Which machinery and equipment for a combined-cycle cogeneration facility qualified for Florida's energy-production sales-tax exemption?

Plain-English summary

Florida approved the energy-production exemption for most of the machinery and equipment listed for the new combined-cycle cogeneration facility. Applying the integrated-plant theory, the Department treated equipment used in the generation process as qualifying even when it mainly made the plant operate more practically.

The approved categories included all listed combustion-turbine equipment, qualifying fuel equipment, instrumentation and controls, steam-boiler equipment, central cooling machinery, conduits and ducts, auxiliary generation equipment, generators, turbine piping, and switching equipment. Most of the water-supply and purification system also qualified.

The approval had limits. Three listed water-system items—the circulating-water chemical-feed building, its drains and plumbing, and the water sampling and analyzing system—did not qualify. Chlorination-system machinery qualified, but the chemicals used in that system did not. No. 2 distillate storage and supply equipment qualified only when used to produce steam or electricity, not when serving trucks or other nonqualifying equipment.

The ruling also addressed a lump-sum real-property contract. The contractor, as the consumer of materials incorporated into real property, was responsible for tax on those purchases. The producer's machinery exemption could not be passed through to the contractor.

What this means for you

Power producers and cogeneration facilities

Classify each item by its actual role in producing electricity or steam. A system's plant location or operational usefulness was not enough when the item was real property, was not machinery or equipment, or did not serve the production process.

Construction contractors

A lump-sum contract does not transfer the producer's exemption to the contractor. The ruling treated the contractor as the taxable consumer of materials used to improve real property.

Accountants and tax professionals

Keep records separating qualifying installed machinery from chemicals, real-property improvements, and equipment used for other purposes. The statute also required the purchaser's exemption affidavit.

Common questions

Q: Did all listed combustion-turbine, boiler, generator, piping, and switching equipment qualify? A: Yes. The Department approved every item in those listed categories.

Q: Did the whole water-supply and purification system qualify? A: No. The chemical-feed building, its drains and plumbing, and the water sampling and analyzing system were excluded.

Q: Were chlorination chemicals exempt with the cooling system? A: No. The chlorination equipment and machinery qualified, but the chemicals did not.

Q: Did diesel-oil storage and supply equipment qualify? A: Only when it handled No. 2 distillate used to produce steam or electricity. Equipment serving trucks or other nonqualifying uses did not qualify.

Q: Could a lump-sum construction contractor buy its materials exempt under the producer's exemption? A: No. The ruling said the exemption did not pass through to the contractor, which remained responsible for tax on materials incorporated into real property.

Q: Can another facility rely on this TAA? A: Not automatically. The advisement binds the Department only under the facts and circumstances described in the request, and later legal changes or judicial interpretations may produce a different result.

Citations and references

• Fla. Stat. § 212.08(5)(c) — machinery and equipment used to produce electrical or steam energy
• Fla. Stat. § 212.085 — penalty referenced for a false exemption affidavit
• Fla. Admin. Code r. 12A-1.051 — contractors who construct or improve real property
• Jacksonville Electric Authority v. Department of Revenue, 486 So. 2d 1350 (Fla. 1st DCA 1986) — integrated-plant theory
• JEA/FPL Declaratory Statement, Exhibit B — Department guide used to compare the listed equipment

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-060

Original ruling text

Dec 09, 1996

Re: Technical Assistance Advisement 96A-060 Sales and Use Tax; 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 May 9, 1996, wherein you requested a technical assistance advisement concerning the purchases of machinery and equipment for a new cogeneration facility. Your letter provides the following project description.

XXXX will construct a combined cycle combustion turbine and heat recovery steam generator in XXX, that will be used in the production of electrical energy for resale. The unit has been designed to use natural gas as the primary fuel, and number 2 distillate oil as a backup fuel. Exhibit A lists the various systems included in this generation facility. The machinery and equipment associated with these systems will be used at a fixed location and are necessary, within the integrated plant theory, in the production of electrical or steam energy resulting from the burning of boiler fuels other than residual oil.

RELEVANT AUTHORITY

The statutory authority for the specific exemption in question is Section 212.08(5)(c), F.S., which 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.

FPL/JEA COURT CASE
As you are aware, 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 resulted from an appeal taken from a declaratory statement issued to Jacksonville Electric Authority and XXXX. The declaratory statement set forth in an exhibit ("exhibit B"), a list of the taxable status of certain machinery and equipment to be used in the burning of coal to produce electrical energy. The machinery and equipment fell into three categories: (1) coal handling equipment; (2) equipment required by state and federal law; and (3) electrostatic precipitators. An appeal was taken with respect to certain items of machinery and equipment found to be taxable by the Department.

