What does Missouri LR 8180 conclude about Taxability of Machinery & Equipment for Solar Electric Facility?

Plain-English summary

The Missouri Department of Revenue considered a company planning to build a solar electric facility in Missouri to sell electricity at retail. The applicant asked whether various pieces of equipment — from the solar panels themselves through to the transformers that feed power onto the grid — qualify for Missouri's sales and use tax exemption for manufacturing machinery and equipment. The answer was a split decision: some equipment is exempt, and some is not.

The Department held that the photovoltaic modules (solar panels) — both those installed right away and spares kept on hand in case of damage — are exempt, along with the support structures and parts that hold the modules and aim them at the sun. The Department's reasoning relies on the Missouri Supreme Court's holding in Missouri Public Service Company v. Director of Revenue that generating electricity counts as "manufacturing" in Missouri, and on Section 144.030.2(5), RSMo, which exempts machinery and equipment used directly in manufacturing a product for ultimate sale. Spare modules were separately found exempt as "replacement machinery" under Section 144.030.2(4), RSMo.

By contrast, the Department held that the foundations for the support structures, the DC combining equipment, cables, and conduits, the DC-to-AC inverters, the low-voltage AC combining equipment, and the step-up transformers are all taxable. For the foundations, the Department found they simply aren't used directly in manufacturing. For everything downstream of the panels — the equipment that collects, combines, inverts, and steps up the electricity after it's already been generated by the panels — the Department relied on the Missouri Supreme Court's decision in Utilicorp United, Inc. v. Director of Revenue, which held that equipment used to transmit or distribute electricity that has already been manufactured does not qualify for the manufacturing exemption, even though its voltage and amperage are being changed along the way.

In short: the line the Department drew is between equipment that actually makes the electricity (exempt) and equipment that merely moves, combines, or conditions the electricity after it has already been made (taxable), plus a separate finding that foundation materials aren't used "directly" in manufacturing at all.

What this means for you

Solar developers and project owners in Missouri

If you are planning or building a solar electric facility for retail sale of electricity, expect to pay Missouri sales/use tax on the foundations for your panel support structures, DC combining equipment, inverters, AC combining equipment, and step-up transformers. You can plan to purchase photovoltaic panels (including spares) and the racking/support structures that aim them without sales or use tax, provided your facts match those described here — a new or expanded manufacturing facility using the equipment directly to generate electricity for ultimate retail sale.

Accountants and tax professionals

When advising solar or utility clients on Missouri sales/use tax treatment of generation equipment, this ruling is a useful data point for where the Department currently draws the manufacturing-exemption line under Section 144.030.2(4) and (5), RSMo — but it is binding only on this specific Applicant, only for three years from its January 28, 2022 date, and only if the underlying facts and law don't change. A sibling ruling, LR 8169, addresses similar solar equipment questions and should be reviewed separately since letter rulings are fact-specific and not necessarily identical in outcome.

Business owners considering similar equipment purchases

If your equipment converts sunlight (or another input) directly into the finished product for sale, it's more likely to be treated as exempt manufacturing equipment. If your equipment instead only transmits, combines, or conditions a product that's already been made, expect the Department to treat it as taxable, following Utilicorp. Foundations and site work supporting production equipment are treated as not "directly" used in manufacturing regardless of how essential they are to keeping the equipment in place.

Common questions

Q: Are solar panels exempt from Missouri sales and use tax?
A: In this ruling, yes — both photovoltaic modules installed immediately and spare modules kept on hand for replacement were held exempt as manufacturing machinery and equipment (and replacement machinery) under Section 144.030.2(5) and 144.030.2(4), RSMo, because generating electricity is "manufacturing" in Missouri.

Q: Is everything used in a solar facility exempt, then?
A: No. This ruling found the support structures for the panels exempt, but the concrete foundations for those structures, the DC combining equipment and cabling, the DC-to-AC inverters, the low-voltage AC combining equipment, and the step-up transformers were all held taxable, because they transmit or process electricity that has already been generated by the panels rather than manufacturing it themselves.

