Was synthetic gas sold for electric generation subject to gross receipts tax and sales tax?

Plain-English summary

Florida applied gross receipts tax but not sales tax to the synthetic-gas sale. The gas was manufactured from solid fuels and used by a utility to generate electricity for sale.

The gross-receipts exclusion named natural gas, not manufactured gas. The sales-tax exemption was broader and covered all qualifying generation fuels.

What this means for you

The same fuel can receive different treatment under different taxes. Analyze each statute separately.

Common questions

Q: Did modern gasification technology avoid the manufactured-gas label?
A: No.

Q: Was sales tax due?
A: No on the stated generation use.

Citations and references

• Fla. Stat. §§ 203.01 and 203.012 — gross receipts and manufactured gas
• Fla. Stat. § 212.08(4)(a)2 — generation-fuel exemption
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-012

Original ruling text

SUMMARY

QUESTION: Whether the sale of manufactured gas to an entity
for use in the generation of electric power or energy for
sale is subject to gross receipts tax and sales tax?

ANSWER - Based on Facts Below: The sale of manufactured gas
to an entity for use in the generation of electric power or
energy for sale is subject to gross receipts tax, but is
not subject to sales tax.

Mar 19, 2003

Re: Technical Assistance Advisement 03A-012
XXX [hereinafter "Taxpayer"]
Sales and Use Tax and Gross Receipts Tax - Sales of
Manufactured Gas
Sections: 203.01, 203.012, 212.05, and 212.08(4), Florida
Statutes (F.S.)
Rules: 12A-1.059, Florida Administrative Code (F.A.C.)

Dear :

This is a response to your letter of February 4, 2003,
requesting a Technical Assistance Advisement (TAA) regarding the
above-referenced matter. This response to your request
constitutes a TAA under Chapter 12-11, Florida Administrative
Code (F.A.C.), and is issued to you under the authority of
Section 213.22, Florida Statutes (F.S.).

FACTS

This determination is based on the following provided
information:

1. Taxpayer developed an integrated gasification combined-cycle
   power project at one of its power stations, consisting of an
   electric generating facility (hereinafter "Power Block") and a

coal gasification facility (hereinafter "Facility") designed to
produce a product capable of fueling the Power Block.

2. Taxpayer plans to sell the Facility to a yet to be formed
   limited liability company that will be classified as a
   partnership for federal tax purposes (hereinafter "Company") and
   will be owned by other unrelated parties.

3. The Facility creates a synthetic gas (hereinafter "Product")
   from solid fuels, including coal, petroleum coke and biomass,
   through a multi-stage process developed by [Oil Company] that is
   described in Exhibit A. In this process, a solid fuel slurry is
   fed to the gasifier in which high pressure (approximately 450
   p.s.i.), heat (approximately 2500 degrees Fahrenheit), and
   oxygen are used to partially oxidize the solid fuel slurry into
   a gaseous mixture consisting mainly of carbon monoxide, carbon
   dioxide, hydrogen, hydrogen sulfide, hydrogen chloride and
   particulates of partially gasified solid fuel, ash and slag. The
   gaseous mixture is then moved through several stages of cooling
   and cleaning before the resulting clean Product is sent to the
   Power Block. Through these cleaning stages, hydrogen sulfide,
   hydrogen chloride, hydrogen chlorine and particulates of
   partially gasified coal, ash and slag are removed. In addition,
   sulfur in the form of the hydrogen sulfide is removed and
   converted into sulfuric acid, which is sold commercially to the
   local phosphate industry. Some of the partially gasified coal
   and slag also may be sold or redirected to the coal slurry that
   feeds the gasifier. The Product is metered prior to delivery to
   the Power Block.

4. The Power Block is a 250 net megawatt combined cycle baseload power plant that includes the following items: (a) a
   combustion turbine to burn fuel and generate electricity; (b) a
   heat recovery steam generator to recover waste heat from the
   combustion turbine by superheating steam, preheating boiler
   feedwater, and producing steam; (c) a steam turbine to produce
   electricity from the steam; (d) an exhaust stack from the
   combustion turbine; and (e) equipment and lines for transmitting
   the electricity outside the facility.

