Which purchases for a new natural-gas and distillate-oil electric generating unit qualified for Florida's power-production machinery exemption?

Plain-English summary

Florida concluded that the machinery and integrated systems for a city's new combined-cycle electric generating unit generally qualified for the section 212.08(5)(c) sales-tax exemption at the time of purchase.

The unit used natural gas as its primary fuel and No. 2 distillate oil as its secondary fuel. Neither was residual oil. Because the unit would produce electrical energy for sale, the Department found the facility met the exemption's fuel and production requirements.

That fuel mix also avoided the partial-exemption refund procedure. The statute required proration and a later refund where machinery burned both residual and nonresidual fuels. Here, no residual oil was used, so qualifying purchases by the city and contractor were exempt when bought.

The integrated generation systems qualified

Applying Jacksonville Electric Authority v. Department of Revenue and the integrated-plant theory, the Department treated machinery used in the generation process as exempt even when it made the plant operate more practically rather than being intrinsically necessary to generate electricity.

The qualifying major components included the gas turbine/generator, steam turbine/generator, heat-recovery steam generator, steam and feedwater systems, condensate and circulating systems, auxiliary cooling water, water treatment, continuous emissions monitoring, fire protection, and the listed miscellaneous and electrical systems subject to two exclusions.

Distribution and real-property improvements did not qualify

• Transformers: only the first step-up transformer after a turbine qualified. Later step-up transformers were part of electrical distribution, not generation.
• Roads and stormwater: roadway improvements and stormwater systems were real-property improvements and did not qualify under this machinery-and-equipment exemption.

The exemption affidavit had to follow the purchasing chain

The benefit extended to the city, the contractor, and subcontractors. The city gave an affidavit to the contractor; the contractor issued its own affidavit to subcontractors with a copy of the city's; and the process continued until the purchase order reached the vendor.

The TAA said the affidavit could be attached to or incorporated into the purchase order, had to carry the false-affidavit warning, and had to be notarized. A party could not use another business's registration, exemption, or direct-pay certificate number.

What this means for you

Electric utilities and municipalities

Classify each component by function. Generation equipment may qualify under the integrated-plant analysis, but distribution equipment and real-property improvements can remain taxable within the same project.

General contractors

The exemption did not rest solely on the city's status. The TAA required an affidavit chain from the city through the contractor and every subcontract tier to the vendor making the qualifying sale.

Subcontractors and procurement teams

Match each purchase order to qualifying machinery, equipment, or materials and use your own entity's documentation. Do not place another party's sales-tax registration, exemption-certificate, or direct-pay number on the affidavit.

Tax professionals

Confirm both the fuel test and the equipment's place in generation. If residual oil is also burned, the proration/refund rule described in subsection 2 may apply instead of exemption at purchase.

Common questions

Q: Why did the facility qualify?
A: It burned nonresidual fuels and produced electrical energy for sale.

Q: Did the city have to pay tax first and seek a refund?
A: Not on the stated fuel mix. The TAA says qualifying machinery and equipment were exempt at purchase because residual oil was not a fuel source.

Q: Did all transformers qualify?
A: No. Only the first step-up transformer after a turbine qualified; later ones were distribution equipment.

Q: Did roads and drainage qualify?
A: No. The TAA classified roadway improvements and stormwater systems as real-property improvements.

Q: Which entities received the benefit?
A: The city, contractor, and subcontractors, using the affidavit procedure described in the TAA.

Q: Did the affidavit need notarization?
A: Yes. The Department required notarization whether the affidavit was separate or incorporated into the purchase order.