Q: Why are inverters and transformers taxable if they're essential to delivering usable power?
A: The Department applied Utilicorp United, Inc. v. Director of Revenue, 75 S.W.3d 725 (Mo. banc 2001), which held that changing electricity's voltage or amperage for transmission doesn't change the underlying product — the electricity itself was already manufactured before it reaches that equipment, so the equipment isn't "used directly in manufacturing" for exemption purposes.

Q: Can another solar company rely on this ruling?
A: No. Under Section 536.021.10, RSMo and 12 CSR 10-1.020, this letter ruling is binding on the Department only as to the Applicant who requested it, only for three years from its January 28, 2022 date, and only so long as the facts and law remain the same. Other taxpayers, including those with the similar LR 8169, would need their own ruling or independent analysis.

Citations and references

• Section 144.020.1, RSMo (imposition of sales tax on retail sales)
• Section 144.610.1, RSMo (imposition of use tax)
• Section 144.030.2(5), RSMo (manufacturing exemption for new/expanding plants)
• Section 144.030.2(4), RSMo (replacement machinery exemption)
• Section 144.615(3), RSMo (use tax exemption mirroring Section 144.030.2)
• Section 536.021.10, RSMo, and 12 CSR 10-1.020 (letter ruling authority and procedure)
• Missouri Public Service Company v. Director of Revenue, 733 S.W.2d 448 (Mo. banc 1987) (electricity generation is manufacturing)
• Utilicorp United, Inc. v. Director of Revenue, 75 S.W.3d 725 (Mo. banc 2001) (transmission/distribution equipment not exempt)

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8180

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated Dec. 7, 2021.

The facts as presented in your letter ruling request are summarized as follows:

Applicant may construct a solar electric facility in Missouri for the retail sale of electricity.

Photovoltaic modules (solar panels) will be installed and aimed at the sun to collect sunlight that will be converted into direct current electricity. The photovoltaic modules are held in place by photovoltaic module support structures that are anchored to concrete foundations. Spare photovoltaic modules are maintained in case of damage to installed modules to ensure continued generation of electricity. The modules are all wired together and all electricity is collected and combined via direct current (DC) combining equipment. The DC combining equipment is also a point of disconnection for safety issues. The collected DC is then sent to a set of inverters for additional processing into alternating current (AC). The AC power is then collected and combined via Low-Voltage Alternating Current Combining Equipment then processed through a step-up transformer to complete the manufacturing process so the power may be transmitted to customers. Applicant will purchase these materials from a vendor.

ISSUE 1 :

Is Applicant's purchase of photovoltaic modules (solar panels), including both those installed immediately and those purchased as spares, exempt from Missouri sales or use tax?

RESPONSE 1 :

Yes. Both Applicant's purchase of photovoltaic modules installed immediately and those used as spares would be exempt from Missouri sales or use tax. Section 144.020.1, RSMo provides "tax is hereby levied and imposed... upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state." Section 144.610.1, RSMo, provides "a tax is imposed for the privilege of storing, using or consuming within this state any article of tangible personal property[.]"

Section 144.030.2(5), RSMo exempts:

Machinery and equipment, and parts and the materials and supplies solely required for the installation or construction of such machinery and equipment, purchased and used to establish new or to expand existing manufacturing, mining or fabricating plants in the state if such machinery and equipment is used directly in manufacturing, mining or fabricating a product which is intended to be sold ultimately for final use or consumption.

Section 144.615(3), RSMo, exempts from Missouri use tax "[t]angible personal property, the sale or other transfer of which, if made in this state, would be exempt from or not subject to the Missouri sales tax pursuant to the provisions of subsection 2 of section 144.030[.]"

The production of electricity is manufacturing in Missouri. See Missouri Public Service Company v. Director of Revenue , 733 S.W.2d 448, 449 (Mo. banc 1987). Applicant's purchases of photovoltaic modules that are immediately installed are exempt under section 144.030.2(5).

Applicant's purchases of photovoltaic modules that are not immediately installed, but saved as spares would be exempt from sales tax under section 144.030.2(4), RSMo.

