Could a new Florida desalination business buy its production machinery and equipment without sales tax?

Plain-English summary

The planned desalination partnership qualified as a new business eligible to buy qualifying production machinery and equipment without sales tax. Turning seawater into potable water through filtration, chemicals, and reverse osmosis was “processing” tangible personal property for sale at a fixed Florida location.

The qualifying production line began with seawater intake equipment and piping in Florida territorial waters and ended at the product-water storage tank. The pipeline carrying finished potable water to the regional water authority came after production and did not qualify.

The business still had to obtain its Department registration, register with the WAGES program, and apply for a temporary tax exemption permit. Purchases had to be made before productive operations began, although equipment ordered before that date could arrive within 12 months afterward.

What this means for you

The exemption followed the production boundary, not the whole project. Integral machinery, special foundations, specified wiring, qualifying controls, pollution equipment, and certain waste-removal equipment could qualify; post-production distribution assets did not.

Timing was equally important. Test and calibration runs did not begin production unless the resulting product was inventoried or sold. For this project, production began when potable water became available for sale or was sold to the authority.

Common questions

Q: Did the desalination activity count as processing? Yes. The Department treated conversion of seawater into potable water as processing tangible personal property for sale.

Q: Where did the qualifying production process end? At the product-water storage tank.

Q: Did the delivery pipeline to the water authority qualify? No. It operated after production was complete.

Q: Could equipment be delivered after production started? Yes, if it was purchased before production and delivered within 12 months after production began.

Q: Did calibration testing start production? Not by itself. Production began when water was available for sale or sold, including if test-run water entered inventory or was immediately sold.

Citations and references

• Fla. Stat. § 212.08(5)(b) — new-business machinery and equipment exemption, permits, timing, and registration
• Fla. Stat. § 212.02(19) — tangible personal property
• Fla. Stat. § 212.18(3)(a) — business registration
• Fla. Admin. Code r. 12A-1.096 — qualifying machinery, equipment, production boundaries, foundations, and wiring
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-072

Original ruling text

Nov 07, 1997

Re: Technical Assistance Advisement 97A-072
Sales and Use Tax
New Business Exemption
Section 212.08(5)(b), F.S.
Rule 12A-1.096, F.A.C.

Dear :

This is in response to your letter of September 26, 1997,
requesting a Technical Assistance Advisement (TAA) on behalf of
your client, XXX, who is forming a new partnership (hereinafter
"Taxpayer") with an affiliate of XXX. The subject of this
request concerns Taxpayer's ability to qualify for an exemption
from sales and use tax on purchases of machinery and equipment
under the provisions of Section 212.08(5)(b), F.S., as a new
business.

TAXPAYER'S PROPOSED ACTIVITY

Based on the information provided in your letter and our
telephone conversations, Taxpayer does not currently operate any
kind of facility in Florida. Taxpayer is considering the
construction of a desalination facility in Florida. The
facility would be constructed at the water's edge or in close
proximity thereto. Seawater would be drawn into the facility
and processed into potable (drinkable) water. This would be
accomplished through filtration, the addition of chemicals, and
the use of reverse osmosis equipment and technology. Following
the desalination process, the potable water would be transported
through pipelines and sold to a regional water authority
governed by the provisions of Section 373.1962, F.S.

RELEVANT AUTHORITY

Section 212.08(5)(b), F.S. (1996), provides in part:

(b) Machinery and equipment used to increase productive

output.

1. Industrial machinery and equipment purchased for use in
   new businesses which manufacture, process, compound, or
   produce for sale,... items of tangible personal property at
   fixed locations are exempt from the tax imposed by this
   chapter upon an affirmative showing by the taxpayer to the
   satisfaction of the department that such items are used in
   a new business in this state. Such purchases must be made
   prior to the date the business first begins its productive
   operations, and delivery of the purchased item must be made
   within 12 months of that date....

3.a. To receive an exemption provided by subparagraph 1. or
subparagraph 2., a qualifying business entity shall apply
to the department for a temporary tax exemption permit....

6. For the purpose of the exemptions provided in
   subparagraphs 1. and 2., these terms have the following
   meanings:

a. "Industrial machinery and equipment" means "section 38
property" as defined in s. 48(a)(1)(A) and (B)(i) of the
Internal Revenue Code, provided "industrial machinery and
equipment" shall be construed by regulations adopted by the
Department of Revenue to mean tangible property used as an
integral part of the manufacturing, processing,
compounding, or producing for sale,... of items of tangible
personal property. Such term includes parts and
accessories only to the extent that the exemption thereof
is consistent with the provisions of this paragraph....

