Which repairs, steam-channeling equipment, and chemicals qualified for Florida exemptions at natural-gas cogeneration plants?

Subject

Purchases by Steam Generating and Manufacturing Facilities

Plain-English summary

The electricity-and-steam machinery exemption covered qualifying repairs, maintenance, replacements, and parts, not only the original plant construction. A revised version of the taxpayer's sample affidavit was acceptable vendor documentation, although actual qualifying use—not the affidavit itself—established exemption.

The pipes, pumps, wiring, and valves moving steam to the ethanol thermal host and returning condensate did not qualify under the SIC-limited repair exemption. They nevertheless qualified under section 212.08(5)(c) as an integral part of the power plants' steam and condensate return system.

The plants' process-water chemicals and calibration gases were taxable. The zero-liquid-discharge plants produced no wastewater, and recycled process water did not become wastewater; section 212.051's specialty-chemical exemption did not cover those uses.

What this means for you

One item can fail one exemption and qualify under another. Function within generation, actual use, wastewater status, and documentation each required separate analysis.

Common questions

Q: Did repair and replacement purchases qualify? Yes, when tied to exempt generation machinery.

Q: Was the steam-return channeling equipment exempt? Yes, under section 212.08(5)(c).

Q: Did the affidavit create the exemption? No.

Q: Were process-water chemicals or calibration gases exempt? No.

Citations and references

• Fla. Stat. § 212.08(5)(c) — electricity and steam production machinery
• Fla. Stat. § 212.08(7)(zz) — industrial machinery repair exemption
• Fla. Stat. § 212.051 — pollution-control chemicals and products
• 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 01A-038

Original ruling text

SUMMARY

QUESTION 1: Whether the exemption provided by s.
212.08(5)(c), F.S., on purchases of machinery, equipment,
and parts thereof extends to repairs, maintenance, and
replacements of such machinery, equipment, and parts
thereof.

ANSWER 1 - Based on Facts Below: The exemption provided
by s. 212.08(5)(c), F.S., is not limited to the original
machinery and equipment used in the construction of an
electrical or steam generation facility. The exemption also
extends to repairs, maintenance, and replacements of such
machinery, equipment, and parts thereof.

QUESTION 2: If the exemption does extend to repairs,
maintenance, and replacements of such machinery, equipment,
and parts thereof, will the affidavit submitted as Exhibit
A to the request for a TAA be appropriate for submission by
Taxpayer to its vendors at the time of purchase in lieu of
payment of sales tax.

ANSWER 2 - Based on Facts Below: The sample affidavit
submitted by Taxpayer, with minor changes, is appropriate
to extend to vendors. The sample affidavit, with changes
incorporated, has been made an attachment to this TAA.

QUESTION 3: Whether the repairs and maintenance to
a system of pipes, pumps, wiring, and valves (referred
to as "channeling equipment") owned by the power plant
and carrying steam to a thermal host plant (a
manufacturing operation) are eligible for exemption
pursuant to s. 212.08(7)(zz), F.S.

ANSWER 3 - Based on Facts Below: Generators of
electricity and steam are classified under SIC Industry
Major Group Number 49. That group number is not one of
the numbers eligible for exemption under s.
212.08(7)(zz), F.S. Accordingly, Taxpayer is not
entitled to an exemption pursuant to s. 212.08(7)(zz),
F.S., on purchases for the channeling equipment. However,

the channeling equipment is entitled to an exemption under
s. 212.08(5)(c), F.S., as a part of the power plant's steam
and condensate return system.

QUESTION 4: Whether the chemicals used in processes at the
power plants are exempt from sales and use tax as specialty
chemicals and bioaugmentation products for pollution
control pursuant to s. 212.051, F.S.

ANSWER 4 - Based on Facts Below: Specialty chemicals and
bioaugmentation products for pollution control are only
exempt pursuant to s. 212.051, F.S., when used in the
treatment of wastewater. Since Taxpayer's power plant does
not produce wastewater and the exemption is not available
to process chemicals, no exemption is available.

