regenerating the demineralizer anion units, and
condensate.

The following items are not considered to be "machinery and
equipment" necessary in the production of electrical or steam
energy and will not qualify for the exemption: the buildings and
the chemicals used in this process, deep wells, and tankage and
pumps for untreated water.

3. Sulfuric plant start-up

The systems and equipment within this operational area will
not qualify for the exemption since it cannot be determined
whether the primary economic activity is to produce sulfuric
acid as a phase in the production of phosphoric acid or to
produce electrical or steam energy.

4. Sulfuric acid tank farm

The sulfuric acid tanks and pumps will not qualify for the
exemption, since they are not used in the process of producing
electrical or steam energy.

5. Five sulfuric acid plants

The systems and equipment within this operational area will
not qualify for the exemption since it cannot be determined
whether the primary economic activity is to produce sulfuric
acid as a phase in the production of phosphoric acid or to
produce electrical or steam energy.

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
Tax Law Specialist
Statutory Compliance

encl.
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