Was a facility that sold steam but earned most of its revenue from electricity primarily engaged in producing electricity for resale under Georgia's energy exemption?

Plain-English summary

The taxpayer burned biomass fuel, tire-derived fuel, natural gas, coal, and other energy sources to produce steam. It sold part of the steam to one customer and used the rest to generate electricity for resale. Its equipment design required substantial steam extraction to generate electricity near capacity, and steam sales helped make the integrated operation work. More than half of gross revenue nevertheless came from electricity, the company had a long-term power-purchase agreement, and it classified the facility under NAICS 221117 for biomass electric power generation.

Georgia's manufacturing exemption includes energy necessary and integral to manufacturing, but its definition excludes energy purchased by a manufacturer primarily engaged in producing electricity for resale.

The Department ruled that this taxpayer fell within that exclusion. It considered the total operation rather than relying on a single input measure such as capital invested, heat devoted to steam, or production time. The combination of the business model, power contract, revenue mix, self-classification, production design, and financial dependence on electricity sales showed that electricity production for resale was the primary activity.

The ruling decides that classification under O.C.G.A. § 48-8-3.2(a)(3). It notes that much of the taxpayer's biomass fuel met the separate "biomass material" definition in O.C.G.A. § 48-8-3(83)(A), but it does not issue a ruling on that separate exemption.

What this means for you

Cogeneration and combined steam-power facilities

Producing and selling substantial steam does not prevent electricity from being the primary business. The Department examined the whole commercial and operational picture, especially revenue, contracts, financial viability, and industry classification.

Tax and fuel-purchasing teams

Do not assume all heat or fuel used in an integrated production facility qualifies for the general manufacturing-energy exemption. If the operator is primarily an electricity reseller, the statutory definition excludes its purchased energy from that exemption; a separately enacted fuel-specific exemption must be analyzed on its own terms.

Common questions

Q: Why was the facility primarily an electricity producer if it sold large amounts of steam?

A: Electricity produced more than half of gross revenue, the business depended on electricity sales, it had a long-term power agreement, and it identified itself under a biomass electric-power-generation code.

Q: Did the Department decide the issue solely by revenue?

A: No. Revenue was one factor in a totality analysis that also considered the production design, business model, purchaser relationships, contract, financial viability, and NAICS classification.

Q: Did greater capital or heat input for steam control?

A: No. The Department said those inputs were not determinative because steam production was also required for the electricity operation.

Q: What is the tax consequence of the classification?

A: O.C.G.A. § 48-8-3.2(a)(3) excludes energy purchased by a manufacturer primarily engaged in producing electricity for resale from the manufacturing-energy definition.

Q: Did the ruling deny the separate biomass-material exemption?

A: No. The facts say much of the biomass met that separate definition, but the formal issue and ruling address only whether the taxpayer primarily produced electricity for resale.

Q: Can another power producer rely on this ruling?

A: No. The result is limited to this taxpayer's integrated facility, contracts, revenue mix, and other represented facts.

Citations and references

Authorities:

• O.C.G.A. § 48-8-3.2(a)(3) -- energy definition and electricity-resale exclusion
• O.C.G.A. § 48-8-3.2 -- manufacturing energy exemption
• O.C.G.A. § 48-8-3(83)(A) -- separate biomass-material provision referenced in the facts
• Ga. Comp. R. & Regs. r. 560-12-2-.64 -- energy necessary and integral to manufacturing
• Ga. Comp. R. & Regs. r. 560-12-1-.18 -- strict construction of exemptions

Source

• Landing page: Georgia Sales & Use Tax Letter Rulings
• Original PDF: LR SUT-2017-07

