Was a steam-and-power facility primarily engaged in producing electricity for resale, excluding its fuel purchases from Georgia's manufacturing-energy exemption?

Plain-English summary

A facility burned biomass, tire-derived fuel, natural gas, coal, and other energy inputs to make steam. It sold most useful thermal output to an affiliated paper mill and used remaining steam to generate electricity sold under a long-term power agreement. It asked Georgia to reconsider an earlier ruling that it was primarily engaged in producing electricity for resale.

That classification mattered because Georgia's manufacturing exemption covers energy necessary and integral to manufacturing but excludes energy purchased by a manufacturer primarily engaged in producing electricity for resale.

The Department kept its earlier conclusion. Looking at the totality of the steam-purchaser relationship, business model, facility design, production methods, self-classification, and power sales, it found the company primarily engaged in producing electricity for resale. A federal cogeneration standard and revised NAICS classification did not change the Georgia statutory analysis.

The ruling therefore excluded the purchased fuels from the manufacturing exemption's definition of energy on these facts. It separately noted that much of the biomass met the definition used by another biomass-material exemption, but that separate exemption was not the issue decided here.

What this means for you

Power and cogeneration facilities

Selling more thermal output than electric output does not by itself establish that the business is primarily a steam or industrial facility. Georgia considered the entire operating and commercial arrangement rather than adopting a single output, revenue, or federal-certification test.

Manufacturers with on-site generation

The manufacturing-energy exemption can be unavailable when the entity buying the inputs is primarily an electricity producer for resale. Structure, contracts, production dependency, and actual operations all matter.

Accountants and tax professionals

Do not assume FERC qualifying-facility status or a chosen NAICS code controls Georgia sales-tax classification. Also test separate exemptions independently: the ruling's conclusion under O.C.G.A. § 48-8-3.2 did not resolve whether particular biomass qualified under O.C.G.A. § 48-8-3(83)(A).

Common questions

Q: Why did Georgia classify the facility as primarily producing electricity for resale?
A: The Department relied on the totality of its relationship with the paper mill, business model, self-classification, production methods, and electricity-sale arrangement.

Q: Did the fact that 77% of energy output was steam control?
A: No. The taxpayer presented that figure, but the Department said the additional information did not change the determinative factors from its earlier ruling.

Q: Did federal cogeneration status control the Georgia exemption?
A: No. The Department said the federal cogeneration requirements did not correspond to Georgia's statutory definition of energy.

Q: Were all biomass purchases necessarily taxable?
A: The ruling did not decide that. It noted that much of the biomass met the definition used by a separate exemption, while deciding only the manufacturing-energy classification issue.

Q: Can another facility rely on this ruling?
A: No. It is limited to the requesting taxpayer and detailed operating facts, which were central to the totality analysis.

Citations and references

Statutes and rules:

• O.C.G.A. §§ 48-8-1 and 48-8-30(a) (sales and use tax imposition)
• O.C.G.A. § 48-8-3.2(a)(3); O.C.G.A. § 48-8-3.2 (manufacturing energy and electricity-resale exclusion)
• O.C.G.A. § 48-8-3(83)(A) (separate biomass-material exemption referenced by the ruling)
• Ga. Comp. R. & Regs. r. 560-12-2-.64 (manufacturing energy)
• 18 C.F.R. §§ 292.202 and 292.205 (federal cogeneration standards discussed by the taxpayer)

Source

• Landing page: Georgia Sales & Use Tax Letter Rulings
• Original PDF: LR SUT-2018-09

Original ruling text

Georgia Letter Ruling Number: LR SUT-2018-09
Topic: Manufacturing, Energy
Dated: July 31, 2018
This letter is in response to your request for reconsideration of the Department’s 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: for selling steam to the adjacent, affiliated paper mill 1 and
for using the remaining steam to generate electricity to be sold to a power company.
On February 11, 2016, Taxpayer submitted a request for a letter ruling determining if 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
following facts were presented to the Department:
Taxpayer supplies the majority of the paper mill’s steam, although the mill’s needs are greater than Taxpayer
can provide. 2 While Taxpayer controls the amount of steam produced, the paper mill’s consumption is
controlled by the mill rather than Taxpayer. In other words, Taxpayer does not limit the paper mill’s
consumption of steam (except as limited by the capacity of the operations). This sale of steam is an arm’s
length transaction, but there is no penalty for non-delivery of steam. Additionally, Taxpayer does not have
the ability to sell steam to any other entities.
Based on the twenty-year power purchase agreement between Taxpayer and the power company, Taxpayer
has a contracted limit for electricity to be sold to the power company but not a contracted base amount.
Despite the flexibility provided in the contract, it is financially advantageous for Taxpayer to deliver almost
all of its declared capacity because of its participation in a capacity payment system.
Taxpayer’s steam turbine generator has limited condensing capacity. This design configuration depends on
large amounts of steam being extracted for paper mill use: Taxpayer cannot generate the current declared
capacity of 29 MW without steam extracted. Thus, it is necessary to maintain mill 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 to the mill and, consequently, maintains
its current power sales rate near production capacity.
In addition to the process description above, Taxpayer provided the following:
•
The value of the capital assets and investments used to produce steam far exceed those
used to produce electricity for resale.
•
Approximately 59% of the energy derived from the combustion of solid fuels within the
boiler is used to produce steam for purchase by the mill. The remainder of this energy goes to
condensing steam or other processes in power production.
•
On average, 45% of Taxpayer’s gross revenue results from the sale of steam and 55%
Taxpayer’s gross revenue results from the sale of electricity. By contract with the power company,
power revenue fees are set for 20 years with a 2.5% annual adjustment. The steam fees are adjusted
annually based on a neutral index, with a cap of 2.5% per year.

