Could a Florida seawater desalination plant buy electricity tax-free for machinery that converted seawater into potable water?

Plain-English summary

The partnership could claim the electricity exemption for power used directly and exclusively in the desalination production process. The plant would use chemical treatment, filtering, and reverse osmosis to turn seawater into potable water for sale. The Department treated that activity as manufacturing or processing tangible personal property at a fixed Florida location.

The exemption also covered qualified pollution-control, recycling, maintenance, monitoring, and control equipment related to production. It did not cover the entire facility: administrative offices, parking and exterior lighting, employee areas, cafeterias, washrooms, and storage areas were examples of nonqualifying uses.

Metering controlled the amount. A meter serving both exempt and nonexempt uses qualified for only a 50% exemption. A separate meter measuring qualified electricity could receive the full exemption then available under the statute's phase-in schedule. The partnership also had to register with the WAGES program and remain within an eligible SIC industry group.

What this means for you

The source treated potable water as tangible personal property even though Florida separately exempted water sales. Converting raw seawater into saleable potable water was the qualifying production process.

Facilities with both production and general-building loads need reliable electrical separation. The ruling did not allow estimates to turn mixed-use electricity into a blanket plant-wide exemption.

Common questions

Q: Did all electricity used at the desalination facility qualify? No. Only electricity used directly and exclusively for the listed production and related equipment qualified.

Q: Did office and employee-area electricity qualify? No. The Department listed administrative offices, exterior lighting, locker rooms, lounges, cafeterias, washrooms, and storage areas as nonqualifying examples.

Q: What happened if one meter served both qualifying and nonqualifying uses? The exemption was limited to 50% of the electricity charge on that meter.

Q: What additional eligibility conditions applied? The partnership had to register with the WAGES program, fall within an eligible SIC major industry group, and use the electricity at a fixed Florida location.

Citations and references

• Fla. Stat. § 212.08(7)(ii) — qualifying electricity uses, industry groups, metering, registration, and phase-in
• Fla. Stat. § 212.02(19) — tangible personal property
• Fla. Stat. § 212.08(4)(a)1. — water exemption
• Fla. Admin. Code r. 12A-1.096 — fixed location, process, and production-process definitions used by analogy
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-070

Original ruling text

SUMMARY

Electricity can be purchased tax exempt by partnership where: (1) the partnership will register with the WAGES program; (2) the partnership's SIC major industry group number is one of those specified in section 212.08(7)(ii), F.S.; (3) the electricity will be used at a fixed location in Florida; and (4) the electricity will be used directly and exclusively to operate machinery and equipment that is used to process seawater into potable water through chemical, filtering and desalination operations or is pollution control, recycling, maintenance, monitoring or control equipment related to such operations. The extent of the exemption will depend upon whether electricity used for qualified purposes is separately metered and upon the phase-in limitation in the statute.

Nov 04, 1997

Re: Technical Assistance Advisement 97A-070 Electricity Exemption - Desalination Plant Section 212.08(7)(ii), F.S. Rule 12A-1.096, F.A.C. Taxpayer: XXX FEI#: XXX

Dear :

This response is to your letter dated October 6, 1997, requesting the Department's issuance of a Technical Assistance Advisement (TAA) pursuant to section 213.22, F.S., and Chapter 12-11, F.A.C., regarding the referenced matter. Your letter and supporting documents provided the following pertinent information.

FACTS PRESENTED

XXX (the "General Partner") is forming a new Florida limited

partnership (the "Partnership") with an affiliate of YYY. The Partnership will register with the Department as a dealer under Florida's sales and use tax laws and will register with the appropriate WAGES (Work and Gain Economic Self-sufficiency Act) Program business registry. The Partnership will submit a proposal to ZZZ (the "Authority") to design, construct, and operate a seawater desalination facility. Seawater would be drawn into the facility and be processed into potable water, using chemical and filtering processes and reverse osmosis technology. This will require desalination and other processing equipment as well as equipment to serve pollution control, maintenance, monitoring and control functions. The General Partner has determined that the The Partnership will be classified under Standard Industry Classification Number 3999, "Manufacturing Industries, Not Elsewhere Classified."

The facility will be designed to produce XXX gallons of desalinated water daily. The water would be delivered through a pipeline to a distribution center owned and operated by the Authority, which would purchase the entire output of the facility. The Authority would resell the water to governmental units, which would in turn sell the water to the ultimate consumers.

REQUESTED ADVISEMENT

The General Partner has requested an advisement that the Partnership will qualify for an exemption from sales tax on electricity pursuant to section 212.08(7)(ii), F.S.

RELEVANT AUTHORITIES

Section 212.08(7)(ii), F.S., was enacted in 1996 to provide an exemption for electricity used by certain taxpayers. The relevant portion of the statute reads as follows:

(ii) Certain electricity uses.--Charges for electricity used directly and exclusively at a fixed location in this state to operate machinery and equipment that is used to manufacture, process, compound, or produce items of tangible personal property for sale, or to operate

pollution control equipment, recycling equipment, maintenance equipment, or monitoring or control equipment used in such operations are exempt from the tax imposed by this part as provided in subparagraph 2. The exemption provided for herein is applicable if the electricity that is used for the exempt purposes is separately metered, or if it is not separately metered, it is irrevocably presumed that 50 percent of the charge for electricity is for nonexempt purposes. This exemption only applies to industries classified under SIC Industry Major Group Numbers 10, 12, 13, 14, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, and 39. As used in this paragraph, "SIC" means those classifications contained in the Standard Industrial Classification Manual, 1987, as published by the Office of Management and Budget, Executive Office of the President....

Notwithstanding any other provision in this paragraph to the contrary, in order to receive the exemption provided in this paragraph a taxpayer must register with the WAGES Program Business Registry established by the local WAGES coalition for the area in which the taxpayer is located....

