Which city and contractor purchases for repowering an electric generating unit qualified for exemption?

Plain-English summary

A city planned to repower an electric generating unit to burn natural gas and distillate oil and asked whether its and its contractors' machinery and equipment purchases qualified for Florida's generating-facility exemption.

Florida applied the integrated-plant approach. Machinery, equipment, and qualifying enclosures used in generating electricity for sale could be exempt even when an item mainly made the plant operate more practically. Distribution equipment was outside the stated production exemption.

The exemption did not cover ordinary real-property site improvements, site and road materials, site labor and preparation, or temporary construction equipment such as rented cranes, scaffolding, and earthmovers. Qualifying permanent equipment could be bought exempt at the transaction using the required purchaser-specific affidavit.

What this means for you

The dividing line is functional integration into electricity production and permanent installation, not merely whether an item is used somewhere on the construction project.

Common questions

Why did the generating equipment qualify? The facility produced electricity for sale from fuels other than residual oil, and the equipment was integrated into that production process.

Were equipment shelters eligible? Yes, when their only purpose was to enclose, shelter, or control the environment for qualifying machinery.

What remained taxable? Ordinary site improvements and temporary or rented construction equipment not incorporated into the finished generating machinery.

How was the exemption claimed? The city or contractor gave the vendor an affidavit for its own qualifying purchase and could not use another entity's registration or exemption number.

Citations and references

• Fla. Stat. § 212.08(5)(c) (electric-generation machinery and equipment exemption)
• Fla. Admin. Code r. 12A-1.051 (real-property improvements)
• Jacksonville Electric Authority v. Department of Revenue, 486 So. 2d 1350 (Fla. 1st DCA 1986)
• Fla. Stat. § 212.085 (false exemption affidavits)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06A-018

Original ruling text

SUMMARY
QUESTION: Whether certain systems and machinery and equipment purchased for the repowering of an electric
generating unit may qualify for exemption when purchased by a city and the city's contractor.
ANSWER - Based on Facts Below: The systems and machinery and equipment as described in the advisement
request will qualify for exemption except for those purchases that are considered real property improvements or
purchases of items that will not be incorporated into the final project. The city and the city's contractor must follow
certain affidavit procedures as described in the advisement.

July 20, 2006

Re: Technical Assistance Advisement 06A-018
Sales and Use Tax
Repowering of electric generating unit
Section 212.08(5)(c), F.S.
Dear
This is in response to your request for a Technical Assistance Advisement regarding the repowering of Unit No. 2
("Unit 2") at the XXX ("electric generating facility") by XXX ("the City").
Based on your letter and other information, the following is understood. The City contemplates repowering of Unit 2
at the City's electric generating facility. The repowering project involves the replacement of the existing unit with a unit
that is more technologically efficient. Specifically, the repowering project will encompass the installation of a General
Electric 7FA combustion turbine generator, a heat recovery steam generator, SCR catalyst for emissions control, main
power transformers, and related auxiliary equipment. The electric generating facility is fueled by natural gas as a
primary fuel and distillate oil (#2 oil) as a secondary fuel.
The City will be directly purchasing the following major pieces of equipment:

• GE 7FA combustion turbine generator
• Heat recovery steam generator
• Main power transformer
• Continuous emission monitoring system
• High energy piping

The City will acquire the balance of the equipment and materials for the project through General Work Contract(s)
("GWC"). These items include:

• Equipment foundations (forms, concrete, reinforcement steel)
• Equipment and auxiliary system piping
• Equipment and auxiliary system wiring
• Equipment and auxiliary system conduit
• Ammonia storage tanks (pollution control equipment)
• Water storage tanks
• Equipment and auxiliary system enclosures
• Equipment and auxiliary system pumps and motors
• Equipment and auxiliary system valves
• Equipment and auxiliary system instrumentation
• Site and road construction materials (fill, asphalt, concrete)
• Site construction labor
• Site preparation
• Rental construction equipment
• Oily waste separator (pollution control equipment)
  TAXPAYER'S POSITION
  The items as enumerated above meet the criteria for exemption from sales and use tax pursuant to the exemption
  provisions of s. 2l2.08(5)(c), F.S., and pursuant to the "integrated plant theory" as provided in the FPL/JEA declaratory
  statement as issued by the Department of Revenue.
  RELEVANT AUTHORITY
  The following passage from the Florida Statutes (F.S.) is pertinent to your request for a Technical Assistance
  Advisement.

Section 212.08(5)(c), F.S., 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 vendor 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 s. 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 and distillate oil fuels to be burned at the
   generating facility are not residual oil fuels. 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.
   Electrica1 energy is the tangible personal property that is produced for sale. Accordingly, since the generating facility
   does not burn residual oil and electrical energy is produced for sale, the generating machinery and equipment at the
   generating facility qualify for exemption. Further, since residual oil is not a fuel source, the City and the GWC
   contractors are 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. The City’s and the GWC
   contractors’ purchases of qualifying machinery and equipment will be exempt at the time of the purchase transaction.
   Qualifying Purchases
   The scope of s. 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 s. 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 s. 2l2.08(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, the Department now finds that all of the above
indicated items within this advisement request qualify for the exemption under s. 212.08(5)(c), F.S., with the following
exceptions.

• Site and road construction materials (fill, asphalt, concrete)
• Site construction labor
• Site preparation
• Rental construction equipment
  The exemption under s. 2l2.08(5)(c), F.S., does not extend to real property improvements at the generating facility.
  Accordingly, site improvements that do not constitute foundations or sub-surface improvements for foundations for
  machinery and equipment that is integral to the production of electrical energy will not qualify for exemption. GWC
  contractors performing real property improvements are subject to the provisions of Rule 12A-l .051, F.A.C. Generally,
  the GWC contractor will be subject to tax on all materials consumed in the real property improvement activities.
  Structures or facilities whose only purpose is to enclose, provide shelter, or control environments for qualifying items
  of machinery and equipment are considered to be an integral part of that machinery and equipment and do not
  constitute real property improvements. Accordingly, such structures or facilities will qualify for exemption.
  The exemption under s. 212.08(5)(c), F.S., is only applicable to items that are installed as a permanent part of the
  machinery and equipment that is integral to the production of electrical energy. Accordingly, the rental of any
  construction equipment, such as cranes, scaffolding, or earthmovers, will remain fully taxable to the GWC contractors.
  Affidavit Procedures

The benefit of the exemption inures to the City and to the GWC contractors. 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 s. 2l2.08(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 City to the GWC contractor. The GWC contractor, in turn, would
then issue its own affidavit to any subcontractors along with a copy of the affidavit provided by the City. 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
Sworn to and
subscribed before me
this __ day of

_________.
Signature

__, 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 upon 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 from that which is
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
id# 21364