Were the sale and leaseback payments for a heavily anchored 80-megawatt cogeneration plant subject to Texas sales tax when the agreements called it personal property?

Plain-English summary

Neither the plant's sale to the trustee nor the operator's later lease payments were subject to Texas sales tax. The Comptroller treated the 80-megawatt cogeneration plant as real property even though the transaction documents designated it as personal property.

The physical facts controlled. Major turbines, generators, buildings, cooling structures, storage tanks, and other components were housed in enclosures or anchored to reinforced concrete slabs, basins, grade beams, and deep caissons. The letter followed a 1972 Attorney General opinion that similarly treated a refinery as real property despite an agreement calling it removable personal property.

What this means for you

The historical ruling looked beyond financing labels and contract declarations to the plant's construction and attachment. Large industrial assets do not become personal property merely because sale-leaseback documents say so.

Common questions

Was the plant sale taxable? No.

Were the leaseback payments taxable? No.

Did the agreements' personal-property clause control? No. The Comptroller classified the plant as real property from its physical construction.

What authority did the letter compare? Texas Attorney General Opinion M-1289 (1972), involving an oil-refinery sale and leaseback.

Citations and references

• Tex. Att'y Gen. Op. No. M-1289 (1972)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8710L0843A01

Original ruling text

October 12, 1987

Gentlemen:

Through your local counsel, ***, you have asked me to give an
opinion on behalf of the Comptroller of Public Accounts, State of Texas
concerning the permanent financing of an 80-megawatt plant outside the
City of *****. The cogeneration plant was built by your company
on approximately 4.2 acres leased from CORPORATION A. On July 30, 1987,
the plant was, thereafter, sold to TRUST as trustee for CORPORATION B.
Concurrently the plant was leased back to THE COMPANY which currently
operates the plant.

A question has arisen as to whether the Texas Sales and Use Tax is
applicable to any of the above transactions. Specifically, is the sale
from THE COMPANY to the TRUST subject to the Texas sales tax and are
subsequent lease payments made by THE COMPANY to TRUST subject to the
Texas sales tax?

Under the terms of the various agreements, the plant is designated as
"personal property." The nucleus of the plant consists of three
17-megawatt Ingersoll-Rand GT 61 gas-fired turbine generators, three
Econotherm heat recovery steam generators (HRSGs) and one 20-megawatt
Terry/AEG steam turbine. Additional major components of the plant
include a two-story turbine, mechanical and electrical building, a
cooling tower, a circulating water pump house, an LPG storage system, a
propane control building, spare parts warehouse, gas measurement house,
fire pump house, an electrical substation, and numerous storage tanks,
compressors, condenser, pumps, surface and subsurface pipes, conduits,
sumps, meters and hydrants, as well as exhaust stacks, pipe trestles,
light standards, transformers, breakers, cyclone security fences,
asphalt and graveled surfaces.

Each gas turbine is housed in an acoustic, weatherproof, enclosure; the
HRSGs are mounted inside enclosures; and the steam turbine is mounted on
the second floor of the turbine, mechanical and electrical building.
Buildings and enclosures housing the gas turbines, steam turbine and
HRSGs sit on foundations constructed of 12-inch thick reinforced
(3,000 psi) concrete slabs anchored by 24-inch diameter reinforced
concrete caissons 20 feet deep. The cooling tower is constructed in a
12-inch thick reinforced concrete basin with its perimeter wall
supported by grade beams on caissons. Major storage tanks are affixed
to concrete slabs anchored by concrete caissons. The propane system,
principally consisting of six 30,000 gallon tubular storage tanks,
mixing station and blending building, are anchored to concrete
foundations.

You have provided photographs of the plant and a written statement from
the plant engineer attesting to this method of construction and the plant
description contained in the least agreement between TRUST and THE
COMPANY.

A similar question was raised in 1972 by our office in Tex. Atty. Gen.
Op. No. M-1289 (1972.) In that case an oil refinery was sold and leased
back. Under the agreement, the parties agreed the oil refinery would
remain personal property. The parties also agreed the oil refinery
could be repossessed and removed from the property.

Our office asked if the intent of the parties was controlling. If so,
the transfer of the oil refinery would be taxable and the subsequent
lease payments would also be taxable. The attorney General advised us
the refinery was real property regardless of any contrary language in
the transfer agreements. Consequently, the entire transaction was not
subject to sales tax.

Upon reviewing the information and photographs submitted to me, I have
concluded the cogeneration plant is real property. Consequently,
neither the sale of the plant to the trustee nor the subsequent lease
payments to the trustee by THE COMPANY are subject to Texas sales tax
regardless of any statements in the transfer agreements classifying
he plant as personal property.

I hope this satisfactorily answers your questions.

Sincerely,

Wade Anderson
Executive Counsel