Jul 05, 2001

Re: Technical Assistance Advisement 01A-038
Sales and Use Tax
Purchases by Steam Generating and Manufacturing Facilities
Sections 212.051 and 212.08(5)(c) and (7)(zz), F.S.

Dear :

This is in response to your letter of April 20, 2001, which
requests a Technical Assistance Advisement (TAA) on behalf of
your client XXX (hereinafter "Taxpayer").

Background

Between 1993 and 1995, Taxpayer constructed two
cogeneration facilities ("power plants") in Florida. These
facilities are non-utility generators or independent power
producers. The fuel source for the power plants is natural gas.
The two power plants are owned in part by subsidiaries of
Taxpayer and are operated by Taxpayer. A separate ethanol
plant, referred to as a "thermal host," was built adjacent to

one of the power plants. Taxpayer is the owner of this thermal
host. Taxpayer leases the thermal host to an unrelated third
party. A thermal host was also built adjacent to the other
power plant. That thermal host is not owned or operated by
Taxpayer.

The thermal hosts are connected to the power plants by a
system of pipes, pumps, wiring, and valves referred to as
"channeling equipment." The channeling equipment is owned by
the power plants. Excess steam created at the power plants is
transferred to the thermal hosts through the channeling
equipment. The thermal hosts use the steam in the production of
tangible personal property for sale. After the steam energy has
been used at the thermal hosts, the water from the condensed
steam is returned to the power plants, again through the
channeling equipment.

The power plants use certain chemicals in their processes.
These chemicals may be placed into three categories: (1) HRSG
(boiler) water, (2) cooling/waste water, and (3) calibration
gases.

HRSG Water - The chemicals used in the heat recovery steam
generator (HRSG) water pre-treat that water by purifying it for
steam production. This process will protect the equipment from
corrosion and thereby extend the life of that equipment.
Examples of these chemicals are amine, phosphate, and oxygen
scavenger.

Cooling/Waste Water - The power plants are designed as
zero-liquid discharge plants. That means that all of the water
is reused until it is evaporated. This eliminates pollution of
any body of water. The chemicals used in this process minimize
corrosion and scaling of the equipment and to process the water
as it is continuously being recycled. Minerals removed from the
water are disposed of off-site. Examples of these chemicals are
phosphates, coagulants, and flocculents.

Calibration Gases - The power plants utilize continuous
emission monitoring systems (CEMS) to monitor the level of
pollutants from the combustion turbine exhaust stacks. In order

to maintain the accuracy and integrity of the CEMS, daily and
quarterly calibrations are performed using special gases. These
calibrations are required by the Environmental Protection Agency
(EPA). The calibration gases include nitrogen oxides (NOx),
carbon monoxide (CO), and oxygen (O2).

Specific Issues

1. Whether the exemption provided by s. 212.08(5)(c), F.S.,
   on purchases of machinery, equipment, and parts thereof extends
   to repairs, maintenance, and replacements of such machinery,
   equipment, and parts thereof.

2. If the exemption does extend to repairs, maintenance,
   and replacements of such machinery, equipment, and parts
   thereof, will the affidavit submitted as Exhibit A to the
   request for a TAA be appropriate for submission by Taxpayer to
   its vendors at the time of purchase in lieu of payment of sales
   tax.

3. Whether the repairs and maintenance to the channeling
   equipment are eligible for exemption pursuant to s.
   212.08(7)(zz), F.S.

4. Whether the chemicals used in processes at the power
   plants are exempt from sales and use tax as specialty chemicals
   and bioaugmentation products for pollution control pursuant to
   s. 212.051, F.S.

