Which generating-plant machinery, services, and construction items qualified for Florida's historical energy-production exemption?

Subject

Application of Tax to Machinery and Equipment Production of Energy

Plain-English summary

Florida partially approved the generating-plant exemption under the integrated-plant theory. Machinery and equipment necessary to producing electric or steam energy at the fixed site could qualify even when its function was to make the plant practically operable, including legally required pollution-control equipment and production-integral auxiliary, control, electrical, fuel, turbine, and waste-treatment systems.

Buildings and components serving shelter or personnel, construction facilities, roads, parking, fencing, grading, drainage, general area lighting, and other nonproduction items were taxable. Professional mechanical and electrical engineering services were exempt, as was qualifying job-site fabrication or installation labor improving real property.

What this means for you

The ruling classified function, not merely location. Mixed systems qualified only to the extent used in energy production, and the exemption required a notarized affidavit trail from owner/operator through contractors to the purchasing vendor.

Common questions

Did every item inside the plant qualify? No. Buildings, comfort systems, construction support, and general site improvements were excluded.

Could legally mandated pollution-control equipment qualify? Yes, under the integrated-plant analysis.

Was the determination final without audit? No. It was subject to audit verification of actual use, and contrary audit findings would void the answers.

Citations and references

• Fla. Stat. §§ 212.08(5)(c), 212.08(7)(v), 212.085, and 213.22
• Fla. Admin. Code r. 12A-1.051(5)(f)
• Jacksonville Electric Authority v. Department of Revenue, 486 So. 2d 1350 (Fla. App. 1 Dist. 1986)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-005

Original ruling text

Jan 12, 1994

RE: TAA 94A-005
Sales Tax; Application of Tax to Machinery and Equipment
Production of Energy
s. 212.08(5)(c) and 212.08(7)(v), F.S.
Rule 12A-1.051(5)(f), F.A.C.

Dear

This acknowledges receipt of your request for a Technical
Assistance Advisement, to Ms. Linda Lettera, General Counsel,
Department of Revenue, dated March 26, 1993. Your letter has
been assigned to me for response.

FACTS

As ascertained from your letter the following conclusions
of fact have been made. XXX (hereinafter, Taxpayer) and XXX
(hereinafter, Affiliate) have jointly contracted for the
construction of an electric generating plant. Natural gas will
be the primary fuel burned by the combustion turbines to produce
electricity. The secondary fuel will be No. 2 diesel.

The combustion turbine equipment for the facility consists
of a stationary, single shaft turbine generator and associated
auxiliary equipment. Exhibit "A" has been forwarded to the
Department, listing the machinery and equipment for the
generating plant, which is to be used at a fixed location and is
"necessary" in the production of electric or steam energy
resulting from the burning of boiler fuels other than residual
oil.

You have indicated to the Department that you believe that
there are certain statutory and regulatory exemptions from sales
tax to which this transaction should be entitled. Following
please find the Department's determination regarding the tax
treatment of this transaction.

DISCUSSION AND DETERMINATION

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

"(c) 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."
(Emphasis Supplied).

The scope of s. 212.08(5)(c), F.S., was reviewed 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 (hereinafter, "JEA") to be
used in the burning of coal to produce electrical energy. The
JEA court concluded that the machinery and equipment fell into
three categories: (1) coal handling equipment; (2) equipment
required by state and federal law; and (3) electrostatic
precipitators.

The JEA court in examining the legislative intent, based on
the tape recorded proceedings of the Florida Senate Committee on
Ways and Means, determined that "[t]he committee's discussion
sounds much like the `integrated plant theory'," at 1354. In
the amended Declaratory Statement, issued by the Department,
January 27, 1987, the "integrated plant theory" was adopted as
the position of the Department. 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. Therefore, the machinery and equipment used in the
process of generating electrical energy would qualify for the
exemption provided in s. 212.08(5)(c), F.S.

The Court construed s. 212.08(5)(c), F.S., to include
pollution control equipment as "necessary in the production of
steam or electrical energy", notwithstanding the fact that a
plant could theoretically produce electrical or steam energy
without the legally mandated pollution control equipment. The
Court stated:

"No matter how theoretical the physics of producing steam
or electrical energy, in reality no equipment or machinery
in Florida is going to produce electricity without the
mandated pollution control equipment" (Id. 1335).

When determining whether machinery and equipment qualifies
for the exemption provided in s. 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 JEA/FPL Florida Department of
Revenue Declaratory Statement. "Exhibit B" now serves as a
guide for the Department when embracing the "Integrated Plant
Theory." A photocopy of "Exhibit B" is enclosed for your
information and convenience.

The Exhibit "A" will now be reviewed, based upon "Exhibit
B" to make a preliminary determination of whether each item will
qualify for the exemption.

Department of Revenue's Review and Determination
of Exhibit "A" under s. 212.08(5)(c), F.S.