The District Court of Appeal determined that it was the legislative intent, based on the tape recorded proceedings of the Florida Senate Committee on Ways and Means, 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.

Therefore, the machinery and equipment used in the process of generating electrical energy would qualify for the exemption provided in Section 212.08(5)(c), F.S.

The Court construed Section 212.08(5)(c), F.S., to include pollution control equipment as "necessary in the production of steam or electrical energy", notwithstanding 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. at 1355

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, which has instructed the Department to embrace the "Integrated Plant Theory." The Department implemented the court's instructions in that case by amending "Exhibit B" of the JEA/FPL Declaratory Statement. This "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.

Along with your request, you submitted a copy of a document entitled "Exhibit A" for examination. This technical assistance advisement will address the applicability of the exemption to the various systems and subsystems as presented in that exhibit. The determination as to whether a particular line item qualifies or does not qualify is based on whether that line item matches or is the equivalent to those items listed in "Exhibit B" of the JEA/FPL Declaratory Statement.

1. Combustion Turbines and Equipment

All equipment and machinery listed as "combustion turbines and equipment" qualifies for the exemption.

2. Fuel Equipment

All equipment and machinery listed as "fuel equipment" qualifies for the exemption. Please note, however, that the items listed as "a. Diesel Oil Storage" and "b. Diesel Oil Supply System" are exempt only if they refer to #2 distillate used in the process of producing steam or electrical energy. Diesel storage and supply systems for other purposes (such as to run non-qualifying equipment, trucks, etc.) will not qualify for the exemption.

3. Instrumentation and Control

All equipment and machinery listed as "instrumentation and control" qualifies for the exemption.

4. Steam Boiler

All equipment and machinery listed as "steam boiler" qualifies for the exemption.

5. Water Supply and Purification System

All equipment and machinery listed as "water supply and purification system" qualifies for the exemption with the following exceptions:

b. Circulating Water Chemical Feed Building

c. Circulating Water Chemical Feed Building Drains and Plumbing

i. Water Sampling and Analyzing System

6. Central Cooling System

All equipment and machinery listed as "central cooling system" qualifies for the exemption. However, under the item titled "a. Chlorination System", the exemption does not apply to any chemicals which are used in that system; only the actual

equipment and machinery used within the system are exempt.

7. Conduit/Ducts

All equipment and machinery listed as "conduit/ducts" qualifies for the exemption.

8. Auxiliary Generation Equipment

All equipment and machinery listed as "auxiliary generation equipment" qualifies for the exemption.

9. Generators

All equipment and machinery listed as "generators" qualifies for the exemption.

10. Turbine Plant Piping

All equipment and machinery listed as "turbine plant piping" qualifies for the exemption.

11. Switching Equipment

All equipment and machinery listed as "switching equipment" qualifies for the exemption.

It is important to note that the exemption provided by Section 212.08(5)(c), F.S., is limited to machinery and equipment used in the production of electrical or steam energy. The above line items indicated as not qualifying for the exemption are either: (a) real property improvements, (b) not machinery or equipment, or (c) machinery or equipment not used in the production of electrical or steam energy.

You further request a finding that lump sum contracts to construct or improve real property are exempt from sales and use tax under Rule 12A-1.051(5)(f), F.A.C. Rule 12A-1.051, F.A.C., in general, pertains to contractors who construct or improve real property. Contractors who engage in such activities are deemed to be the ultimate consumers of the materials they use in

fulfilling their contracts and are required to pay tax on all purchases of tangible personal property. Labor on real property improvements is not taxable. In the instant case, XXXX would enter into such a contract to improve real property with a registered contractor for a lump sum amount. The contractor would then be responsible for paying the tax to his material suppliers. The question of whether XXXX is liable for tax on these real property improvements is moot, since the liability for any tax due rests with the contractor.

It must be noted that the exemption provided by Section 212.08(5)(c), F.S., does not allow for the "pass through" of the exemption to the contractor (i.e., the contractor is not allowed to use the exemption to purchase materials on a tax exempt basis for use in real property contracts). In other words, the exemption applies only to the purchase of machinery and equipment by the actual producer of the steam or electrical 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 advice 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 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 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 the response.

Sincerely,

Patrick S. Foster
Senior Tax Specialist
Tax Policy and Dispute Resolution

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