7. 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.
   Such registration establishes a commitment on the part of
   the taxpayer to hire WAGES program participants to the
   maximum extent possible consistent with the nature of their
   business.

DETERMINATION

Qualification for Exemption

The provisions of Section 212.08(5)(b), F.S., present
various criteria that must be met in order for a business to
qualify for exemption under that statute. From an operational
standpoint, the statute requires the business to manufacture,
process, compound, or produce an item of tangible personal
property at a fixed location for sale. It is the Department's
position that the conversion of seawater into potable water is
"processing" for the purposes of the exemption statute. Potable
water is tangible personal property as that term is defined in
Section 212.02(19), F.S. Further, the construction of a
desalination facility would obviously be a fixed location.
Finally, it is Taxpayer's intention to sell the potable water to
a regional water authority. Therefore, since Taxpayer will
begin processing tangible personal property at a fixed location
for sale, Taxpayer meets the criteria as a new business pursuant
to Section 212.08(5)(b)1., F.S.

The exemption statute also establishes certain
administrative criteria for exemption. Pursuant to subparagraph

3. of the exemption statute, a business must apply for the
   exemption. This may be accomplished by completing and
   submitting an Application for Temporary Tax Exemption Permit,
   Form DR-1214. Subparagraph 7. additionally requires the
   business seeking the exemption to register with the WAGES
   Program Business Registry. This may be accomplished by
   completing and submitting a WAGES Program Business Registry
   Application, Form J&B 5000, with the Florida Department of Labor
   & Employment Security. Although not an express requirement
   within the exemption statute, Section 212.18(3)(a), F.S.,
   requires every person (business) desiring to conduct business in
   this state to apply for a certificate of registration with the
   Department of Revenue before engaging in that business. This
   application may be made by completing and submitting an
   Application for Sales and Use Tax Registration, Form DR-1.

Therefore, based on the proposed activities of Taxpayer, at

such time as Taxpayer has obtained a certificate of
registration, has registered with the WAGES Program Business
Registry, and has submitted an application for temporary tax
exemption permit, it will qualify for and be issued a temporary
tax exemption permit as a new business.

Machinery and Equipment Qualifying for Exemption

The machinery and equipment qualifying for exemption is
that which is allowed in subparagraph 6.a. of the exemption
statute. Generally, this includes all machinery and equipment
which is integral to the production process, beginning at the
point where raw materials are received, and ending at the point
where the finished goods are packaged or are in saleable form if
packaging is not done. However, pursuant to Rule 12A1.096(1)(e), F.A.C., the production process may include
subsequent quality control activities for perishable foods, if
such quality control activities are required by good
manufacturing practices mandated by state or federal government
agencies.

With respect to the desalination facility, the exemption
would begin with the seawater intake equipment and piping
located in Florida's territorial waters and continue through the
product water storage tank. The pipeline which transfers the
potable water to the water authority occurs after the production
process and will not qualify for exemption.

Pursuant to Rule 12A-1.096(8), F.A.C., special foundations
for, and electrical wiring from the panel box to the qualifying
machinery and equipment also qualify for the exemption.
Additional types of qualifying equipment are: quality controls,
pollution controls, monitoring or controlling equipment, and
machinery and equipment used to remove waste materials from the
production process where the removal of such waste material is
integral to maintain the operation of the production process.
Further, replacement or repair parts for qualifying machinery
and equipment will likewise qualify for exemption if the
replacement or repair parts are ordered prior to the start of
production and are received within 12 months of the first date
of production.

Start of Production

A qualifying new business is allowed to purchase machinery
and equipment tax exempt prior to the date that productive
operations begin. Any purchases initiated by a new business
after the start of production will not qualify for exemption.
If a purchase agreement for machinery and equipment is made
before the start of production, but the items will not be
received until after production has commenced, those items will
still qualify for exemption, if they are received within 12
months of the start of production.

The start of production is generally the date that a
product is first placed in inventory or is immediately sold.
Initial test or trial runs necessary to calibrate or evaluate
the operation of machinery and equipment are not considered to
be the start of production, unless the product is placed into
inventory or is immediately sold. Taxpayer's start of
production will be that date that water is available for sale or
is sold to the water authority.

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 advise 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 advise 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 response.

Sincerely,

Jeffery L. Soff
Tax Law Specialist
Technical Assistance and
Dispute Resolution

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