5. The proposed transaction involves the sale of the Facility by

Taxpayer to the Company. The Power Block will be retained by
Taxpayer. Taxpayer (or one or more of its affiliates) will serve
as the manager of the Company and will contract with the Company
to operate and maintain the Facility, purchase Product
manufactured in the Facility, and provide certain other services
to the Company.

6. Your request provided a brief summary of two project
   documents that the parties anticipate will be put in place at or
   in connection with the closing of the proposed transaction.

a. Asset Purchase and Sale Agreement. Pursuant to this
agreement, the Company will purchase all of the equipment
comprising the Facility from [Taxpayer] in exchange for a
lump sum cash payment to be paid at closing. In addition,
the Company will acquire any outstanding inventoried coal
feedstocks and spare parts associated with the Facility.
The Company would be permitted to transfer, sell or
otherwise encumber any part of the Facility, subject to
certain limitations to be set forth in the agreement and
the financing documents. [Taxpayer] would be granted the
option to repurchase the Facility at the end of the term of
the Synthetic Fuel Sale and Purchase Agreement for a
purchase price equal to its then current fair market value.

b. Synthetic Fuel Sale and Purchase Agreement. Pursuant to
this agreement, [Taxpayer] will purchase Product
manufactured in the Facility from the Company in exchange
for a monthly base payment. The "base payment" would
consist of a capacity payment (reflecting the dedication of
all production capacity from the Facility to [Taxpayer]), a
fixed operating payment (representing certain fixed
operating and maintenance costs attributable to the
operation of the Facility), a fuel payment (representing
the cost of fuels consumed in the Facility less an agreed
upon discount during periods prior to January 1, 2008
during the period which the Company is entitled to Section
29 tax credits), and a variable payment (representing
certain variable costs attributable to the ownership and
operation of the Facility).

TAXPAYER'S POSITION

Gross Receipts Tax

Taxpayer asserts that the sale of Product by Company to
Taxpayer is not subject to the gross receipts tax, because the
provision of Product is not a utility service. Taxpayer believes
that Product is not a manufactured gas, as that term was
understood by the Legislature when it enacted the gross receipts
tax in 1931 and, as such, is not the sale of a utility service.
Taxpayer notes that the production of manufactured gas, as that
term was understood by the Legislature, ceased in Florida in
1959, and the distribution infrastructure used by the
manufactured gas industry was acquired by the natural gas
industry as it entered the Florida market at that time.

In support of its position, Taxpayer asserts that Product
is the result of a new technology and is significantly different
from manufactured gas as it existed in 1931, when the gross
receipts statute was enacted to tax, among other things,
manufactured gas for light, heat, or power. Taxpayer further
explains that Product is significantly different from
manufactured gas as it existed in 1957, when the exemption in s.
203.01(3)(a), F.S., was enacted, providing that receipts from
the sale of natural gas to a public or private utility, either
for resale or for use as fuel in the generation of electricity,
was not a gross receipt.

Taxpayer notes that the natural gas industry entered the
Florida energy market around 1958 and acquired the manufactured
gas industry's distribution infrastructure to use for its
natural gas distribution purposes. Manufactured gas was not cost
competitive with natural gas for light, heat, or power. Further,
the production of manufactured gas in Florida generally ceased
by 1958. It was replaced by less expensive natural gas. Since
manufactured gas was not used by public or private utilities as
fuel in the generation electricity in 1957, it was not included
in the exemption in s. 203.01(3)(a), F.S. Thus, the exemption
was clearly intended to include all fuels used by public or
private utilities in the generation of electricity. Taxpayer
asserts that had manufactured gas been used by utilities in 1957

to generate electricity, it would have been included in the
exemption. Taxpayer continues by stating that manufactured gas
was generally used, like natural gas, by retail customers such
as homeowners, businesses, and government entities for their own
consumption to provide heat, light, and power. In contrast,
Product is used by Taxpayer to generate electricity that is then
sold to homeowners, businesses, and government entities to
provide heat, light, and power for their own consumption.
Product is not purchased by retail customers for heat, light, or
power.

