Was steam purchased from a cogeneration facility subject to Florida sales tax?

Subject

Purchase of Steam

Plain-English summary

The Department treated the charge for steam supplied to the plant as a taxable sale of tangible personal property. Steam could be measured, title and risk passed at the delivery point on the plant site, the supplier invoiced based on pounds delivered, and the steam itself was a significant part of the transaction.

The Department rejected the argument that the arrangement was an exempt professional or personal service. The cogeneration company produced and sold steam, owned and operated the delivery interconnection, and could sell excess steam to others while meeting the plant's needs.

The official status notice says revised TAA 94A-055R was issued February 7, 1995.

What this means for you

Under the original ruling, labeling the arrangement a service did not control when the contract transferred a measurable energy product for a stated price. The revised advisement should be consulted for the later treatment of these facts.

Common questions

Was steam treated as tangible personal property? Yes.

Was the steam charge taxable? Yes, under the original ruling.

Is this the final version? No. The document directs readers to revised TAA 94A-055R.

Citations and references

• Fla. Stat. §§ 212.02(20), 212.05(1)(a), 212.06(1)(b), 212.08(7)(v), and 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-055

Original ruling text

Status: Revised TAA 94-055R issued February 7, 1995

Oct 31, 1994

Re: TAA 94A-055
Application of Sales Tax to the Purchase of Steam
ss. 212.02(15)(a), (16)(a)(c), (20); 212.05(1)(a);
212.06(2)(a); 212.08(7)(v), F.S.

Dear :

This is in response to your request for a Technical
Assistance Advisement (TAA) dated January 27, 1994 and the
additional information submitted on July 14, 1994. Your request
is made on behalf of your client, XXXXX [hereinafter "Taxpayer"]
which entered into various agreements with XXXX. You have
identified XXXXX as "Corporation" in your statement of deletions
of private and confidential materials as required under Rule 1211.005, F.A.C. We will use that identification for XXXXX in our
response.

At issue is whether an agreement for providing steam to
"Taxpayer" for use in its citrus processing operation is subject
to sales tax under Chapter 212, F.S. With your request you
provided copies of the site lease agreement, thermal energy
purchase and sale agreement, water well lease agreement, and
assignment of water use permit.

FACTS PRESENTED

"[Taxpayer] owns and operates a citrus processing plant. To
facilitate the operation of this plant, [Taxpayer] has
leased an adjoining property to [Corporation].
[Corporation] has constructed a cogeneration facility on
the property. [Corporation], in turn, has an agreement to
sell the electricity produced by the cogeneration facility
to [a utility company].

"A product of the cogeneration facility is steam.
[Taxpayer] and [Corporation] have entered into an agreement
whereby [Corporation] will provide a service to [Taxpayer]
of heating water until it turns to steam and returning the
steam resulting from the heating of the water to [Taxpayer]
for use in its citrus processing operations. The agreement
provides that [Taxpayer] will pay [Corporation] for the
service of providing steam to the [Taxpayer] citrus
processing plant.

"The agreement also provides that [Taxpayer] has assigned
[Corporation] its water use permit issued by [Water
Management District]. In addition, the agreement provides
that [Taxpayer] will lease to [Corporation] the capped
water well on the leased property. Thus, [Taxpayer] owns
the water use permit, the water well, and the physical site
upon which the well is located....

"Taxpayer's Position: [Taxpayer] requests a determination
that the services provided by [Corporation] are not subject
to tax pursuant to [C]hapter 212, Florida Statutes (1993).
Services provided by [Corporation], i.e., the heating of
water owned by [Taxpayer] and leased to [Corporation], is
not a taxable service pursuant to the provisions of
[C]hapter 212[, F.S.] Moreover, the agreement does not
involve the sale of tangible personal property as defined
under [C]hapter 212[, F.S.] Section 212.08(7)(v), Florida
Statutes (1993) states as follows:

"[`]1. Also exempted are professional, insurance, or
personal service transactions that involve sales as
inconsequential elements for which no separate charges
are made....['] [Your emphasis]

"Under the statute, the heating of water owned by
[Taxpayer], obtained out of a well owned by [Taxpayer], and
obtained under a water use permit owned by [Taxpayer] and
assigned to [Corporation] is such a service exempted from
taxation under [C]hapter 212[, F.S.]