ITEM

TAX TREATMENT

A. Auxiliary Power Supply System

EXEMPT

NOTE: It is understood that all parts (items 1 through 14) of
this system operate as a complete system.

B. Plant Services

1. Building

TAXABLE

NOTE: Buildings are not machinery nor equipment; therefore, they
do not qualify for the exemption.

2. Drains and plumbing

TAXABLE

NOTE: It is understood that these are personnel related systems,
not machinery and equipment used for the production of
electrical or steam energy; therefore, they do not qualify for
the exemption.

3. Lighting

TAXABLE

NOTE: See 2., above.

4. Building space conditioning

TAXABLE

NOTE: See 2., above.

C. Water Treatment

1. Building

Explained

NOTE: Only portions of the building that structurally brace or
support the water treatment equipment or components of that
equipment will qualify for the exemption; however, those items
that provide shelter to equipment or personnel do not.

2. Drains and Plumbing

TAXABLE

NOTE: It is understood that these are personnel related systems,

not machinery and equipment used for the production of
electrical or steam energy; therefore, they do not qualify for
the exemption.

3. Lighting

TAXABLE

NOTE: See 2., above.

4. Building Space Conditioning

TAXABLE

NOTE: See 2., above.

D. Site Fire Protection

1. Fire Water Pump Building

Explained

NOTE: The essential fire protection equipment will qualify for
the exemption; however, items representing building components
will not.

2. Lighting

TAXABLE

NOTE: It is understood that these are personnel related systems,
not machinery and equipment used for the production of
electrical or steam energy, therefore, they do not qualify for
the exemption.

3. Fire Water Foam Tank Shelter

TAXABLE

4. One diesel driven fire pump

EXEMPT

5. One motor driven fire pump

EXEMPT

6. One pressure maintenance pump

7. Sprinkler system

EXEMPT

TAXABLE

NOTE: This does not qualify for the exemption, unless it is for
the protection of the machinery and equipment used for the
production of electrical or steam energy.

8. Foam system for protection of the fuel oil storage tank
EXEMPT

9. Portable extinguisher

TAXABLE

NOTE: This does not qualify for the exemption, unless it is for
the protection of the machinery and equipment used for the
production of electrical or steam energy.

E. Compressed Air System

Explained

NOTE: This is exempt with regard to those systems that are
integral to the production of electric or steam energy; however,
those systems not integral to electrical steam or energy
production, such as air filter cleaning and pneumatic tools, are
taxable.

F. Construction Facilities

1. Construction Water

TAXABLE

2. Construction Building

TAXABLE

3. Construction Security

TAXABLE

4. Construction Lighting

TAXABLE

5. Construction Sanitary Facilities

TAXABLE

NOTE: These items do not qualify for the exemption, since they
are not used in the production of electrical steam or energy.

G. Control System

Explained

1. Control Panels

2. SCADA Interface

NOTE: These items are exempt, provided they are integral to the
production of electrical or steam energy.

H. Electrical System

1. Freeze Protection

EXEMPT

2. Grounding

EXEMPT

3. Raceway

EXEMPT

4. Cathodic Protection

EXEMPT

I. Fuel Gas Supply System

Explained

1. Full capacity, reciprocating natural gas compressor

2. Inlet vane separator type gas scrubber to remove
   impurities from the gas prior to entering the compressor

3. Discharge coalescing filter type gas scrubber to remove
   liquids and vapor prior to delivering the gas to the
   turbine

4. Scrubber drain tanks

5. Flow meter to measure the gas flow to the turbine

6. Fuel gas stainers, stop and control valves, and
   automatic vent valves

NOTE: Only those systems at the plant site, from the metering
station to the plant, will qualify for the exemption.

J. Fuel Oil Unloading and Storage

1. Truck unloading station

EXEMPT

2. Duplex basket type unloading strainer

EXEMPT

3. Positive displacement totalizing type
   flowmeter

4. Biocide injection system

EXEMPT

EXEMPT

5. Fuel oil storage

Explained

Note: If the storage tank(s) is (are) used to store fuel oil
which will be burned to generate steam or electric energy, it
will be exempt; however, if the tank(s) is (are) used for
storing fuel which will be used in mobile equipment, such as
trucks or tractors, it will be taxable.

K. Fuel Oil Supply

1. Fuel oil forwarding skid

2. On base fuel oil control equipment

L. Generator Terminal

EXEMPT

EXEMPT

Explained

1. Generator bus duct

2. Generator transformer

3. Generator surge protection

4. Generator neutral grounding

NOTE: The exemption only applies for the systems up to, and
including, the first step-up transformer; the systems
representing the distribution of power will not qualify for the
exemption.

M. Primary Power Supply System

Explained

1. Disconnect switches

2. Bus

3. Support towers

NOTE: The exemption only applies for the systems up to, and
including, the first step-up transformer; the systems
representing the distribution of power will not qualify for the
exemption.

