If a company buys or builds equipment mainly to control air and water pollution — vapor recovery systems, leak detectors, cathodic protection, double-wall tanks, cleanup gear — is that equipment exempt from Alabama sales, use, and property tax, and deductible for franchise and income tax?

Plain-English summary

Company A, an Alabama corporation in the petroleum business (producing, processing, and selling petroleum products), asked the Department how five categories of environmental equipment it planned to buy or build would be taxed:

1. Vapor recovery systems at retail and bulk storage plants (capture petroleum fumes) — about $500–$5,000 for retail, $10,000–$20,000 for bulk;
2. In-line leak detectors ($2,500–$5,000);
3. Cathodic protection equipment (early-warning of tank leaks) ($1,000–$5,000);
4. Double-wall storage tanks and piping (extra leak protection) — the company asked only about the excess cost over an ordinary tank; and
5. Cleanup equipment (functions like a "vacuum cleaner" for spills).

Alabama gives favorable treatment to "all devices or facilities … acquired or constructed primarily for the control, reduction or elimination of air and water pollution" across four tax provisions: a sales/use tax exemption (§ 40-23-4(16)), a property tax exemption (§ 40-9-1(20)), a franchise tax deduction from capital employed (§ 40-14-41(d)(2)(c)), and an income tax deduction (§ 40-18-35(13)).

The Department stressed the statutory word "primarily." Drawing on Chemical Waste Management, Inc. v. State, it explained: if a device has a substantial function in producing the business's products or services, the exemption does not apply; if the device's end use is primarily pollution control (only incidental to the manufacturing/service process), the exemption does apply. "Pollution" is read broadly — "to make physically impure or unclean," any impurity, not just man-made waste (Rush v. Department of Revenue). And costs can be apportioned: for a double-wall tank, only the added cost over a standard tank is for pollution control, because the company needs a tank regardless (Ex Parte Kimberly Clark Corp.).

Finding that all of Company A's proposed items relate to pollution control and give no benefit, incidental or otherwise, to the production process, the Department ruled:

• (1) Sales/use tax — exempt under § 40-23-4(16) (whether acquired or self-constructed).
• (2) Property tax — exempt under § 40-9-1(20).
• (3) Franchise tax deduction from capital employed under § 40-14-41(d)(2)(c) — the devices qualify, but this provision applies to foreign corporations, and Company A is an Alabama (domestic) corporation not subject to it when computing its franchise tax.
• (4) Income tax — deductible currently under § 40-18-35(13), to the extent the pollution-control cost exceeds the cost of a similar non-pollution-control item (e.g., the excess of a double-wall tank over a normal tank).

What this means for you

Buying pollution-control equipment in Alabama

If you acquire or build equipment primarily to control, reduce, or eliminate air or water pollution, Alabama can exempt it from sales and use tax (§ 40-23-4(16)) and property tax (§ 40-9-1(20)) and allow an income-tax deduction (§ 40-18-35(13)). The exemption reaches the devices, their identifiable components, and materials for use in them, and applies whether you buy them or self-construct them.

"Primarily" is the whole ballgame

The exemption turns on the equipment's primary end use. Equipment that does real double duty — meaningfully improving your production or product — can lose the exemption because it isn't primarily for pollution control. Document that the item's dominant purpose is environmental and that any production benefit is incidental.

Dual-purpose items: expect to apportion

Where you'd need the item anyway (the classic example is a tank), only the extra cost attributable to pollution control — the excess of the enhanced item over the ordinary one — gets the benefit. Keep cost records that separate the "normal" item from the pollution-control upgrade.

Domestic vs. foreign corporations, franchise tax

The franchise-tax deduction from capital employed under § 40-14-41(d)(2)(c) is aimed at foreign (out-of-state) corporations. A domestic Alabama corporation like Company A is not subject to that provision, so the deduction didn't change its franchise tax. Confirm how the current franchise tax applies to your own entity.

It's a one-taxpayer ruling

Under § 40-2A-5 this ruling may not be cited as precedent and binds the Department only as to Company A's facts. Use it to understand how Alabama applies the "primarily for pollution control" test, not as a guarantee for your equipment.

Common questions

Q: Is pollution-control equipment exempt from Alabama sales and use tax?
A: Yes, if it is acquired or constructed primarily for the control, reduction, or elimination of air or water pollution (§ 40-23-4(16)). Equipment that mainly serves your production process does not qualify.

Q: What about property tax on that equipment?
A: It is likewise exempt under § 40-9-1(20), on the same "primarily for pollution control" standard.