"The service agreement between [Taxpayer] and [Corporation]

does not involve the sale of tangible personal property as
defined in section 212.02(20), Florida Statutes (1993).
Section 212.02(20)[, F.S.,] defines tangible personal
property as meaning and including:

"[`...] personal property which may be seen, weighed,
measured, or touched or is in any manner perceptible
to the senses, including electric power or energy,
boats, motor vehicles and mobile homes as defined in
s. 320.01(1) and (2), aircraft as defined in s.
330.27, and all other types of vehicles....[']

"Here, the agreement between [Taxpayer] and [Corporation]
provides that [Corporation] will heat water obtained from
wells owned by [Taxpayer] and assigned to [Corporation].
After heating the water, [Corporation] will then transfer
the steam to [Taxpayer] for use in its citrus processing
plant. Therefore, any charge imposed by [Corporation] to
[Taxpayer] for the processing of water into steam should be
exempt from Florida sales tax pursuant to section
212.08(7)(v)[, F.S.]..."

STATUTORY/REGULATORY AUTHORITY
Section 212.02, F.S., provides in part:

"(15)(a) Retail sale' or asale at retail' means a sale
to a consumer or to any person for any purpose other than
for resale in the form of tangible personal property or
services taxable under this part, and includes all such
transactions that may be made in lieu of retail sales or
sales at retail....
"(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....
"(c) The producing, fabricating, processing, printing, or
imprinting of tangible personal property for a
consideration for consumers who furnish either directly or
indirectly the materials used in the producing,
fabricating, processing, printing, or imprinting....

"(20) `Tangible personal property' means and includes
personal property which may be seen, weighed, measured, or
touched or is in any manner perceptible to the senses...."

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

"Sales, storage, use tax.-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....
"(1) For the exercise of such privilege, a tax is levied on
each taxable transaction or incident, which tax is due and
payable as follows:
"(a)1.a. At the rate of 6 percent of the sales price of
each item or article of tangible personal property when
sold at retail in this state, computed on each taxable sale
for the purpose of remitting the amount of tax due the
state, and including each and every retail sale...."

Section 212.06(2)(a), F.S., provides:

"The term `dealer,' as used in this chapter, includes every
person who manufactures or produces tangible personal
property for sale at retail; for use, consumption, or
distribution; or for storage to be used or consumed in this
state."

Section 212.08(7)(v), F.S., provides in part:

"Professional Services. "1. Also exempted are professional, insurance, or personal
service transactions that involve sales as inconsequential
elements for which no separate charges are made...."

DISCUSSION OF FACTS

We have reviewed the terms and conditions of the thermal
energy purchase and sale agreement. Terms and conditions of the
agreement, as amended, pertinent to this response are summarized
as follows:

"Corporation" intends to finance, construct, own, and
operate a cogeneration facility on a site leased from "Taxpayer"
for the purpose of producing electricity to be sold to a utility
company.

"Corporation" desires to sell steam produced by it in an
amount sufficient to ensure the continuous qualification of the
facility as a qualifying cogeneration facility.

"Taxpayer" desires to purchase steam produced by
"Corporation" for use in the operation of its plant.

Sections 2.1, 2.2, and 2.4, provide that "Taxpayer" will
purchase the steam it needs for use in its plant operations.
"Taxpayer" also agrees to purchase a certain minimum amount of
pounds of steam. "Corporation" is not required to provide steam
above a certain maximum poundage. "Corporation" has the right
to supply steam to others if the steam supplied to "Taxpayer"
meets its requirements; or, if the quantity of steam purchased
by "Taxpayer" is not sufficient for "Corporation" to maintain
its status as a qualified cogeneration facility under the
criteria set forth by the Federal Energy Regulatory Commission
[hereinafter FERC].

Section 4.1, provides a formula to determine the price of
the steam delivered to "Taxpayer" during each month. Section
4.2 provides that as long as "Corporation's" facility remains a
qualified cogeneration facility, "Taxpayer" is entitled to a
discount equal to a certain dollar amount per thousand pounds of
steam delivered to "Taxpayer". If the discounts earned by
"Taxpayer" in any contract year are less than a certain minimum
discount dollar amount, "Corporation" will be required to pay
"Taxpayer" the difference between the discounts earned and the
minimum discount dollar amount.

Section 5.1, provides that "Corporation" shall use its best
efforts to render monthly itemized invoices to "Taxpayer"
showing the total pounds of steam delivered to "Taxpayer" and
the total pounds of condensate returned by "Taxpayer" to
"Corporation" based on "Corporation's" reading of the meters
connected to the equipment where steam is delivered to

"Taxpayer".

Section 6.4, provides that title to and risk of loss with
respect to all steam shall pass to and rest in "Taxpayer" upon
the steam being made available to the "Taxpayer" at the steam
delivery point. [The steam delivery point is a point mutually
agreed upon by "Taxpayer" and "Corporation" which point is
located on "Taxpayer's" plant site.]