N. Site System

1. Roads and Parking

TAXABLE

2. Fencing and Security

TAXABLE

3. Grading and Drainage

TAXABLE

4. Area Lighting

TAXABLE

O. Combustion Turbine Generator

1. Combustion turbine generator

EXEMPT

2. Combustion turbine drains

EXEMPT

3. Combustion turbine off-base auxiliaries

EXEMPT

P. Waste Collection and Treatment

1. Drainage piping

2. Oil separator

3. Impoundment areas

4. Neutralization basin

5. Chemical waste mixer

6. Wastewater wet well pumps

Q. Water Supply and Storage System

EXEMPT

EXEMPT

EXEMPT

EXEMPT

EXEMPT

EXEMPT

Explained

1. Service Water

2. NOx Injection Water Supply

NOTE: Only the items that are used for the production of
electrical or steam energy are exempt, but items used in systems

for the comfort of personnel, such as safety showers, are not.

R. NOx Injection Water Treatment

Explained

NOTE: Only items that are used for the production of electrical
or steam energy are exempt.

As provided in the above list, Exhibit"A", the Department
agrees with you, in part, regarding the exemptions for machinery
and equipment under s. 212.08(5)(c), F.S.

However, please be advised that the exemption provided by
s. 212.08(5)(c), F.S., is limited to machinery and equipment
used in the production of electrical or steam energy, at a fixed
location in this state. The above line items indicated as not
qualifying for the exemption are either not machinery or
equipment, or if they are machinery or equipment, they are not
used in the production of electrical or steam energy.

Section 212.08(7)(v), F.S., provides that professional
services, such as mechanical and electrical engineering
services, are specifically exempt from sales and use tax
pursuant to s. 212.08(7)(v), F.S. Therefore, you are correct,
and the Department agrees that said professional services are
not taxable. In addition, Rule 12A-1.051(5)(f), F.A.C.,
provides that fabrication labor, including installation labor,
incurred at the job site, in the performance of improving real
property, is not subject to sales and use tax.

AFFIDAVIT PROCEDURES

This section will address the proper procedure for
extending an affidavit pursuant to s. 212.08(5)(c), F.S.

The benefit of the exemption inures to the owner and
operator of the facility, to the general contractor, and to the
general contractor's subcontractors. In order to exempt the
qualifying purchases, an affidavit must be given by the
owner/operator of the facility to the contractor. The
contractor, in turn, would then issue its own affidavit to its
subcontractors along with a copy of the affidavit provided by

the owner/operator. This process continues from subcontractors
to sub-subcontractors until the actual purchase order is issued
to the vendor or supplier for the qualifying machinery and
equipment or materials. 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 s. 212.085, Florida Statutes, and as otherwise
provided by law."

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

At no time when extending an affidavit for the exemption
provided in s. 212.08(5)(c), F.S., should anyone include another
business entity's Certificate of Registration number (sales tax
number) or Direct Pay Certificate number. A Certificate of
Registration number or Direct Pay Certificate number may only be
used by the business entity to whom it was assigned. Under s.
212.08(5)(c), F.S., a business entity cannot authorize other
business entities to use its Certificate of Registration number
or Direct Pay Certificate number in order to purchase tangible
personal property tax exempt.

The following documents and records should be retained by
the owner/operator, the contractor and subcontractors in order
to support the exemption provided by s. 212.08(5)(c), F.S.: (1)
Photocopies of affidavits; (2) Purchase orders; (3) Invoices;
(4) Depreciation Schedules; (5) Chart of Accounts; and (6) Any

other document which could be used to support the exemption.

AFFIDAVIT

STATE OF FLORIDA
COUNTY OF ______

On this day, personally appeared the undersigned who, being
first duly sworn, deposes and says:

That all machinery and equipment purchased from __
___________ will be
incorporated into and/or become a component part of the

located in ___, Florida, County of ____.
Further that said machinery and equipment is necessary for the
production of electric or steam energy resulting from the
burning of boiler fuels other than residual oil and is exempt
from the tax imposed by Chapter 212, Florida Statutes, Sales and
Use Tax Act, pursuant to s. 212.08(5)(c), Florida Statutes.

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

Purchaser's Name

Signature

Sworn to and
subscribed before me
this __ day of
_______, A.D.,
19 ___

Notary Public

(Seal)

My Commission Expires

This response is predicated upon the facts and
circumstances of your letters and Exhibit "A", and is subject to
audit verification to confirm the use of said machinery and
equipment. If the Division of Audits, during an audit,
determines that the machinery and equipment do not meet the
qualifications for exemption specified in s. 212.08(5)(c), F.S.,
then the answers provided in this letter are null and void.

This response constitutes a Technical Assistance Advisement
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
based 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 and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 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 the response.

Sincerely,

Nydia Men‚ndez
Technical Assistant

/NM
Con. #7964