Could a company claim Virginia's coal incentive credit when it bought and consumed Virginia coal but did not own the electric generator?

Subject

Coal-consuming subsidiary lacked required electric-generator ownership

Plain-English summary

Virginia denied the coal incentive credit because the subsidiary did not own the electric generator. Its disregarded LLCs purchased Virginia-mined coal and burned it to create steam and mechanical energy, but an unrelated manufacturing plant owned the generator and exciter.

The statute granted the credit to an "electricity generator" that purchased and consumed qualifying coal. Virginia interpreted actual electricity production to require ownership of the generator. Supplying indispensable preliminary equipment or functions was not enough.

What this means for you

• Purchasing and consuming Virginia coal alone did not establish eligibility.
• The claimant also had to be the person actually producing electricity.
• Ownership of steam and generating support equipment did not replace generator ownership.
• An unrelated party's ownership of the generator defeated this claim.

Citations and references

• Va. Code § 58.1-433.1.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-58

Original ruling text

May 1, 2009

Re: Ruling Request: Virginia Coal Employment and Production Incentive Tax Credit

Dear *:

This is in response to your letter requesting a ruling regarding whether * ("the Taxpayer") would qualify for the Virginia Coal Employment and Production Incentive Tax Credit ("the Credit").

FACTS

The Taxpayer files a combined Virginia Corporation Income Tax Return, Form 500. Included in the combined return is the income of * ("Subsidiary 1 "), a C Corporation that is a wholly owned subsidiary of the Taxpayer. Included in the income of Subsidiary 1 is income from ("Subsidiary 2") and ** ("Subsidiary 3"). Both Subsidiary 2 and Subsidiary 3 are single-member LLCs treated as divisions of their parent, Subsidiary 1.

Subsidiary 2 purchases coal mined in Virginia from a third party and sells the coal to Subsidiary 3. Subsidiary 3, in turn, burns the coal to make steam and mechanical energy used for electricity production by an unrelated manufacturing plant located at the same site. Subsidiary 1 owns all of the steam and electric generating equipment except the electric generator and exciter.

You state that you believe Subsidiary 1 is eligible for the Credit because Subsidiary 1 actually consumes the Virginia coal used in the electricity production. You also state that the production of electricity at the unrelated manufacturing plant would not be possible without the function performed by the equipment owned and operated by Subsidiary 1.

DETERMINATION

Virginia Code § 58.1-433.1 states that the Credit is available for electricity generators for each ton of coal purchased and consumed by the electricity generator, provided the coal was mined in Virginia. For the purposes of the Credit, "electricity generator" is defined as "any person who produces electricity for self-consumption or for sale."

Therefore, to be eligible for the Credit, a company must purchase and consume the applicable coal, as well as, own the electric generator used to produce the electricity. You stated that while Subsidiary 1 purchases and consumes the coal, it does not own the electric generator. The electric generator is owned by an unrelated third party. Accordingly, Subsidiary 1 would not qualify, for the Credit. This is true even if, as you assert, the function performed by the equipment owned and operated by Subsidiary 1 is needed in order for the unrelated manufacturing facility to actually produce the electricity. The law is clearly designed to benefit those who actually produce the electricity, not those who perform some of the preliminary functions in the process.

I hope the foregoing has responded to your inquiry and should you have additional questions, please contact * in the Office of Tax Policy, Policy Development Division, at ***.

Sincerely

Janie E. Bowen

Tax Commissioner