Section 7.1 provides that "Taxpayer" is to return all of
the condensate it captures to "Corporation". Section 7.3
provides that "Corporation" will test the condensate to
determine if it meets certain specifications. "Corporation" may
either reject or treat the condensate. Title to the condensate
meeting certain specifications remains with "Taxpayer" if
"Corporation" rejects the condensate. If "Corporation" chooses
to treat the condensate owned by "Taxpayer", "Taxpayer" will pay
one-half of the costs for treatment.

Section 8.2 and Section 9.1, provide that "Corporation"
will arrange for and finance the cost of and operate and
maintain the interconnection facilities between "Taxpayer's"
plant site and "Corporation's" facility at its own expense. The
interconnection facilities, as defined in "Article I Definitions," means the physical connection at the condensate
return point, the condensate return lines, the physical
connection at the steam delivery point, the metering and
connection devices, and lines and equipment that permit an
interface between "Taxpayer's" plant site and "Corporation's"
facility for the delivery of steam and the return of the
condensate.

Section 10.1, provides that the water required for
"Corporation's" production of steam will be taken from a well
located on "Taxpayer's" plant site and leased to "Corporation."
"Corporation" is required, at its own expense, to install and
maintain a pump, an electrical conduit to the well, and a water
line from the well to its facility. "Corporation is required to
supply all electricity required to operate the pump. If the
pump fails, "Taxpayer" will provide water from another existing
well, if possible. In this event, expenses incurred in

supplying water from an alternate well will be paid by
"Corporation." If the leased well does not provide water,
"Taxpayer" will provide another well site, provided the well is
not needed by "Taxpayer" for its operations.

Section 10.3 provides "Corporation" is responsible, at its
own expense, for providing, installing, operating, maintaining,
calibrating, and reading metering devices to meter steam
delivered to "Taxpayer" and condensate returned to
"Corporation."

DETERMINATION

Steam is tangible personal property in that it meets the
statutory definition under s. 212.02(20), F.S., as property
which may be weighed or measured. Furthermore, steam is
considered taxable tangible personal property as evidenced under
s. 212.06(1)(b), F.S., which provides an exemption on steam or
other energy produced and used directly in the operation of
machinery or equipment that is used to manufacture, process,
compound, produce, or fabricate tangible personal property for
sale.
In construing the exemption provided in s. 212.08(7)(v),
F.S., the Department must adhere to and be guided by the
longstanding and fundamental precept of statutory construction,
established by the Florida Supreme Court, which mandates that
exemptions from or exceptions to taxing statutes must be
strictly construed against the taxpayer. See Asphalt Pavers v.
Dept. of Revenue, 584 So.2d 55, 57 (Fla. 1st DCA 1991); Dade
Cty. Taxing Auth. v. Cedars of Lebanon, 355 So.2d 1202, 1205
(Fla. 1978), reh. den. April 5, 1978; Williams v. Jones, 326
So.2d 425 (Fla. 1975), reh. den. March 4, 1976; Straughn v.
Camp, 293 So.2d 689 (Fla. 1974); United States Gypsum Company v.
Green, 110 So.2d 409 (Fla. 1959).

In the instant case, "Corporation" will produce and sell
steam necessary for it to continuously qualify as a qualified
cogeneration facility under certain federal mandates.
"Taxpayer" has agreed to purchase such steam at a certain price
with allowable discounts. Title to the steam passes at the time
the steam is delivered to "Taxpayer." "Corporation," at its own

expense, will provide all interconnection facilities required
for delivery of the steam to "Taxpayer." "Corporation" is
allowed to sell the steam to other parties as long as it
provides "Taxpayer" with the steam required for its plant
operations. "Corporation" will lease a well from "Taxpayer" and
install pumps and water lines to secure water needed for
operation of its facility; however, "Taxpayer" is not required
to provide water.

Based on these facts, it is the Department of Revenue's
position that the agreement between "Taxpayer" and "Corporation"
constitutes an agreement for the purchase and sale of steam.
The agreement cannot be viewed as an exempt professional or
personal service since the tangible personal property (steam) is
not an inconsequential element of the transaction. Neither,
under the circumstances, is the process of converting water into
steam a service of a professional or personal nature for
purposes of s. 212, F.S. Therefore, the charge for the steam
delivered from "Corporation" to "Taxpayer" is subject to sales
tax.

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
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 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,

Sharon Gallops
Technical Assistant

/sg
Cont. #16516