Which combined heat-and-power plant systems qualified for Florida's energy-production machinery exemption?

Plain-English summary

The Florida Department of Revenue concluded that most integrated machinery and systems used to produce electricity, steam, and chilled water at this combined heat-and-power plant qualified for the energy-production exemption.

Exempt items included machinery foundations and platforms, the turbine and connected generator, steam generator, chilled-water plant, cooling tower, electrical building and control room, feedwater piping and pipe bridge, natural-gas lines from the metering station, internal transformers, and the switchyard through the first step-up transformer.

The exemption stopped at distribution. The steam pipeline from the plant to an industrial customer was taxable, and transformers used to distribute power beyond the first step-up transformer did not qualify. Construction work was exempt only when directly related to a qualifying building or subsurface for exempt machinery; professional services alone were nontaxable.

What this means for you

Power and CHP developers

Map every component to production or distribution. Florida treated the first step-up transformer as the end of the qualifying production system for these facts.

Construction and engineering teams

Buildings, foundations, platforms, and subsurface work can qualify when integral to exempt machinery. Unrelated real-property improvements follow the ordinary contractor rules.

Accountants and tax professionals

Keep item-level support for function and system boundaries. Do not extend the exemption to downstream energy distribution.

Common questions

Q: Were the turbine and generator exempt?
A: Yes.

Q: Was the steam pipeline to the industrial customer exempt?
A: No.

Q: Did transformers after the first step-up transformer qualify?
A: No.

Citations and references

• Fla. Stat. §§ 212.08(5)(c), 212.08(7)(v), and 213.22
• Fla. Admin. Code r. 12A-1.051

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 16A-010

Original ruling text

Executive
Director
Leon M. Biegalski

QUESTIONS:
BASED UPON THE FACTS PRESENTED ABOVE, TAXPAYER REQUESTS ADVISEMENT ON
THE FOLLOWING ISSUES:

1. ARE THE LABOR AND OTHER SERVICES ASSOCIATED WITH THE CONSTRUCTION
   OF THE CHP PLANT EXEMPT FROM FLORIDA SALES TAX?
2. ARE THE MACHINERY AND EQUIPMENT FOUNDATIONS AND PLATFORMS EXEMPT
   FROM FLORIDA SALES TAX?
3. ARE THE TURBINE AND CONNECTED GENERATOR EXEMPT FROM FLORIDA SALES
   TAX?
4. IS THE STEAM GENERATOR EXEMPT FROM FLORIDA SALES TAX?
5. IS THE CHILLED WATER PLANT EXEMPT FROM FLORIDA SALES TAX?
6. IS THE STEAM PIPELINE FROM THE CHP PLANT TO AN INDUSTRIAL CLIENT
   EXEMPT FROM FLORIDA SALES TAX?
7. IS THE COOLING TOWER, WHICH IS INTEGRAL TO THE OPERATION OF THE
   CHILLED WATER PLANT AND GENERATOR COOLING SYSTEMS, EXEMPT FROM
   FLORIDA SALES TAX?
8. ARE THE ELECTRICAL BUILDING AND CONTROL ROOM EXEMPT FROM FLORIDA
   SALES TAX?
9. IS THE PIPE BRIDGE AND ASSOCIATED FEEDWATER AND OTHER PIPING EXEMPT
   FROM FLORIDA SALES TAX?
10. ARE THE NATURAL GAS LINES RUNNING TO THE CHP PLANT EXEMPT FROM
    FLORIDA SALES TAX?
11. ARE THE SWITCHYARD AND THE “FIRST STEP UP” TRANSFORMER, WHICH
    TRANSMITS POWER PRODUCED BY THE CHP PLANT ONTO THE POWER GRID,
    EXEMPT FROM FLORIDA SALES TAX?

Child Support – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – Dr. Maurice Gogarty, Director  Information Services – Damu Kuttikrishnan, Director

http://dor.myflorida.com/dor/
Florida Department of Revenue
Tallahassee, Florida 32399-0100