Q: We're installing double-wall tanks. Is the whole cost exempt/deductible?
A: No — only the extra cost over a standard tank. Because you'd need a tank regardless, the Department apportions and allows only the pollution-control portion (following Ex Parte Kimberly Clark Corp.), an approach the ruling applies to the income-tax deduction under § 40-18-35(13).

Q: How does Alabama decide if something is "primarily" for pollution control?
A: From Chemical Waste Management, Inc. v. State: if the device has a substantial function in producing the business's products or services, the exemption is denied; if its end use is primarily pollution control and only incidental to production, the exemption applies.

Q: Can I rely on this ruling?
A: No. Ala. Code § 40-2A-5 makes revenue rulings non-precedential; this one is limited to Company A's facts. Get your own guidance.

Citations and references

Statutes:

• Ala. Code 1975 § 40-23-4(16) — sales and use tax exemption for pollution-control devices
• Ala. Code 1975 § 40-9-1(20) — property tax exemption for pollution-control devices
• Ala. Code 1975 § 40-14-41(d)(2)(c) — deduction from capital employed for foreign franchise tax
• Ala. Code 1975 § 40-18-35(13) — income tax deduction for pollution-control devices
• Ala. Code 1975 § 40-2A-5 — revenue rulings are not to be used or cited as precedent

Cases cited:

• Rush v. Department of Revenue of the State of Alabama, 416 So. 2d 1023 (Ala. Civ. App.) — "pollution" means to make physically impure or unclean; includes any impurity
• Chemical Waste Management, Inc. v. State, 512 So. 2d 115 (Ala. Civ. App. 1987) — construing "primarily" in the pollution-control exemption
• Ex Parte Kimberly Clark Corp., 503 So. 2d 304 (Ala. 1987) — apportionment of dual-purpose (double-lined tank) costs

Source

• Landing page: Alabama Department of Revenue -- Revenue Rulings
• Original PDF: https://www.revenue.alabama.gov/wp-content/uploads/2022/06/2017_05_RR-93-002.pdf

Original ruling text

State of Alabama
Department of Revenue

Montgomery, Alabama 36132 GEORGE E. MINGLEDORFF It!

Assistant Cum missioner

GEORGE E. MINGLEDORFF Ill LEWIS A. EASTERLY

Secretar

Commrssioner rACIINg:

ALABAMA DEPARTMENT OF REVENUE
REVENUE RULING 93-002

This document may not be used or cited as precedent. Code of
Alabama 1975 840-2A-5(a). ;

TO:

FROM: Commissioner of Revenue
Alabama Department of Revenue

DATE: October 12, 1993

RE: Revenue Ruling 93-002

SUBJECT: Exemption from Sales/Use Tax and Property Tax along
with Deductions from Capital Employed for Franchise
Tax Purposes and Deductibility of Costs for Income Tax
Purposes Relating to Proposed Expenditures which
Control, Reduce, or Eliminate Air and Water Pollution.

FACTS

Company A is an Alabama corporation whose corporate office
is located in Alabama. Company A is in the business of
producing, processing and selling petroleum products and is
contemplating purchasing several items which will comply with
existing federal and state environmental regulations and,
further, take an "extra step" in maintaining a safe
environment. The proposed expenditures are as follows:

(1) VAPOR RECOVERY SYSTEMS AT RETAIL AND BULK STORAGE
PLANTS.

The purpose and function of these vapor recovery systems is
to capture harmful petroleum fumes, which otherwise would be
emitted into the surrounding air and water, and return them to
the storage facility. The cost of these systems generally range
between §500 and $5,000 dollars for retail operations and
between $10,000 and $20,000 dollars for bulk storage plants.

(2) IN-LINE LEAK DETECTORS.

The purpose and function of these detectors is to detect,
on a more timely basis, the escape of harmful petroleum liquids
into the surrounding air and water. The cost of these detectors
range between $2,500 dollars and $5,000 dollars.

(3) CATHODIC PROTECTION EQUIPMENT

The purpose and function of this equipment is to provide
early warning signals of possible leaks of harmful petroleum
products in under and above ground tanks into the surrounding
soil and water. The cost of such equipment range between $1,000
and $5,000 dollars.

(4) DOUBLE WALL STORAGE TANKS AND PIPING.

The purpose of these highly fortified tanks and piping is
to provide extra protection against the leakage of harmful
petroleum into the soil and water. It is not anticipated by the
Taxpayer that the full cost of such tanks should qualify for
special treatment under the applicable taxing statutes, but,
rather that only the excess of the cost of the double wall tanks
over the cost of the normal tank would be deducted and/or
excluded.