Citations and references

• Fla. Stat. § 212.08(5)(c) — machinery and equipment used at a fixed location to produce electrical or steam energy from qualifying fuels.
• Fla. Stat. § 212.085 — penalty referenced for a false exemption affidavit.
• Jacksonville Electric Authority v. Department of Revenue, 486 So. 2d 1350 (Fla. 1st DCA 1986) — integrated-plant theory for generation machinery and equipment.
• JEA/FPL Declaratory Statement, Exhibit B — Department guide identified in the TAA for component qualification.
• Fla. Stat. § 213.22 — Technical Assistance Advisements.
• Fla. Stat. ch. 119 — public-record disclosure with identifying details deleted.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-087

Original ruling text

SUMMARY

A city will be constructing an additional electric

generating unit at is existing generation facility. The
primary fuel for the new unit will be natural gas with
distillate oil (#2 oil) as a secondary fuel. All major
components for the new unit will qualify for exemption as
machinery and equipment necessary in the production of
electrical or steam energy, except for stormwater systems
and roadway improvements, which are considered real
property improvements; and transforms occurring after the
first step up transformer, which are considered to be a

part of the electrical distribution system. Since residual

oil is not a fuel source, the requirement of subparagraph

2. of the exemption statute to pay tax upon the purchase of
   qualifying machinery and equipment and seek a subsequent

refund is not applicable.

Dec 02, 1998

Re: Technical Assistance Advisement 98A-087
Sales and Use Tax
Construction of Electric Generating Unit

Section 212.08(5)(c), F.S.

Dear:

This is in response to your request for a Technical
Assistance Advisement regarding the construction of an electric
generating unit designated XXX (hereinafter "Unit") by XXX
(hereinafter "Contractor") for the XXX (hereinafter "the City").

Based on your letter and exhibits accompanying the letter,
the following is understood. Contractor and the City have
entered into a fixed price contract for the construction of a
combined cycle electric generating unit at the City's existing
electric generating facility located in XXX. Unit will be

fueled by natural gas as a primary fuel and distillate oil (#2

oil) as a Secondary fuel. Exhibit B of your letter indicates the
following as major components of Unit that will be constructed:
gas turbine/generator, steam turbine/generator, heat recovery
steam generator (HRSG), steam system, boiler feedwater system,
condensate system, circulating system, auxiliary cooling water
system, electrical (transformers), miscellaneous systems, water
treatment system, continuous emission monitoring systems (CEMS),
and fire protection system. Since Unit is an addition to an

existing facility, no administrative, control, or other

buildings will be constructed under this contract. However,
certain structures will be constructed for the purposes of
enclosing, providing shelter, or controlling the environments

for some machinery and equipment. Approximately XXX of the

contract cost will relate to roads and drainage for Unit.

It is the position of the City that, except for the road
and drainage systems, purchases of materials, machinery, and
equipment for the construction of Unit qualify for exemption

under the provisions of Section 212.08(5)(c), F.S.

RELEVANT AUTHORITY

The following passages from the Florida Statutes (F.S.) are

pertinent to your request for a Technical Assistance Advisement.

Section 212.08(5)(c), F.S. (1998 Supplement), provides:

(c) Machinery and equipment used in production of

electrical or steam energy.

1. The purchase of machinery and equipment for use at a
   fixed location which machinery and equipment 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. Use

of ade minimis amount of residual fuel to facilitate the
burning of nonresidual fuel shall not reduce the exemption

otherwise available under this paragraph.

2. In facilities where machinery and equipment are
   necessary to burn both residual and nonresidual fuels, the
   exemption shall be prorated. Such proration shall be based
   upon the production of electrical or steam energy from
   nonresidual fuels as a percentage of electrical or steam
   energy from all fuels. Purchasers claiming a partial
   exemption shall obtain such exemption by refund of taxes

paid, or as otherwise provided in the department's rules.

3. The department may adopt rules that provide for
   implementation of this exemption. Purchasers of machinery
   and equipment qualifying for the exemption provided in this
   paragraph shall furnish the department with an affidavit
   stating that the item or items to be exempted are for the
   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. Purchasers with self-accrual authority
   shall maintain all documentation necessary to prove the

exempt status of purchases.

DETERMINATION

Exemption of Facility

The exemption provided under Section 212.08(5)(c), F.S., is
applicable to those facilities that produce electrical or steam
energy from the burning of fuels other than residual oil. The
natural gas and distillate oil fuels to be burned at Unit are
not residual oil fuels. The exemption further requires that
such electrical or steam energy must be primarily used in
manufacturing, processing, compounding, or producing tangible
personal property for sale. It is the established position of
the Department that the electrical energy is the tangible
personal property that is produced for sale. Accordingly, since
Unit does not burn residual oil and electrical energy is
produced for sale, Unit qualifies for exemption. Further, since
residual oil is not a fuel source, Contractor and the City are

not obligated under the provisions of subparagraph 2. of the

exemption statute to pay tax on the purchases of machinery and
equipment and seek a subsequent refund of the exempt portion.
Contractor's and the City's purchases of qualifying machinery
and equipment will be exempt at the time of the purchase

transaction.