Taxpayer further explains that the use of Product to
generate electricity is a new technology. The technology was
first used in the United States in the early 1980s in Southern
California and was used for the first time in Florida when the
Taxpayer placed the above-described Facility and the Power Block
in service in September 1996. Product did not exist in Florida
in 1931 or 1957. Taxpayer notes that taxing statutes are
strictly construed against the taxing authority (see Maas Bros.
Inc. v. Dickinson, 195 So.2d 193 (Fla.1967)). Taxpayer then
concludes that Product is not a manufactured gas as that term
was understood when the gross receipts tax statutes were
enacted. Therefore, Taxpayer argues that the sale of Product by
Company to Taxpayer is not subject to the gross receipts tax,
because Company is not receiving payment for a utility service.

Sales Tax

Taxpayer asserts that the sale of Product by Company to
Taxpayer is not subject to sales tax because it is exempt as a
fuel used by a public or private utility, including any
municipal corporation or rural electric cooperative association,
in the generation of electric power or energy for sale pursuant
to s. 212.08(4)(a)2., F.S. In support of its position, Taxpayer
asserts that the sale of Product by Company to Taxpayer is
exempt from sales tax, because it is a fuel used by a public
utility in the generation of electric power or energy for sale
pursuant to s. 212.08(4)(a)2., F.S. Further, Taxpayer is a
public utility that uses Product to generate electrical power
for sale. Therefore, Taxpayer concludes that its purchases
clearly fall within the exemption.

REQUESTED ADVISEMENT

Whether the sale of Product by Company to Taxpayer is subject to
gross receipts tax and/or sales tax?

APPLICABLE LAW

The following statutory and administrative provisions are
relevant to the issues under advisement:

Section 203.01, F.S., provides, in part:

(1)(a)1. Every person that receives payment for any utility
service shall report by the last day of each month to the
Department of Revenue, under oath of the secretary or some
other officer of such person, the total amount of gross
receipts derived from business done within this state, or
between points within this state, for the preceding month
and, at the same time, shall pay into the State Treasury an
amount equal to a percentage of such gross receipts at the
rate set forth in paragraph (b). Such collections shall be
certified by the Comptroller upon the request of the State
Board of Education.

(3) The term "gross receipts" as used herein does not
include gross receipts of any person derived from:

(a) The sale of natural gas to a public or private utility,
including a municipal corporation or rural electric
cooperative association, either for resale or for use as
fuel in the generation of electricity.... (Emphasis
Supplied.)

Section 203.012, F.S., provides, in part:

(1) "Utility service" means electricity for light, heat, or
power; and natural or manufactured gas for light, heat, or
power.

Section 212.08(4)(a)2., F.S., provides, in part:

(4) EXEMPTIONS; ITEMS BEARING OTHER EXCISE TAXES, ETC.--

(a) Also exempt are:

2. All fuels used by a public or private utility, including
   any municipal corporation or rural electric cooperative
   association, in the generation of electric power or energy
   for sale. Fuel other than motor fuel and diesel fuel is
   taxable as provided in this chapter with the exception of
   fuel expressly exempt herein....

Rule 12A-1.059, F.A.C., provides, in part:

(1)(a) The sale of fuel, including crude oil, fuel oil,
kerosene, sterno, diesel oil, natural and manufactured gas,
coke, charcoal briquets, cord wood, and other fuel products
is taxable....

Merriam-Webster's Collegiate Dictionary, 10th edition, provides
the following definition of "manufacture," in part:

1: to make into a product suitable for use 2 a: to make
from raw materials by hand or by machinery.... (Emphasis in
Original.)

