When a company builds a power plant, can it buy the fuel and equipment tax-free -- fully as a utility 'furnishing electricity,' and partially as machinery used in 'processing'?

Plain-English summary

Heads-up on currency: DRS's published copy of this Ruling is marked "not current … provided for reference purposes only," and states that the Ruling "has been revoked in part by Ruling 2004-2." Treat the analysis below as a snapshot of the law as DRS read it in 2000, not as current guidance.

A company was building a power plant to generate electricity for wholesale sale to wholesale and retail remarketers, feeding the New England grid. It asked DRS whether two different Connecticut manufacturing-type exemptions applied to what it bought to build and run the plant.

DRS said both apply, but at different levels:

• Fuel, materials and tools — fully exempt (Conn. Gen. Stat. § 12-412(18)). That statute exempts materials, tools and fuel used directly not only in fabricating goods for sale, but also in furnishing electricity delivered to consumers through mains, lines or pipes. DRS held that generating electricity is part of "furnishing" it, so the fuel and materials used directly to generate electricity are fully exempt — as long as the power is sold and delivered to consumers (or to a wholesaler/remarketer who will sell and deliver it to consumers).
• Generating machinery and equipment — only a partial exemption (the Manufacturing Recovery Act, § 12-412i). Here's the twist: the Connecticut Supreme Court had already held (in United Illuminating Co. v. Groppo, 220 Conn. 749 (1992)) that generating electricity is not "manufacturing." So the plant's machinery does not qualify for the full machinery exemption in § 12-412(34). But DRS concluded that generating electricity is "processing" — "the physical application of the materials and labor necessary to modify or change the characteristics of tangible personal property" (§ 12-412i(b)(3)), and Connecticut's definition of tangible personal property (§ 12-407(13)) expressly includes the generation and transmission of electricity. Because it's "processing," machinery and equipment used primarily to generate electricity get the Manufacturing Recovery Act's partial exemption — an effective rate of 3% rather than tax-free.
• Smokestacks and other real property — no exemption. Materials used to build the smokestacks are real property, not machinery or equipment, so they qualify for neither the full § 12-412(18) exemption nor the MRA partial exemption.

The practical takeaway a power developer would have drawn in 2000: full break on fuel and consumables, a partial (3%) break on the generating equipment, and no break on structural/real-property construction — with the important caveat that Ruling 2004-2 later revoked part of this.

What this means for you

Electricity generators and power developers

This Ruling illustrates that Connecticut historically split a power plant's purchases into three buckets — fully exempt fuel/materials, partially exempt generating machinery, and non-exempt real-property construction. But because Ruling 2004-2 revoked part of this and DRS marks the page as not current, do not rely on these conclusions today without confirming the present rules for generation-related exemptions with DRS or a Connecticut tax professional.

Accountants and tax professionals

The historical analysis turns on two distinct manufacturing regimes: the § 12-412(18) full exemption (materials/tools/fuel used directly in fabricating goods or furnishing electricity) and the § 12-412i Manufacturing Recovery Act partial exemption for machinery used in manufacturing, processing or fabricating. The linchpin is United Illuminating Co. v. Groppo — generation is not "manufacturing" (so no § 12-412(34) full machinery exemption) but is "processing" (so it reaches the MRA partial rate). Real-property construction materials sit outside every manufacturing exemption. Given the partial revocation by Ruling 2004-2, verify the current state of the law before applying any of this.

Common questions

Q: Is this Ruling still good law?
A: Not entirely. DRS's own copy is marked "not current … for reference purposes only" and says the Ruling was revoked in part by Ruling 2004-2. Use it for historical context and confirm current treatment separately.

Q: Can a power plant buy its fuel and materials tax-free?
A: As DRS read it in 2000, yes — materials, tools and fuel used directly to generate electricity for sale to consumers (or to remarketers who sell to consumers) were fully exempt under § 12-412(18).

Q: What about the generating machinery — is it also fully exempt?
A: No. Because generating electricity is not "manufacturing," the machinery didn't get the full § 12-412(34) exemption. It qualified only for the Manufacturing Recovery Act's partial exemption (effective 3% rate) as machinery used in "processing."

Q: Are the smokestacks exempt?
A: No. Smokestack materials are real property, not machinery or equipment, and no manufacturing exemption covers materials used to construct real property.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-412(18) (full exemption for materials, tools and fuel used directly in fabricating goods for sale or furnishing electricity to consumers)
• Conn. Gen. Stat. § 12-412i (Manufacturing Recovery Act of 1992; partial exemption for machinery/equipment used in manufacturing, processing or fabricating), including § 12-412i(b)(3) (definition of "processing")
• Conn. Gen. Stat. § 12-407(13) (tangible personal property includes distribution, generation or transmission of electricity)
• Conn. Gen. Stat. § 12-412(34) (full exemption for machinery used in manufacturing) and § 12-407(2)(i)(I)

Cases and guidance:

