Which machinery and materials for a natural-gas electricity and steam plant qualified for Florida's production exemption?

Plain-English summary

Florida found the natural-gas facility eligible for the machinery exemption and approved most equipment integrated into producing electricity and steam for sale. The plant would generate 240 MW of electricity for a utility grid and sell steam to a manufacturer.

Qualifying categories included the gas and steam turbine systems, condenser, natural-gas and heat-recovery systems, chemical treatment, compressors, pumps, cooling tower, battery and electrical systems, emissions monitoring, tanks, controls, communications, fire protection, miscellaneous mechanical equipment, and permanent construction materials.

Specific exclusions included the compressor water-wash system, manuals, turbine and generator maintenance tools, special tools, instruction books, and workshop equipment. The Department expressed no opinion on categories marked not included or not required, such as water and sanitary treatment, security, fuel-oil, ponds, and bridge cranes.

The exemption had to be documented through notarized affidavits passed from owner to contractor and through each subcontracting tier to the vendor. A contractor reselling materials could alternatively use its own resale certificate where permitted.

What this means for you

The integrated-plant approach reached machinery that made production function as a system, but not distribution, general tools, manuals, or unrelated support items. Map every purchase to the approved process and affidavit chain.

Common questions

Q: Why did the facility itself qualify? It burned natural gas rather than residual oil and produced electricity and steam for sale.

Q: Did all Exhibit G items qualify? No.

Q: Was a refund required after paying tax? No. Qualifying purchases could be exempt at the transaction when properly documented.

Citations and references

• Fla. Stat. § 212.08(5)(c) — machinery and equipment producing electrical or steam energy
• Jacksonville Electric Authority v. Department of Revenue, 486 So. 2d 1350 (Fla. 1st DCA 1986) — integrated-plant theory
• Fla. Stat. § 212.085 — false-affidavit penalty
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-077

Original ruling text

SUMMARY

QUESTION: Contractor and Owner have entered into an
agreement for the construction of an electricity and steam
generating facility that will be fueled by natural gas. The
issue is whether materials, equipment, and supplies as
enumerated in an exhibit of that agreement constitute
machinery and equipment necessary in the production of
electrical or steam energy and, therefore, qualify for
exemption from Florida sales and use tax pursuant to
Section 212.08(5)(c), Florida Statutes.

ANSWER - Based on Facts Below: Those items that are
consistent with the findings of the JEA/FPL Declaratory
Statement and prior technical assistance advisements as
issued by the Department will qualify for exemption,
provided the proper affidavit procedures are followed.

Dec 28, 1999

Re: Technical Assistance Advisement 99A-077
Sales and Use Tax
Construction of Electricity and Steam Generating Facility
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
electricity and steam generating facility (hereinafter
"Facility") by XXX (hereinafter "Contractor") for XXX
(hereinafter "Owner").

Based on your letter and the documents accompanying the
letter, the following is understood. Contractor and Owner have
entered into a contract for the construction of a Facility on
the Florida property of a manufacturer. The electricity
produced by the Facility will be supplied to the local utility's

electrical grid for resale to customers. The steam will be sold
to the manufacturer for its use in the production of tangible
personal property for sale. The Facility will be fueled by
natural gas and will produce 240 MW of electricity from a gas
combustion turbine generator and steam from an exhaust gas heat
recovery system.

Article VII, Section 7.1. of the contract between Owner and
Contractor (hereinafter "Agreement") specifies the amount to be
paid for the Facility. Section 7.1.1. divides that amount into
three categories: an amount in payment of the combustion
turbine; an amount in payment for the balance of the materials,
equipment, and supplies listed in "Exhibit G" of the Agreement
which are necessary to construct the Facility; and an amount for
the "Work" applicable to the design, construction, and start-up
of the Facility. Sections 7.1.2., 7.1.3., and 7.1.4. of the
Agreement generally provide that Contractor will purchase the
items listed in Exhibit G and resell those items to Owner.
Contractor will separately itemize the materials on the invoices
given to Owner and charge tax on those materials unless Owner
has provided its "exemption certificate/affidavit" to
Contractor.