Black's Law Dictionary, Abridged 6th edition, provides the
following definition of the noun "manufacture," in part:

The process or operation of making goods or any material
produced by hand, by machinery or by other agency; anything
made from raw materials by the hand, by machinery, or by
art. The production of articles for use from raw or
prepared materials by giving such materials new forms,
qualities, properties or combinations, whether by hand
labor or machine.

DETERMINATION

This determination is specifically limited to the sale of
Product to Taxpayer and does not address any other transactions.

The determination is based on the provided description of the
proposed transaction.

The Product sold by Company is considered to be a manufactured
gas, because Product is a gas that has been created from raw
materials. While Taxpayer is factually correct that Product did
not exist at the time the taxing statute or the exclusion to the
taxing statute was enacted, the term "manufactured gas" has a
plain, ordinary, and expansive meaning. It is not limited to gas
produced from any particular raw materials, using any particular
technology, or having any particular chemical composition. Any
gas product that results from using raw or prepared materials
and altering the materials by hand, machinery, or art to create
a product suitable for use would be considered a manufactured
gas.

Further, when a statutory term is clear and unambiguous there is
no need for statutory construction, such as determining that a
specific product did not exist at the time the term was used by
the Legislature when the statute was enacted and that the
Legislature could not have meant to include the product in its
use of the term. The Florida Supreme Court in Florida Dept. of
Revenue v. Florida Mun. Power Agency, 789 So.2d 320 (Fla. 2001),
stated:

Legislative intent must be derived primarily from the words
expressed in the statute. If the language of the statute
is clear and unambiguous, courts enforce the law according
to its terms and there is no need to resort to rules of
statutory construction. [citing footnote 1 citing Zuckerman
v. Alter, 615 So.2d 661, 663 (Fla.1993); see also St.
Petersburg Bank & Trust Co. v. Hamm, 414 So.2d 1071
(Fla.1982).] "Even where a court is convinced that the
Legislature really meant and intended something not
expressed in the phraseology of the act, it will not deem
itself authorized to depart from the plain meaning of the
language which is free from ambiguity." Forsythe v.
Longboat Key Beach Erosion Control Dist., 604 So.2d 452,
454 (Fla.1992) [quoting Van Pelt v. Hilliard, 75 Fla. 792,
78 So. 693, 694-95 (1918)].

The unique issue here is that the sale of both natural and
manufactured gas has been subject to gross receipts tax since
1931, but the statutory amendment in 1957 excluded sales of
natural gas, but not manufactured gas, to a public or private
utility from the term "gross receipts." It is not for the
Department to depart from the plain language of a statute.
Clearly, the exclusion can not be applied to the sale of
manufactured gas. The Legislature could have chosen to include
manufactured gas in the exclusion. The Department can not
presume, as Taxpayer argues, that the Legislature meant to
include all fuels used by utilities when it used the words
"natural gas." Therefore, it must be concluded that Product sold
by Company is subject to gross receipts tax.

As noted above, the exclusion from the term "gross receipts"
found in s. 203.01(3)(a), F.S., does not apply to sales of
manufactured gas. No other exemption in Chapter 203, F.S.,
applies to Taxpayer, because there is no "resale or for use in
the generation of electricity" exclusion applicable to
manufactured gas.

The sales tax issue illustrates the uniqueness of the gross
receipts tax issue. The exemption from sales tax found in s.
212.08(4)(a)2., F.S., specifically includes all fuels used by a
public or private utility in the generation of electric power or
energy for sale. This exemption illustrates that the Legislature
is aware of the difference between a reference to all fuels and
a reference to one specific form of fuel. Thus, charges for
manufactured gas used in the generation of electricity by the
identified entities are exempt from sales tax. Therefore, the
sale of Product by Company to Taxpayer for use in the generation
of electricity is not subject to sales tax.

In conclusion, the sale of Product by Company to Taxpayer is
subject to gross receipts tax and is not subject to sales tax.

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 requests
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 backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Jennifer J. Silvey
Senior Attorney
Technical Assistance & Dispute Resolution

Control #: 53676
JJS/