Which machinery for a natural-gas electricity and steam facility qualified for Florida's exemption?

Subject

Construction of Electrical Energy Generating Facility

Plain-English summary

The natural-gas facility qualified for the machinery-and-equipment exemption because it would produce electricity and steam for sale without burning residual oil. Qualifying purchases could be exempt at the time of sale rather than taxed first and refunded later.

Florida applied the integrated-plant theory to machinery used in generation, even where a component mainly made the plant operate more practically. Distribution equipment did not qualify. The ruling specifically treated the sanitary sewage system and concrete acoustic walls as taxable, while the plug-in control room and numerous generation, water, steam, cooling, fuel, instrumentation, and support systems qualified as described. The purchaser still had to provide the statutory affidavit and retain proof.

What this means for you

Eligibility was component-specific. Physical proximity to a power plant was not enough; the item had to fit the generation process or another stated exemption, and the purchaser had to follow the affidavit procedure.

Common questions

Q: Did the natural-gas facility qualify generally? Yes.

Q: Was every project component exempt? No.

Q: Did distribution equipment qualify under the integrated-plant rule? No.

Citations and references

• Fla. Stat. § 212.08(5)(c) — machinery and equipment for electrical or steam production
• Fla. Stat. § 212.085 — false exemption affidavit penalty
• Jacksonville Electric Authority v. Department of Revenue, 486 So. 2d 1350 (Fla. 1st DCA 1986)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-039

Original ruling text

SUMMARY

QUESTION: Taxpayer will be constructing an electricity and
steam generating facility that will be fueled by natural
gas. The issue is whether the equipment and systems as
enumerated in an exhibit provided by the Taxpayer
constitute machinery and equipment necessary in the
production of electrical or steam energy and, therefore,
qualify for exemption from Florida sales and use tax
pursuant to Section 212.08(5)(c), Florida Statutes?

ANSWER - Based on Facts Below: Those items that are
consistent with the findings of the JEA/FPL Declaratory
Statement and prior technical assistance advisements as
issued by the Department will qualify for exemption,
provided the proper affidavit procedures are followed.

Jul 06, 2000

Re: Technical Assistance Advisement 00A-039
Sales and Use Tax
Construction of Electrical Energy Generating Facility
Section 212.08(5)(c), F.S.

Dear :

This is in response to your request for a Technical
Assistance Advisement regarding the construction of an
electrical energy generating facility by XXX (hereinafter
"Taxpayer").

Based on your letter and our telephone conversations of
June 19, 2000, the following is understood. Taxpayer will be
constructing an electrical energy generating facility
(hereinafter "Facility") near the current site of the XXX
(hereinafter "City") generating facility. Taxpayer will sell
electricity in the electrical grid to various other electrical
energy suppliers. Further, Taxpayer will be selling steam to

City for its use in the production of electrical energy. The
Facility will use natural gas as its only fuel source. "Exhibit
A" of your letter indicates the major components that will be
constructed at the Facility.

RELEVANT AUTHORITY

The following passages from the Florida Statutes (F.S.) are
pertinent to your request for a Technical Assistance Advisement.

Section 212.08(5)(c), F.S. (1999), provides:

(c) Machinery and equipment used in production of
electrical or steam energy.-

1. The purchase of machinery and equipment for use at a
   fixed location which machinery and equipment are necessary
   in the production of electrical or steam energy resulting
   from the burning of boiler fuels other than residual oil is
   exempt from the tax imposed by this chapter. Such
   electrical or steam energy must be primarily for use in
   manufacturing, processing, compounding, or producing for
   sale items of tangible personal property in this state. Use
   of a de minimis amount of residual fuel to facilitate the
   burning of nonresidual fuel shall not reduce the exemption
   otherwise available under this paragraph.

2. In facilities where machinery and equipment are
   necessary to burn both residual and nonresidual fuels, the
   exemption shall be prorated. Such proration shall be based
   upon the production of electrical or steam energy from
   nonresidual fuels as a percentage of electrical or steam
   energy from all fuels. Purchasers claiming a partial
   exemption shall obtain such exemption by refund of taxes
   paid, or as otherwise provided in the department's rules.

3. The department may adopt rules that provide for
   implementation of this exemption. Purchasers of machinery
   and equipment qualifying for the exemption provided in this
   paragraph shall furnish the department with an affidavit
   stating that the item or items to be exempted are for the

use designated herein. Any person furnishing a false
affidavit to the vendor for the purpose of evading payment
of any tax imposed under this chapter shall be subject to
the penalty set forth in s. 212.085 and as otherwise
provided by law. Purchasers with self-accrual authority
shall maintain all documentation necessary to prove the
exempt status of purchases.