The exemption is to be phased in at 20 percent per year on July 1, 1996, 1997, 1998, 1999, and 2000. Currently, the exemption applies to 40 percent of the electricity a taxpayer uses for the purposes specified in the statute.

The Department has not yet issued any regulatory interpretation of section 212.08(7)(ii), F.S. There is, however, another exemption with similar wording in section 212.08(5)(b), F.S. That provision exempts certain purchases of machinery and equipment by "businesses which manufacture, process, compound, or produce for sale,... items of tangible personal property at fixed locations." There are distinctions between the two exemptions that preclude a conclusion that a taxpayer who qualifies for one will always qualify for the other. They are similar, however, in that they apply only to taxpayers who "manufacture, process, compound, or produce" tangible personal property for sale at "fixed locations." It is reasonable, therefore, to look to the definitional portions of Rule 12A-

1.096, F.A.C., which provides guidance on section 212.08(5)(b), F.S., in interpreting those terms for purposes of section 212.08(7)(ii), F.S. In that regard, Rule 12A-1.096, F.A.C., provides as follows:

12A-1.096 Industrial Machinery and Equipment for Use in a New or Expanding Business.

(1) Definitions - The following terms and phrases when used in this rule shall have the meaning ascribed to them except where the context clearly indicates a different meaning:

(a) "Fixed location" means being permanently affixed to one location or plant site, or any portable plant which is set up for a period of not less than six months in a stationary manner so as to perform the same industrial manufacturing, processing, compounding or production process that could be performed at a permanent location or plant site. The geographical limits of the "fixed location" for purposes of this rule are limited to the immediate permanent location or plant site....

(d) "Process" means a series of operations conducing to an end which is an item of tangible personal property for sale....

(e) "Production process" means production activities beginning when raw materials are delivered at the fixed location of the... facility and generally ending when the items of tangible personal property have been packaged for sale, or are in saleable form if packaging is not done....

"Tangible personal property" is defined in section 212.02 (19), F.S., as "personal property which may be seen, weighed, measured, or touched or is in any manner perceptible to the senses...." Section 212.08(4)1., F.S., specifically exempts water, except mineral water and carbonated water, from sales and use tax.

ADVISEMENT

Section 212.08(7)(ii), F.S., contains the following restrictions and requirements in regard to the exemption for electricity:

1. A taxpayer must register with the WAGES Program.

2. A taxpayer's activities must fall within the specified SIC
   Industry Major Group Numbers.

3. The electricity must be used at a fixed location in Florida.

4. The electricity must be used "directly and exclusively to
   operate machinery and equipment" that is used to "manufacture, process, compound, or produce items of tangible personal property for sale "or is pollution control, recycling, maintenance, monitoring or control equipment related to manufacturing, processing, compounding or production operations.

5. The exempt electricity must be separately metered; if not,
   the statute limits the exemption to 50 percent of the charges for electricity.

The Partnership will satisfy the first three requirements. The General Partner has stated that the Partnership will register with the WAGES Program and it is assumed that will occur prior to the facility being put into operation. The General Partner has determined that the Partnership's activities will be classified under SIC Major Industry Group Number 39, Miscellaneous Manufacturing Industries. A review of the SIC code system confirms the General Partner's conclusion that there is no other category into which operation of a desalination facility as described herein would fit. The facility will be a fixed location in Florida.

The two remaining items listed above deal with restrictions on the exemption. The exemption extends only to electricity used directly and exclusively to operate machinery and equipment that is described in the statute. It is not a blanket exemption for an entire facility. For example, electricity used for administrative or management office areas (including office equipment in those areas), parking lot or other exterior lighting, employee locker rooms or lounges, cafeterias,

washrooms, storage rooms or closets would not qualify.

The Partnership will, however, use various types of machinery and equipment in the conversion of unusable seawater into potable water that will be sold and ultimately used by residential and commercial consumers just as water drawn from other sources is used. Water is tangible personal property within the meaning of section 212.02(19), F.S. It can be seen, touched, weighed, measured and is perceptible to the senses. If this were not the case, it would not be necessary to create an exemption from Chapter 212 for water in section 212.08(4)(a)1., F.S. In addition, the desalination activities to be carried on at the facility are included in the terms "manufacture, process, compound, or produce" as interpreted in Rule 12A-1.096, F.A.C. A raw material (seawater) will be subjected to a series of chemical, filtering and reverse osmosis operations that will alter its composition and convert it into a finished item of tangible personal property (potable water suitable for human consumption) which will be sold. Electricity that is used directly and exclusively to operate machinery and equipment involved in that process or to operate pollution control, maintenance, monitoring or control equipment related to that process is exempt under section 212.08(7)(ii), F.S.

No information has been provided concerning how electricity for the facility will be metered. The Partnership will be limited to a 50 percent exemption for electricity that flows through any meter that handles both exempt and non-exempt electricity. If electricity used for exempt purposes is separately metered, the Partnership will be entitled to total exemption of electricity measured by that meter. Any exemption to which the Partnership is entitled will be subject to the phase-in limitations set forth in the statute.

In summary, the Partnership will produce potable water, which is tangible personal property, for sale. This will be done through a series of operations constituting a manufacturing or production process. The Partnership's SIC Major Industry Group Number is within the list set forth in the statute, and the Partnership will register with the WAGES Program. The Partnership will qualify for the exemption on electricity set

forth in section 212.08(7)(ii), F.S., subject to the limitations and four-year phase-in schedule contained in that statute.

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 confidential information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or this response.

Sincerely,

Linda W. Bridges
Tax Law Specialist
Technical Assistance and Dispute Resolution

LWB/
Control # 31072