ISSUE

Whether the items listed in Exhibit G of the Agreement
constitute machinery and equipment necessary in the production
of electrical or steam energy and, therefore, qualify for
exemption from Florida sales and use tax pursuant to Section
212.08(5)(c), Florida Statutes.

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. (1999), 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 a de 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 to be burned at Facility is not a residual oil fuel.
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 and steam energy are the tangible personal
property that is produced for sale. Accordingly, since Facility
does not burn residual oil and electrical and steam energy are
produced for sale, Facility qualifies for exemption. Further,
since residual oil is not a fuel source, Contractor and Owner
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 Owner'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 consistent
with prior Technical Assistance Advisements issued by the
Department, which interpret that exhibit, the Department now
expresses the following opinions with respect to the items
enumerated in Exhibit G of the Agreement between Contractor and
Owner. The equipment classifications or categories and their
corresponding 28 item numbers shown are the same as those that
appear in Exhibit G of the Agreement.

With exceptions as noted, the machinery, equipment, and
materials utilized or installed in the following categories
fully qualify for exemption.

1 Gas Turbine Generator
(Note A - The subcategory of equipment labeled "Equipment
Cleaning" is understood to be a water wash system for the
compressor. This category does not qualify for exemption.)

(Note B - The subcategory labeled "Services" contains items
labeled as "Documentation" (manuals), "Turbine Maintenance
Tools," and "Generator Maintenance Tools." These items do
not qualify for exemption.)

2 Steam Turbine System
(Note C - The subcategory labeled "Accessories" contains an
item labeled "Special Tools." This item does not qualify
for exemption.)

(Note D - The subcategory labeled "Services" contains a
line item for instruction books. This item does not
qualify for exemption.)
3 Condenser
4 Natural Gas Systems
5 Heat Recovery Stem Generator

9 Chemical Treatment System
10 Air Compressors
11 Pumps
12 Cooling Tower
13 Battery System
14 High Voltage Electrical Equipment
15 Medium Voltage Electrical Equipment
16 Low Voltage Electrical Equipment
17 Continuous Emissions Monitoring
18 Tanks
19 Plant Operation Controls
20 Plant Communication System
21 Fire Protection
27 Miscellaneous Mechanical
28 Permanent Construction Materials

The machinery, equipment, and materials utilized or
installed in the following categories do not qualify for
exemption.

26 Work Shop Equipment

The following categories, although enumerated within
Exhibit G, have been noted in the exhibit as either "not
included" or "not required." Accordingly, no opinion is being
expressed within this advisement with respect to these
categories.

6 Water Treatment System
7 Sanitary Treatment
8 Potable Water Treatment
22 Security System
23 Fuel Oil System
24 Ponds
25 Traveling Bridge Cranes

Affidavit Procedures

The benefit of the exemption inures to Owner, to
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) or Direct Pay Certificate number.
Either of those numbers may only be used by the business entity
to which it was assigned.

Procedurally, Owner must give an affidavit to Contractor.
Contractor will then issue its own affidavit to its material
suppliers or vendors along with a copy of the affidavit provided
by Owner. If Contractor is registered for sales and use tax
purposes, Contractor may alternatively issue a resale
certificate to its vendors, since pursuant to Section 7.1.1 of
the Agreement, Contractor will be selling the materials to
Owner.

If Contractor utilizes subcontractors, then it would issue
its own affidavit to the subcontractors along with a copy of the
affidavit provided by Owner. 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.

I 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 _day of
_, 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, your request
and related documents 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 before disclosure. In an effort to
protect the confidentiality of such information, we request you
provide the undersigned with an edited copy of your request for
Technical Assistance Advisement, backup material and response
within fifteen days of the date of this advisement.

Sincerely,

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

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