• United Illuminating Co. v. Groppo, 220 Conn. 749, 601 A.2d 1005 (1992) (generation of electricity is not "manufacturing")
• Special Notice 93(1.1) (The Manufacturing Recovery Act of 1992 Exemption for Purchases of Property Used in Manufacturing, Processing and Fabricating; "primarily" means "chiefly")
• Ruling 2004-2 (revoked this Ruling in part)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2000-5

Original ruling text

Ruling 2000-5, Sales and Use Taxes / Manufacturing Recovery Act / Electricity Generation

This information is not current and is being provided for reference purposes only

Ruling 2000-5

Sales and Use Taxes

Manufacturing Recovery Act

Electricity Generation

This Ruling has been revoked in part by  Ruling 2004-2

FACTS:

The Company is building a power plant to generate electricity for sale at wholesale to wholesale and retail remarketors. The process of generating electricity will use combustion turbine generators that convert fuel into electrical energy, which will be passed through a step-up transformer near the power plant in order to convert the voltage of the electricity exiting the generators before it is transmitted onto the New England power grid.

ISSUES:

Whether the generation of electricity for sale and delivery at wholesale to wholesale and retail remarketors is the "furnishing of electricity when delivered to consumers through mains, lines or pipes" for purposes of Conn. Gen. Stat. §12-412(18), thus fully exempting purchases of materials, tools and fuel used directly in generating electricity.

Whether the generation of electricity for sale and delivery at wholesale to wholesale and retail remarketors is "processing" within the meaning of the Manufacturing Recovery Act of 1992, Conn. Gen. Stat. §12-412i (the "MRA"), thus partially exempting purchases of machinery and equipment used for generating electricity.

RULING:

The generation of electricity is the "furnishing of electricity when delivered to consumers through mains, lines or pipes" under Conn. Gen. Stat. §12-412(18), and purchases of materials, tools and fuel used directly in generating electricity are fully exempt from sales and use taxes.

The generation of electricity is "processing" within the meaning of Conn. Gen. Stat. §12-412i, and purchases of machinery and equipment for use primarily in generating electricity are partially exempt from sales and use taxes.

DISCUSSION:

Besides exempting purchases of materials, tools and fuel used directly in an industrial plant in the actual fabrication of tangible personal property to be sold, Conn. Gen. Stat. §12-412(18) also exempts purchases of materials, tools and fuel used directly in the furnishing of electricity to be delivered to consumers through mains, lines or pipes. Therefore, purchases of materials, tools and fuel used directly to generate electricity are exempt under this statute, as long the electricity will be sold and delivered to consumers or to a wholesaler or remarketer for sale and delivery to consumers.

Purchases of machinery by a generator of electricity have not been granted similar favorable treatment. In United Illuminating Company v. Groppo , 220 Conn. 749, 601 A.2d 1005 (1992), the Connecticut Supreme Court concluded that the generation of electricity was not manufacturing. The issue in that case was whether the exclusion from the tax on services to commercial, industrial and income-producing real property under Conn. Gen. Stat. §12-407(2)(i)(I) applied to services rendered to machinery and production equipment at an industrial plant. Relying on legislative history and its findings of legislative intent, the Court determined that

[while the generation of electricity may in some sense be a "manufacturing" process, we conclude that the legislature did not intend to exempt businesses engaged in the generation of electricity for public consumption from the tax on services rendered to machinery and production equipment under 12-407 (2) (i) (I).

220 Conn. at 755. Because the generation of electricity is not considered "manufacturing" for purposes of the Connecticut sales and use taxes, purchases of machinery to generate electricity are not eligible for the full exemption under Conn. Gen. Stat. §12-412(34).

The issue now is whether electricity generation may be considered "processing" for purposes of the partial exemption of the MRA. Conn. Gen. Stat. §12-412i(b)(3) defines "processing" as "the physical application of the materials and labor necessary to modify or change the characteristics of tangible personal property." The definition of "tangible personal property" in Conn. Gen. Stat. §12-407(13) includes the distribution, generation or transmission of electricity. By spinning the generator, the Company exposes the wires inside it to a magnetic field, causing the atoms comprising the wires to lose and gain electrons, thus causing an electric current to be created. This activity comes within the definition of "processing" for purposes of the MRA.

Because electricity generation is "processing" under the MRA, purchases of machinery and equipment used primarily (which means chiefly, as defined in Special Notice 93(1.1), The Manufacturing Recovery Act Of 1992 Exemption For Purchases Of Property Used In Manufacturing, Processing And Fabricating ) to generate electricity are partially exempt, subject to tax at an effective rate of three percent.

Most of the items described by the Company are either machinery, the component parts of machinery, or equipment, which are partially exempt under the MRA. However, the materials used to construct the smokestacks do not qualify either for full exemption under Conn. Gen. Stat. §12-412(18) or partial exemption under the MRA. ( United Illuminating Company v. Groppo , Super. Ct., No. CV 87-0382460 (January 30, 1991); the plaintiff did not appeal this issue to the Connecticut Supreme Court.) The smokestacks are real property, not machinery or equipment, and materials used to construct real property are not covered by any of the manufacturing exemptions.

LEGAL DIVISION

July 13, 2000