(5) CLEAN-UP EQUIPMENT.

Equipment under this category is numerous, but its function
is to clean up any possible leaks of harmful petroleum products
into the air, soil, or water. The equipment generally functions
similar to a “vacuum cleaner", the cost of which varies greatly
depending on the type and number of pieces employed.

ISSUES

(1) Whether the above proposed expenditures, acquisition
or self-construction of these items would exempt the
same from sales and use tax under Alabama Code
§40-23-4(16)3

(2) Whether these items or devices would be exempt from
property tax under Alabama Code §40-9-1(20);

(3) Whether the cost of these devices can be deducted from
capital employed within Alabama for foreign franchise
tax purposes under 840-14-41(d) (2) (c)3 and

(G4) Whether the cost of these devices can be deducted from
the Taxpayer's current year taxable income under
Alabama Code §40-18-35(13).

LAW AND ANALYSIS

Alabama Code §§40-23-4(16), 40-9-1(20), 40-14-4100) (2) Co)
and G0-18-35(13) allow exemptions from sales, use and property
tax and deductions from capital employed for foreign franchise
tax purposes and income tax purposes. on “all devices or
facilities and all identifiable components thereof or materials
for use therein, acquired or constructed primarily for the
control, reduction or elimination of air and water pollution."

Alabama law is quite clear that the term "pollution" is
defined as "to make physically impure or unclean." Pollution
has thus been defined to include any impurity and is not limited
to industrial or man-made waste but includes any impurity. Rush
vy. Department of Revenue of the State of Alabama, 416 So.2d 1023
(Ala. Civ. App.).

As noted in Chemical Waste Management, Inc. Vv. State, 512
So.2d 115 CAla. Civ. App. 1987) the “greatest source of
difficulty for courts which have construed statutes similar to
the one in question has been in construing the word
'porimarily"’ in the phrase acquired or constructed primarily
for the control, reduction, or elimination of air or water
pollution." There the Court noted that if the product is
determined to have a substantial function in the production of
products or services of that business, the exemption does not
apply. If, however, the end use of the product is determined to
be primarily for pollution control, which is incidental to the
manufacturing process or service which that business is engaged
in, the exemption does apply.

Along the same line, apportionment of costs for pollution
control has also been allowed in Alabama for income tax
deduction purposes. In the situation involving the double lined
tanks, the taxpayer would be allowed to deduct the difference in
cost between a standard and doubled lined tank. See Ex Parte
Kimberly Clark Corp., 503 So.2d 304 (Ala. 1987). The reasoning
behind the apportionment is obvious. Company A has to have
tanks in order to conduct its business. However, the useage of
a double lined tank does not enhance or alter the production
process, but rather is for safety and = pollution control
purposes. The added cost should be allowed under the relevant
statutes as its purpose is solely for pollution control.

It is clear that these Code sections would allow for certain
exemptions and deductions if the property is used exclusively
for pollution control as opposed to providing incidental
benefits to the production process. Based on the information
provided by Company A, all of the proposed expenditures are
intended and relate to pollution control and do not give any
benefit, incidental or otherwise, to the production process.

Accordingly, these expenditures would be used to purchase
and/or construct items that are used primarily for the control,
reduction or elimination of air and water pollution.

RULINGS

Company A contemplates certain expenditures which would be
used to purchase and/or construct items that are used primarily
for the control, reduction or elimination of air or water
pollution. As such, these expenditures would be exempt from
sales, use and property tax and allowed as a deduction from the
corporate foreign franchise tax base and current years taxable
income. Based on this analysis, the Department issues the
following rulings:

(1) The acquisition of self-construction of
the proposed pollution control devices or
structure would. be exempt from sales
and/or use tax under Code of Alabama
§40-23-4(16).

(2) The proposed expenditures for pollution
control devices would be exempt from
property tax under Code of Alabama
§40-9-1(20).

(3) The cost of these pollution control
devices would be allowed as deductions
from capital employed for franchise tax

purposes under Code of Alabama
§40-14-41(d) (2) (ce). However, Company A
is an Alabama corporation and is not
subject to this Code provision in

computing its franchise tax liability.

(4) The cost of these pollution control
devices would be allowed as a current
year deduction from taxpayer's taxable
income under Code of Alabama
§40-18-35(13), to the extent that the
cost of the pollution control aspect
exceeds the cost of the non-pollution
control device or equipment of similar
nature i.e. tanks.

George E. Mingledorff II!

GEM:DES:pj194%