The paper mill, which shares some common ownership with Taxpayer, provides to Taxpayer biomass which is used
as one of the fuel types in Taxpayer’s boiler.
2
The paper mill owns a gas fired package boiler and a gas turbine-generator with a heat recovery steam generator.
When the steam provided by Taxpayer is insufficient to maintain desired production levels, the mill produces the
necessary steam with these units.
1

Georgia Letter Ruling Number: LR SUT-2018-09
Topic: Manufacturing, Energy
Dated: July 31, 2018
Page 2 of 4
•
It takes approximately 1.25 hours to produce electricity with the same heat value as the
amount of steam produced in one hour. It takes approximately 47.8 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. 3
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.
On February 24, 2017, the Department issued a letter ruling (the “First Ruling”) with the Department’s position that
Taxpayer is primarily engaged in producing electricity for resale. On September 5, 2017, Taxpayer requested that the
Department reconsider the First Ruling based on additional information: (i) Taxpayer considers its facility to be
classified under a different NAICS code and (ii) Taxpayer meets a Federal Energy Regulatory Commission (FERC)
fundamental use standard regarding energy sold to an electric utility.
NAICS Code
Taxpayer provides that the company selected NAICS code 221117 (Biomass Electric Power Generation), as described
above, but only in error because the engineers saw “biomass” in the description and did not realize there was a code
more closely aligned with the facility’s actual operations. Taxpayer claimed that this was the NAICS code entered on
the sales tax registration application Taxpayer filed with the Department in 2014 but that the code was subsequently
changed to a different code, NAICS code 314999 (All Other Miscellaneous Textile Product Mills), as reflected on
Taxpayer’s Georgia Sales Tax Certificate of Registration effective August 2014. 4 In July 2017, after the issuance of
the First Ruling, Taxpayer updated the Department’s records to be classified using NAICS code 221330 (Steam and
Air Conditioning Supply), which includes steam production and distribution.
FERC certification
Taxpayer’s agreement to sell electricity to the power company is conditioned on Taxpayer being certified by FERC
as a Qualifying Facility (QF). Pursuant to federal law and regulations, a QF must qualify as a (i) small power
production facility or (ii) a cogeneration facility. 5 Although Taxpayer is self-certified as a QF solely based on
qualifying small power production facility status, Taxpayer claims that the facility qualifies as a small power
production facility as well as a cogeneration facility. 6
“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).
4
The Department’s records reflect that Taxpayer claimed the NAICS code 314999 (All Other Miscellaneous Textile
Product Mills) at the time of the company’s sales tax registration application. As a result, this code is included on
Taxpayer’s Georgia Sales Tax Certificate of Registration. In August 2016, as part of a response to Department
questions about the first letter ruling request, Taxpayer asserted 221117 (Biomass Electric Power Generation) is the
NAICS code with the closest description available.
5
16 U.S.C. § 792, et seq.; 18 C.F.R. Part 292.
6
Taxpayer explained that the company completed the forms a small power production facility because it is a far
simpler and less expensive process than to qualify as a cogeneration facility. Taxpayer further provided that, for the
initial certification, limited data at the time meant that it was much more expedient to file as a small power production
facility. However, the records available through the FERC Online eLibrary (elibrary.ferc.gov) show that Taxpayer
3