Section 144.030.2(4), RSMo exempts:

Replacement machinery, equipment, and parts and the materials and supplies solely required for the installation or construction of such replacement machinery, equipment, and parts, used directly in manufacturing, mining, fabricating or producing a product which is intended to be sold ultimately for final use or consumption.

Applicant's purchases of spare modules would fall under the replacement machinery contemplated by the statute.

ISSUE 2:

Is Applicant's purchase of photovoltaic module support structures and parts that hold photovoltaic modules and aim them toward the sun exempt from Missouri sales or use tax?

RESPONSE 2:

Yes. Applicant's purchases of photovoltaic module support structures and parts would be exempt from Missouri sales and use tax as parts and machinery used directly in manufacturing, mining, fabricating or producing a product which is intended to be sold ultimately for final use or consumption as items at issue help aim the photovoltaic modules towards the sun. See response 1 regarding the application of section 144.030.2(5).

ISSUE 3:

Is Applicant's purchase of the materials and supplies that provide foundation for photovoltaic module support structures exempt from Missouri sales or use tax?

RESPONSE 3:

No. Applicant's purchases of the materials and supplies that provide foundation for photovoltaic module support structures are not exempt from Missouri sales and use tax as parts and machinery used directly in manufacturing, mining, fabricating or producing a product which is intended to be sold ultimately for final use or consumption. The items at issue are not used directly in manufacturing.  See response 1 regarding the application of section 144.030.2(5).

ISSUE 4:

Is Applicant's purchase of DC combining equipment, cables, and related conduits and fittings used in the installation and construction of the equipment exempt from Missouri sales or use tax?

RESPONSE 4:

No. Applicant's purchase of DC combining equipment, cables, and related conduits and fittings would not be exempt from Missouri sales or use tax.

In Utilicorp United, Inc., v. Director of Revenue, 75 S.W.3d 725 (Mo. banc 2001), the Missouri Supreme Court ruled that purchases of machinery and equipment used to transmit or distribute electricity that has already been manufactured do not qualify for the exemption under section 144.030.2(5). The DC combing equipment collects and combines electricity that has already been manufactured by the photovoltaic modules. The court in Utilicorp stated that,

"[t]he product-electricity-may have its voltage increased, and thereby its amperage reduced, for transmission across distances. And its voltage may be reduced and its amperage thereby increased near the customer's meter to deliver electricity at a voltage suitable for the customer's needs. But the essential product, and the total electric power expressed in watts, remains fundamentally unchanged from the time and place the electricity was generated." (at 728-729)

The DC combining equipment and the associated cables and conduits collect and transmit electricity that was already manufactured by the photovoltaic modules.

ISSUE 5:

Is Applicant's purchase of DC to AC inverters and spare inverters used to invert the electricity from DC to AC exempt from Missouri sales or use tax?

RESPONSE 5:

No. Applicant's purchase of DC to AC inverters are not exempt from Missouri sales or use tax. See response 4 regarding Utilicorp United, Inc. v. Director of Revenue , 75 S.W.3d 725 (Mo. banc 2001).

ISSUE 6:

Is Applicant's purchase of low-voltage AC combining equipment, cables, and related conduits and fittings exempt from Missouri sales or use tax?

RESPONSE 6:

No. Applicant's purchase of low-voltage AC combining equipment, cables, and related conduits and fittings are not exempt from Missouri sales or use tax. See response 4 regarding Utilicorp United, Inc. v. Director of Revenue , 75 S.W.3d 725 (Mo. banc 2001).

ISSUE 7:

Is Applicant's purchase of step-up transformers exempt from Missouri sales or use tax?

RESPONSE 7:

No. Applicant's purchase of step-up transformers are not exempt from Missouri sales or use tax. See response 4 regarding Utilicorp United, Inc. v. Director of Revenue, 75 S.W.3d 725 (Mo. banc 2001).

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals.  If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change.  For this reason, the interpretation set forth above should be reviewed on a regular basis.  Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Legal Counsel J. Ross Shelton, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475 (phone 573-751-0961), or me.

Sincerely,

Wayne Wallingford