Original ruling text

Georgia Letter Ruling: LR SUT-2017-07
Dated: February 24, 2017
Topic: Manufacturing Exemptions, Energy
This letter is in response to your request for guidance on the application of Georgia sales and use tax to energy
necessary and integral to manufacturing.
Facts Presented by Taxpayer
[Redacted] (“Taxpayer”) purchases and uses biomass fuel, tire derived fuel, electricity, natural gas, and coal to produce
steam. The steam is produced for two purposes: to be sold to one entity and for using the remaining steam to generate
electricity.
Taxpayer sells a contractually limited amount of electricity which does not include a base amount. Despite the
flexibility provided in the contract, it is financially advantageous for Taxpayer to deliver almost all of its declared
capacity.
Taxpayer’s steam turbine generator has limited condensing capacity. This design configuration depends on large
amounts of steam being extracted: Taxpayer cannot generate the current declared capacity without steam extracted.
Thus, it is necessary to maintain steam sales to achieve power production at or near capacity, and Taxpayer would not
be financially viable without steam sales. In practice, Taxpayer normally provides the maximum steam possible and,
consequently, maintains its current power sales rate near production capacity.
In addition to the process description above, Taxpayer states the following:
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The value of the capital assets and investments used to produce steam far exceed those used to produce
electricity for resale.
Approximately [redacted amount (more than 50%)] of the energy derived from the combustion of solid fuels
within the boiler is used to produce (sold) steam. The remainder of this energy goes to condensing steam or
other processes in power production.
On average, [redacted amount (less than 50%)] of Taxpayer’s gross revenue results from the sale of steam
and [redacted amount (more than 50%)] Taxpayer’s gross revenue results from the sale of electricity. By
contract, power revenue fees are set for [redacted] years with a [redacted] annual adjustment. The steam fees
are adjusted annually based on a neutral index, with a cap of [redacted] per year.
It takes approximately [redacted] hours to produce electricity with the same heat value as the amount of steam
produced in one hour. It takes approximately [redacted] minutes to produce electricity with the same resale
value as the amount of steam produced in one hour.
Taxpayer considers its facility to be classified under the 2012 North American Industrial Classification
System (NAICS) code 221117 (Biomass electric power generation). This industry comprises establishments
primarily engaged in operating biomass electric power generation facilities. These facilities use biomass to
produce electric energy. The electric energy produced in these establishments is provided to electric power
transmission systems or to electric power distribution systems. 1

Much of the biomass fuel purchased by Taxpayer meets the definition of “biomass material” under the sales and use
tax exemption contained in O.C.G.A. § 48-8-3(83)(A). However, in addition to biomass material, Taxpayer also
purchases other fuels to burn to produce steam. Since Taxpayer classifies these products as materials necessary and
integral for heat, Taxpayer seeks clarification on whether Taxpayer is eligible for a partial energy exemption.
Issue
Is Taxpayer “primarily engaged in producing electricity for resale” as used in the definition of the term “energy” in
O.C.G.A. § 48-8-3.2(a)(3)?
“North American Industry Classification System: 221117 Biomass Electric Power Generation.” United States Census
Bureau. http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=221117&search=2012 (August 23, 2016). This
code is comprised of part of the facilities in 2007 NAICS code 221119 (Other electric power generation), and it is a
subset of 22111 (Electric Power Generation).
1

Georgia Letter Ruling: LR SUT-2017-07
Dated: February 24, 2017
Topic: Manufacturing Exemptions, Energy
Page 2 of 3