Georgia Letter Ruling Number: LR SUT-2018-09
Topic: Manufacturing, Energy
Dated: July 31, 2018
Page 3 of 4
To qualify as a cogeneration facility after 2006, the electrical, thermal, chemical, and mechanical output of a
cogeneration facility must be used fundamentally for industrial, commercial, residential or institutional purposes and
must not be intended fundamentally for sale to an electric utility, taking into account technological, efficiency,
economic, and variable thermal energy requirements, as well as state laws. Federal regulations explicitly provide that,
for the purpose of satisfying this requirement, the electrical, thermal, chemical and mechanical output of the
cogeneration facility will be considered used fundamentally for industrial, commercial, or institutional purposes, and
not intended fundamentally for sale to an electric utility if at least 50 percent of the aggregate of such output, on an
annual basis, is used for industrial, commercial, residential or institutional purposes. 7
Taxpayer contends that the facility meets these operating and efficiency standards for top-cycling cogeneration
facilities. 8 The steam produced by Taxpayer and used by the paper mill is a productive use of steam (thermal energy).
The average output used for industrial purposes (i.e., use by the paper mill) is 77% of the output. 9 Accordingly, because
over 50% of the facility’s energy output is sold to the related paper mill and not an electric utility, Taxpayer asserts
that the facility meets the fundamental use requirement for qualifying cogeneration facilities. As such, since Taxpayer
would satisfy that requirement, Taxpayer believes that the production methods and output support that Taxpayer is
primarily engaged in industrial purposes rather than for sale to an electric utility.
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)?
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. 10
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. 11 “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

first submitted to FERC Form 556 (the notice of self-certification of QF status) in May 2013. At that time, Taxpayer
selected “qualifying cogeneration facility status” rather than “qualifying small power production facility status.” In
2014, Taxpayer submitted Form 556 to change the previously certified facility and sought “qualifying small power
production facility status” rather than “qualifying cogeneration facility status.” The same status was the sole status
selected on forms filed in 2015 and 2017.
7
18 C.F.R. § 292.205 (facilities that do not meet this standard may present other evidence to FERC that the facility
should nevertheless be certified). Facility output is reported as energy measured in MWh.
8
Topping-cycle cogeneration facility means a cogeneration facility (equipment used to produce electric energy and
forms of useful thermal energy - such as heat or steam - used for industrial, commercial, heating, or cooling purposes,
through the sequential use of energy) in which the energy input to the facility is first used to produce useful power
output, and at least some of the reject heat from the power production process is then used to provide useful thermal
energy. 18 C.F.R. § 292.202.
9
Taxpayer provided a chart with monthly useful electrical power output in Btu/Hr compared to useful steam thermal
energy output in Btu/Hr. Taxpayer later clarified that the overall energy measured in Btu – as opposed to power in
Btu/Hr – that Taxpayer sells is, on average over a two-year period, 77% steam and 23% electricity.
10
O.C.G.A. §§ 48-8-1, 48-8-2(31)(A), and 48-8-30(a).
11
O.C.G.A. § 48-8-3.2; Ga. Comp. R. & Regs. r. 560-12-2-.64.

Georgia Letter Ruling Number: LR SUT-2018-09
Topic: Manufacturing, Energy
Dated: July 31, 2018
Page 4 of 4
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. 12
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. 13 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.” 14 “Engaged” means
“involved in activity,” “being used,” or “busy with some activity.” 15
The First Ruling stated that, in light of Taxpayer’s relationship with its steam purchaser, business model, selfclassification, and production methods, the facts presented indicate that Taxpayer is primarily engaged in producing
electricity for resale. The additional assertions in Taxpayer’s September 5, 2017 request for reconsideration do not
change the Department’s understanding of the determinative factors underlying the First Ruling. 16
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. The facts herein are those presented by the
taxpayer and the Department accepts them as true for this ruling. If the facts presented herein change, are not true, are
different, or material facts have been omitted, the conclusions reached in this ruling may change. In addition,
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 tax treatment than that expressed in this ruling.

O.C.G.A. § 48-8-3.2; Ga. Comp. R. & Regs. r. 560-12-2-.64.
Ga. Comp. R. & Regs. r. 560-12-1-.18.
14
“Primarily,” Merriam-Webster.com. http://www.merriam-webster.com/dictionary/primarily (April 18, 2018).
15
“Engaged,” Merriam-Webster.com. http://www.merriam-webster.com/dictionary/engaged (April 18, 2018).
16
Taxpayer’s request states that, should it be necessary, Taxpayer will amend its FERC qualification status from small
power production facility to cogeneration facility. Because the cogeneration facility requirements set forth in 18 C.F.R.
§ 292.205 do not correspond with the relevant portion of the definition of “energy” codified in O.C.G.A. § 48-8-3.2,
such a change to Taxpayer’s federal self-certification status would not, without more, alter the conclusions in this
ruling.
12
13