DETERMINATION

Exemption of Facility

The exemption provided under Section 212.08(5)(c), F.S., is
applicable to those facilities that produce electrical or steam
energy from the burning of fuels other than residual oil. The
natural gas to be burned at the facility is not a residual oil
fuel. The exemption further requires that such electrical or
steam energy must be primarily used in manufacturing,
processing, compounding, or producing tangible personal property
for sale. The electrical energy or steam sold to other energy
suppliers are forms of tangible personal property produced for
sale. Accordingly, since the Facility does not burn residual
oil, and electrical energy and steam are produced for sale, the
Facility qualifies for exemption. Further, since residual oil
is not a fuel source in this case, Taxpayer is not obligated
under the provisions of subparagraph 2. of the exemption statute
to pay tax on the purchases of machinery and equipment and seek
a subsequent refund of the exempt portion. Taxpayer's purchases
of qualifying machinery and equipment will be exempt at the time
of the purchase transaction.

Qualifying Purchases

The scope of Section 212.08(5)(c), F.S., was reviewed by
the First District Court of Appeal of Florida in Jacksonville
Electric Authority v. Department of Revenue, 486 So.2d 1350
(Fla. 1st DCA 1986). That case involved the taxable status of
certain machinery and equipment purchased by the Jacksonville
Electric Authority to be used in the burning of coal to produce
electrical energy.

The District Court of Appeal determined that it was the
legislative intent, based on the tape recorded proceedings of
the Florida Senate Committee on Ways and Means, to embrace the
"integrated plant theory" as a basis for interpreting the
exemption for machinery and equipment provided in Section
212.08(5)(c), F.S. Under the "integrated plant theory,"
machinery and equipment used in the process of generating
electrical energy, regardless of the fact that such machinery
and equipment was not intrinsically necessary to generate
electrical energy or the sole purpose of such machinery and
equipment was to make the plant function more practically, would
be considered a component part of the manufacturing process.
Therefore, the machinery and equipment used in the process of
generating electrical energy, but not distribution, would
qualify for the exemption provided in Section 212.08(5)(c), F.S.

The Department implemented the court's instructions by
amending "Exhibit B" of the JEA/FPL Declaratory Statement.
"Exhibit B" now serves as a guide for the Department when
embracing the "Integrated Plant Theory." Therefore, based on
"Exhibit B" of the JEA/FPL Declaratory Statement and prior
Technical Assistance Advisements issued by the Department, which
interpret that exhibit, the Department now finds the following
major components of the Facility as listed in your "Exhibit A,"
with the exception of those specifically listed as being
taxable, fully qualify for exemption:

1. Subsurface Improvements Related to Exempt Equipment
   (Subsurface improvements related to non-exempt equipment are
   taxable.)
2. Waste Water treatment - Above Grade
3. Waste Water treatment - Below Grade
4. Water Pretreatment System
5. Sanitary Sewage System (This system is taxable.)
6. Yard Fire Protection System
7. Service Water System
8. Waste Water Treatment System
9. Above Ground Racks/Below Ground Trenches (Above ground
   racks and below ground trenches related to non-exempt equipment
   are taxable.)
   10.Acoustic Walls (Taxable. The acoustic walls are

understood to be 14 foot high and constructed of concrete block.
Since the Facility is located next to a residential area, the
installation of the acoustic walls is being mandated by City to
buffer the sound of the combustion turbines. The acoustic walls
are not machinery and equipment. Further, although they are
used in pollution (noise) control, they are not a part of the
electrical generation "system" as considered by the Court in
JEA/FPL. Further, the acoustic walls are not being constructed
pursuant to a law implemented by, or a condition of a permit
issued by, the Florida Department of Environmental Protection.
Accordingly, no exemption is available pursuant to either ss.
212.08(5)(c) or 212.051, F.S.

11. Control Room (It is understood that the control room is
    a trailer-like facility that is effectively plugged-in to the
    overall system to control its operations. This is not a real
    property improvement and it fully qualifies for exemption.)
12. Plant Water Service Equipment
13. Fire Protection Equipment - Lube Oil Purification Area
14. Instrumentation and Controls
15. Steam Turbine Generator Set Steel
16. Heat Recovery Steam Generator Steel
17. Heat Recovery Steam Generator Pressure Parts
18. Heat Recovery Steam Generator Ductwork
19. Thermocouples
20. Heat Recovery Steam Generator Instruments Miscellaneous
21. Chemical Cleaning Piping
22. Plant Instrumentation
23. Feed Water System
24. Main Steam System
25. Extraction Steam System
26. Auxiliary Steam System
27. Condensate System
28. Cooling Water System
29. Demineralized Water System
30. Seal Steam System
31. Desuperheater Spray System
32. Lube Oil System
33. Closed Cooling Water System
34. Condensers and Auxiliaries
35. Circulating Water System

36. Natural Gas System (It is the Department's position
that the exemption begins at the point where the fuel source is
received at the facility. In the case of facilities fueled by
natural gas, the fuel is received and the exemption is
considered to begin at the gas metering station.)