Qualifying Purchases

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). That case involved the taxable status

of certain machinery and equipment purchased by the Jacksonville
Electric Authority to be used in the burning of coal to produce

electrical energy.

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,

but not distribution, would qualify for the exemption provided

in Section 212.08(5)(c), F.S.

The Department implemented the court's instructions by
amending "Exhibit B" of the JEA/FPL Declaratory Statement.
"Exhibit B" now serves as a guide for the Department when
embracing the "Integrated Plant Theory." Therefore, based on
"Exhibit B" of the JEA/FPL Declaratory Statement and prior
Technical Assistance Advisements issued by the Department, which

interpret that exhibit, the Department now finds the following

major components of Unit, with exceptions as noted, fully

qualify for exemption.

Gas turbine/generator

Steam turbine/generator

Heat recovery steam generator (HRSG)
Steam system

Boiler feedwater system

Condensate system

Circulating system

Auxiliary cooling water system

Electrical (Note: All items within this major component
qualify. However, with respect to step up transformers, only
the first step up transformer after a turbine qualifies as
necessary in the production of electrical energy, other step up
transformers are considered to be a part of the distribution
system and do not qualify.)

Miscellaneous systems (Note: All items within this major
component qualify except stormwater systems and roadway
improvements, which are considered to be real property

improvements.)
Water treatment system
Continuous emission monitoring systems (CEMS)

Fire protection system

Affidavit Procedures

The benefit of the exemption inures to the City, to the
Contractor, and to Contractor's subcontractors. The exemption
is implemented by extending an affidavit to the machinery and
equipment or materials vendor at the time of the purchase
transaction. At no time when extending an affidavit for the
exemption provided in Section 212.08(5)(c), F.S., should anyone
include another business entity's Certificate of Registration
number (sales tax number), Consumer's Certificate of Exemption
number, or Direct Pay Certificate number. Each of those numbers
may only be used by the business entity to which it was

assigned.

Procedurally, an affidavit must be given by the City to
Contractor. Contractor, in turn, would then issue its own
affidavit to its subcontractors along with a copy of the
affidavit provided by the City. This process continues from
subcontractors to sub-subcontractors until the actual purchase
order is issued to the vendor or supplier for the qualifying

machinery and equipment or materials.

The affidavit may be a separate document attached to
purchase orders or it may be incorporated within the purchase
order itself. If the affidavit is incorporated within the
purchase order, a statement that would have the same effect as
the statement regarding a false affidavit, as provided in the
sample affidavit, must be incorporated within the purchase
order. Further, it is the position of the Department that the
affidavit must be notarized regardless of whether the affidavit
is incorporated within the purchase order or is an independent
affidavit attached to the purchase order. The following is a

suggested format for the affidavit.

AFFIDAVIT

STATE OF FLORIDA
COUNTY OF

On this day, personally appeared the undersigned who, being

first duly sworn, deposes and says:

That all machinery and equipment purchased from

will be incorporated into and/or become a component part of the

located in , Florida,

County of . Further that said machinery and

equipment is necessary for the production of electric or steam
energy resulting from the burning of boiler fuels other than
residual oil and is exempt from the tax imposed by Chapter 212,
Florida Statutes, Sales and Use Tax Act, pursuant to Section

212.08(5)(c), Florida Statutes.

| understand any person furnishing a false affidavit to a vendor
for the purpose of evading payment of any tax imposed under

Chapter 212, Florida Statutes, shall be subject to the penalty

set forth in Section 212.085, Florida Statutes, and as otherwise

provided by law.

Purchaser's Name Signature

Sworn to and

subscribed before me

this _———s dayoff
,A.D.,19

Notary Public
(Seal)

My Commission Expires

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 response.

Sincerely,

Jeffery L. Soff
Tax Law Specialist
Technical Assistance and

Dispute Resolution

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