Relevant Authority

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

Section 212.051, F.S., provides in part:

212.051 Equipment, machinery, and other materials for
pollution control; not subject to sales or use tax. -(1) Notwithstanding any provision to the contrary, sales,
use, or privilege taxes shall not be collected with respect
to any facility, device, fixture, equipment, machinery,

specialty chemical, or bioaugmentation product used
primarily for the control or abatement of pollution or
contaminants in manufacturing, processing, compounding, or
producing for sale items of tangible personal property at a
fixed location, or any structure, machinery, or equipment
installed in the reconstruction or replacement of such
facility, device, fixture, equipment, or machinery. To
qualify, such facility, device, fixture, equipment,
structure, specialty chemical, or bioaugmentation product
must be used, installed, or constructed to meet a law
implemented by, or a condition of a permit issued by, the
Department of Environmental Protection; however, such
exemption shall not be allowed unless the purchaser signs a
certificate stating that the facility, device, fixture,
equipment, structure, specialty chemical, or
bioaugmentation product to be exempted is required to meet
such law or condition....

(3) For the purposes of this section, "specialty chemicals"
means those chemicals used to enhance or further treat
wastewater, including, but not limited to, defoamers,
nutrients, and polymers, and "bioaugmentation products"
means the microorganisms used in waste treatment plants to
break down solids and consume organic matter.

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

(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....

Section 212.08(7), F.S., provides in part:

(zz) Certain repair and labor charges.1. Subject to the provisions of subparagraphs 2. and 3.,
there is exempt from the tax imposed by this chapter all
labor charges for the repair of, and parts and materials

used in the repair of and incorporated into, industrial
machinery and equipment which is used for the manufacture,
processing, compounding, production, or preparation for
shipping of items of tangible personal property at a fixed
location within this state.

2. This exemption applies only to industries classified
   under SIC Industry Major Group Numbers 10, 12, 13, 14, 20,
   22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36,
   37, 38, and 39 and Industry Group Number 212. As used in
   this subparagraph, "SIC" means those classifications
   contained in the Standard Industrial Classification Manual,
   1987, as published by the Office of Management and Budget,
   Executive Office of the President.

Determination

Response to Specific Issue 1.

Section 212.08(5)(c)1., F.S., provides an exemption on machinery
and equipment, which are necessary in the production of
electrical or steam energy. It is the position of the
Department that this exemption is not limited to the original
machinery and equipment used in the construction of the
facility. The exemption also extends to repairs, maintenance,
and replacements of such machinery, equipment, and parts
thereof.

Response to Specific Issue 2.

In order for a purchaser to receive an exemption on
machinery, equipment, and parts thereof, s. 212.08(5)(c)3.,
F.S., provides that the purchaser must furnish an affidavit
stating that the item or items to be exempted are for the use as
designated by the exemption statute. It is the Department's
position that the sample affidavit submitted by you, with minor
changes, is appropriate when extended to Taxpayer's vendors.
That sample affidavit, with changes incorporated, has been made
an attachment to this TAA.

It is important to understand that the exemption is not

established by the issuance of the affidavit. The exemption is
established when the item or items are used for the express
purpose designated by the exemption statute. The affidavit
simply provides documentation to the vendor as support for the
reason why tax was not charged on a particular transaction. If
Taxpayer has self-accrual authority, then Taxpayer does not have
to issue an affidavit to itself. However, Taxpayer must
maintain all documentation necessary to prove the exempt status
of the purchases.

Response to Specific Issue 3.

The exemption provided by s. 212.08(7)(zz), F.S., is
expressly restricted to certain enumerated SIC Industry Major
Group Numbers. Generators of electricity and steam are
classified under SIC Industry Major Group Number 49. That group
number is not one of the numbers eligible for exemption under s.
212.08(7)(zz), F.S. Accordingly, Taxpayer is not entitled to an
exemption pursuant to s. 212.08(7)(zz), F.S., on purchases for
the channeling equipment.