37. Fuel Oil System (The Facility was originally intended
    to be a dual fuel facility burning natural gas as the primary
    fuel and No. 2 distillate as a secondary fuel. In the event
    that Taxpayer should change its plans and install the fuel oil
    system, such system will qualify for exemption.)
38. Cooling Tower
39. Auxiliary Power Transformers
40. Step Up Transformers (It is important to understand
    that the exemption pursuant to s. 212.08(5)(c), F.S., is for
    machinery and equipment necessary in the production of
    electricity. The exemption does not extend to machinery and
    equipment necessary in the distribution of electricity. It is
    the Department's understanding that distributable power, or
    power that can be placed on the grid, occurs after the first
    step-up transformer. Accordingly, the first step-up transformer
    qualifies for exemption as necessary in the production of
    electricity. However, any step-up transformers serving to
    further distribute power do not qualify for exemption.)
41. Battery Equipment
42. Inverter
43. Underground Conduit and Ducts
44. Metallic Conduit
45. Non-Metallic [Conduit]
46. Cable Tray System
47. Busses
48. Power Cable (Cable from the first transformer that
    provides power back into the plant to exempt equipment would be
    exempt. All other cable to non-exempt equipment would be
    taxable.)
49. Control and Instrument Cable
50. Control Boards, Switchgear & Motor Control Centers
51. Grounding for All Exempt Equipment
52. Combustion Turbine Generator Set
53. Steam Turbine Generator Set

Affidavit Procedures

The benefit of the exemption inures to the Taxpayer, to the
Taxpayer's contractor, and to the contractor's subcontractors.
The exemption is implemented by extending an affidavit to the
machinery and equipment or materials vendor at the time of the
purchase transaction. At no time when extending an affidavit
for the exemption provided in Section 212.08(5)(c), F.S., should
anyone include another business entity's Certificate of
Registration number (sales tax number), Consumer's Certificate
of Exemption number, or Direct Pay Certificate number. Each of
those numbers may only be used by the business entity to which
it was assigned.

Procedurally, an affidavit must be given by the Taxpayer to
the contractor. The contractor, in turn, would then issue its
own affidavit to its subcontractors along with a copy of the
affidavit provided by the Taxpayer. This process continues from
subcontractors to sub-subcontractors until the actual purchase
order is issued to the vendor or supplier for the qualifying
machinery and equipment or materials.

The affidavit may be a separate document attached to
purchase orders or it may be incorporated within the purchase
order itself. If the affidavit is incorporated within the
purchase order, a statement that would have the same effect as
the statement regarding a false affidavit, as provided in the
sample affidavit, must be incorporated within the purchase
order. Further, it is the position of the Department that the
affidavit must be notarized regardless of whether the affidavit
is incorporated within the purchase order or is an independent
affidavit attached to the purchase order. The following is a
suggested format for the affidavit.

AFFIDAVIT

STATE OF FLORIDA
COUNTY OF _______.

On this day, personally appeared the undersigned who, being
first duly sworn, deposes and says:

That all machinery and equipment purchased from
____ will be incorporated into and/or become a
component part of the ___ located in
___, Florida, County of
_______. Further, that said machinery and
equipment is necessary for the production of electric or steam
energy resulting from the burning of boiler fuels other than
residual oil and is exempt from the tax imposed by Chapter 212,
Florida Statutes, Sales and Use Tax Act, pursuant to Section
212.08(5)(c), Florida Statutes.

I understand any person furnishing a false affidavit to a
vendor for the purpose of evading payment of any tax imposed
under Chapter 212, Florida Statutes, shall be subject to the
penalty set forth in Section 212.085, Florida Statutes, and as
otherwise provided by law.

Purchaser's Name

________.
Signature

Sworn to and
subscribed before me
this __day of
_, A.D., 20 _.

________.

Notary Public

(Seal)
________.
My Commission Expires

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the Department
only under the facts and circumstances described in the request
for this advice as specified in Section 213.22, F.S. Our
response is predicated on those facts and the specific situation
summarized above. You are advised that subsequent statutory or
administrative rule changes, or judicial interpretations of the
statutes or rules, upon which this advice is based, may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response, your request
and related documents are public records under Chapter 119,
F.S., which are subject to disclosure to the public under the
conditions of Section 213.22, F.S. Your name, address, and any
other details which might lead to identification of the taxpayer
must be deleted before disclosure. In an effort to protect the
confidentiality of such information, we request you provide the
undersigned with an edited copy of your request for Technical
Assistance Advisement, backup material and response within
fifteen days of the date of this advisement.

Sincerely,

Jeffery L. Soff
Tax Law Specialist
Technical Assistance and
Dispute Resolution

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