Analysis
Georgia levies and imposes a tax (subject to certain specific exemptions) on the retail purchase, retail sale, storage,
use, or consumption of tangible personal property, certain enumerated services, and utilities. 2
The sale and use of energy are exempt from sales and use tax (except certain sales and use taxes for educational
purposes) if the energy is necessary and integral to the manufacture of tangible personal property and sold, used,
stored, or consumed at a manufacturing plant in Georgia. 3 “Energy” means natural or artificial gas, oil, gasoline,
electricity, solid fuel, wood, waste, ice, steam, water, and other materials necessary and integral for heat, light, power,
refrigeration, climate control, processing, or any other use in any phase of the manufacture of tangible personal
property. However, the term “energy,” as used in the exemption at issue, excludes energy purchased by a manufacturer
that is primarily engaged in producing electricity for resale. 4
Here, Taxpayer is purchasing materials to burn for heat, which is necessary to produce steam and electricity. Therefore,
it seems that the purchased materials would be considered energy unless Taxpayer, the manufacturer, is primarily
engaged in producing electricity for resale.
Exemptions from taxation are strictly construed, and an exemption will not be granted unless the relevant statute
clearly and distinctly shows that such was the plain and unambiguous intention of the General Assembly. 5 The phrase
“primarily engaged in producing electricity for resale” is not defined, so the Department assumes that the words are
used in their ordinary senses. “Primarily” means “for the most part” or “in the first place.”6 “Engaged” means
“involved in activity,” “being used,” or “busy with some activity.”7
The Department considers Taxpayer’s whole operation to understand what Taxpayer is primarily engaged in
producing.8 Taxpayer must produce steam before producing electricity. Given Taxpayer’s limited condensing
capacity, Taxpayer could not efficiently produce electricity without selling steam. Taxpayer must repurpose steam
and sell electricity.9
Although there is no minimum production requirement for steam or electricity, Taxpayer entered into a long-term
power purchase agreement with a power company. Because of the production design, Taxpayer would not be
financially viable without producing electricity for resale. In fact, with [redacted amount (more than 50%)] of
Taxpayer’s gross revenue resulting from the sale of electricity, Taxpayer earns more revenue from electricity
production than from steam production.
Moreover, Taxpayer classifies itself as primarily engaged in operating a biomass electric power generation facility.
Taxpayer considers its facility to be classified under the 2012 NAICS code 221117, the code for facilities that primarily
use biomass to produce electric energy. It is under the general industry code of electric power generation. While there
is a different code for steam production establishments, Taxpayer did not identify itself under that category. 10

2

O.C.G.A. §§ 48-8-1, 48-8-2(31)(A), and 48-8-30(a).
O.C.G.A. § 48-8-3.2; Ga. Comp. R. & Regs. r. 560-12-2-.64.
4
O.C.G.A. § 48-8-3.2; Ga. Comp. R. & Regs. r. 560-12-2-.64.
5
Ga. Comp. R. & Regs. r. 560-12-1-.18.
6
“Primarily,” Merriam-Webster.com. http://www.merriam-webster.com/dictionary/primarily (August 23, 2016).
7
“Engaged,” Merriam-Webster.com. http://www.merriam-webster.com/dictionary/engaged (August 23, 2016).
8
Because Taxpayer’s steam and electricity production is a united operation, a more traditional review of production
time is not indicative of the primary activity of Taxpayer.
9
Taxpayer urged consideration of capital and heat inputs, but inputs are not determinative of what the Taxpayer is
primarily engaged in producing. Such measures are misleading since inputs for steam are required for electricity.
10
See “North American Industry Classification System: 221330 Steam and Air-Conditioning Supply.” United States
Census Bureau. http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=221330&search=2012 NAICS Search
(January 13, 2017).
3

Georgia Letter Ruling: LR SUT-2017-07
Dated: February 24, 2017
Topic: Manufacturing Exemptions, Energy
Page 3 of 3

In light of Taxpayer’s relationship with its steam purchaser, business model, self-classification, and production
methods, the facts presented in this case indicate that Taxpayer is primarily engaged in producing electricity for resale.
Ruling
In view of the totality of Taxpayer’s description of its current operations, Taxpayer is “primarily engaged in producing
electricity for resale” as used in the definition of the term “energy” in O.C.G.A. § 48-8-3.2(a)(3).
The opinions expressed in this ruling are based upon the information contained in your request and limited to the
specific transactions, facts, circumstances, and taxpayer in question. Should the circumstances regarding the
transactions change or differ materially from those represented, this ruling may become invalid. Subsequent statutory
or administrative rule changes or judicial interpretations of the statutes or rules upon which this ruling is based may
subject similar future transactions to different tax treatment than that expressed in this ruling.