However, in addition to being manufacturing machinery and
equipment, the channeling equipment is also a part of each power
plant's steam and condensate return systems. The Department has
previously determined that steam and condensate return systems
qualify for exemption pursuant to s. 212.08(5)(c), F.S. (See
TAAs 00A-039, dated July 6, 2000, and 98A-087, dated December 2,
1998.) It is obvious that without the thermal host, this
channeling equipment would probably be unnecessary and never
established. Regardless of the fact that the channeling
equipment may be unnecessary to the production of steam or
electrical energy, the channeling equipment is still an integral
part of the process at Taxpayer's facilities. The channeling
equipment provides a path for the disposal of excess steam and a
source of water for the power plant's boiler. As such, it would
be entitled to exemption under the provisions of s.
212.08(5)(c), F.S.

Your request for a TAA correctly notes that the exemption
provided by s. 212.08(5)(c), F.S., is limited to that machinery
and equipment used in the production of electrical and steam

energy. The Department has consistently held that machinery and
equipment used in the distribution of electrical energy is not
entitled to the exemption. It has generally been held by the
Department that the exemption for the generation of electrical
energy ends at the point in the system that follows the first
step-up transformer. That point is considered to be the
beginning point for the distribution of electricity. (See TAA
00A-039, dated July 6, 2000.) However, TAAs previously issued by
the Department have not formally addressed the issue of the
distribution of steam to consumers.

The system of the generation of electricity is,
effectively, a one-way system. Generated power does not return
to the power plant after use by consumers. Further, electricity
may travel for miles before being consumed. Therefore, a formal
cut-off point for the generation of electricity is necessary and
appropriate. The system of generating steam is a two-way
system. The steam is returned to the power plant's boiler
either as reduced pressure steam, condensate, or both. In
comparison to electricity, steam can only travel a relatively
short distance before its energy is dissipated. Accordingly, it
is impractical to deny the exemption provided by s.
212.08(5)(c), F.S., to a finite part of the overall steam and
condensate return system as part of a distribution system.

Response to Specific Issue 4.

Pursuant to the findings of the First District Court of
Appeal of Florida in Jacksonville Electric Authority v.
Department of Revenue, 486 So. 2d 1350 (Fla. 1st DCA 1986),
pollution control machinery and equipment is eligible for
exemption under the provisions of s. 212.08(5)(c), F.S.
However, the Department does not consider chemicals to be
machinery or equipment. Accordingly, any specialty chemicals or
bioaugmentation products used by power plants do not come under
the exemption purview of s. 212.08(5)(c), F.S.

The exemption for the use of specialty chemicals and
bioaugmentation products for pollution control is exclusively
subject to the provisions of s. 212.051, F.S. These specialty
chemicals and bioaugmentation products must be used primarily

for the control or abatement of pollution or contaminants in
manufacturing tangible personal property for sale. Further,
such specialty chemicals and bioaugmentation products must be
used to meet a law implemented by, or a condition of a permit
issued by, the Florida Department of Environmental Protection
(DEP).

By definition, the specialty chemicals and bioaugmentation
products qualifying for exemption are limited to those used in
the treatment of wastewater. Since Taxpayer's power plants are
"zero-liquid discharge" plants, there is no wastewater to be
treated. The fact that water is continuously recycled and
recirculated at the power plant does not make that process water
"wastewater." Further, the exemption is not expressly applicable
to chemicals used in the treatment of process water or to
chemicals used as calibration gases. Therefore, the various
previously described chemicals used by Taxpayer are not eligible
for exemption pursuant to s. 212.051, F.S.

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

ctrl# 44980

Attachment to Technical Assistance Advisement

AFFIDAVIT

STATE OF FLORIDA
COUNTY OF _________.

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

Check the appropriate line:

_____ That all machinery and equipment purchased

_____ That the charges for labor and/or parts for the necessary
repair, maintenance, or replacements of machinery and equipment

from ______ will be incorporated
into and/or become a component part of the ___
located in _, Florida, County of _____.

Further, that said machinery and equipment and/or the repair,
maintenance or replacement thereof, 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 _______

My Commission Expires ___.

(Seal)