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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