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