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12. ARE INTERNAL TRANSFORMERS, WHICH ARE NECESSARY TO REGULATE POWER
    VOLTAGES IN THE POWER PLANT, EXEMPT FROM FLORIDA SALES TAX?
13. ARE THE MISCELLANEOUS EQUIPMENT AND MACHINERY LISTED ABOVE EXEMPT
    FROM FLORIDA SALES TAX?
    ANSWERS:
14. LABOR AND OTHER SERVICES (INCLUSIVE OF ANY MATERIALS USED) THAT ARE
    ASSOCIATED WITH CONSTRUCTION OF THE CHP PLANT ARE EXEMPT ONLY TO THE
    EXTENT THEY ARE FOR A BUILDING OR SUBSURFACE DIRECTLY RELATED TO
    QUALIFYING MACHINERY AND EQUIPMENT. FOR THESE TRANSACTIONS THE
    AFFIDAVIT PROCEDURES CAN BE USED BY THE CONTRACTOR TO EXEMPT THE
    OTHERWISE APPLICABLE TAX. CONSTRUCTION ACTIVITIES FOR REAL PROPERTY
    IMPROVEMENTS THAT ARE NOT FOR A BUILDING OR SUBSURFACE INTEGRAL TO
    EXEMPT MACHINERY AND EQUIPMENT ARE TAXABLE PURSUANT TO THE
    PROVISIONS OF RULE 12A-1.051, F.A.C., APPLICABLE TO REAL PROPERTY
    CONTRACTORS. PROFESSIONAL SERVICES ONLY (SURVEYORS, ENGINEERS, ETC.)
    ARE NOT SUBJECT TO TAX. SEE S. 212.08(7)(V), F.S.
15. MACHINERY AND EQUIPMENT FOUNDATIONS AND PLATFORMS – EXEMPT.
16. TURBINE AND CONNECTED GENERATORS – EXEMPT.
17. STEAM GENERATOR – EXEMPT.
18. CHILLED WATER PLANT – EXEMPT.
19. STEAM PIPELINE FROM THE CHP PLANT TO AN INDUSTRIAL CLIENT - TAXABLE.
    SECTION 212.08(5)(C), F.S., IS LIMITED TO MACHINERY AND EQUIPMENT USED IN
    THE PRODUCTION OF ELECTRICAL OR STEAM ENERGY. DISTRIBUTION OF THE
    ELECTRICITY OR THE STEAM ENERGY DOES NOT QUALIFY FOR THE EXEMPTION.
20. COOLING TOWER – EXEMPT.
21. ELECTRICAL BUILDING AND CONTROL ROOM – EXEMPT.
    STRUCTURES OR FACILITIES WHOSE SOLE PURPOSE IS TO ENCLOSE, PROVIDE
    SHELTER, OR CONTROL ENVIRONMENTS FOR QUALIFYING ITEMS OF MACHINERY
    AND EQUIPMENT ARE CONSIDERED TO BE AN INTEGRAL PART OF QUALIFYING
    MACHINERY AND EQUIPMENT. SEE JACKSONVILLE ELECTRIC AUTHORITY V.
    DEPARTMENT OF REVENUE, SUPRA.

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9. PIPE BRIDGE AND ASSOCIATED FEEDWATER PIPING – EXEMPT.
10. NATURAL GAS LINES FROM THE METERING STATION TO THE PLANT – EXEMPT.
11. SWITCHYARD AND THE “FIRST STEP UP” TRANSFORMER - EXEMPT.
    HOWEVER, ANY STEP-UP TRANSFORMERS SERVING TO FURTHER DISTRIBUTE
    POWER DO NOT QUALIFY FOR THE EXEMPTION. 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.
    SECTION 212.08(5)(C), F.S., IS LIMITED TO MACHINERY AND EQUIPMENT USED IN
    THE PRODUCTION OF ELECTRICAL OR STEAM ENERGY.
12. INTERNAL TRANSFORMERS WHICH ARE NECESSARY TO REGULATE POWER
    VOLTAGES IN THE POWER PLANT THAT APPLY TO SYSTEMS UP TO, AND
    INCLUDING, THE FIRST STEP-UP TRANSFORMER – EXEMPT.
13. MISCELLANEOUS MACHINERY AND EQUIPMENT LISTED ABOVE TO THE EXTENT
    THAT THEY ARE FOR SYSTEMS UP TO, AND INCLUDING, THE FIRST STEP-UP
    TRANSFORMER - EXEMPT.
    July 21, 2016
    Re:

Technical Assistance Advisement 16A-010
XXXX (“Taxpayer”)
Florida Sales and Use Tax
Exemption For Machinery and Equipment
Sections 212.05, 212.055, 212.08, Florida Statute (F.S.)
BP#: XXXX

Dear XXXX:
This letter is in response to your request dated XXXX, and received in this office on XXXX, for issuance
of a Technical Assistance Advisement (“TAA”) pursuant to Section 213.22, F.S., and Rule Chapter 12-11,
F.A.C., concerning the taxability of machinery and equipment. An examination of your request has
established you complied with the statutory and regulatory requirements for issuance of a TAA.
Therefore, the Department is hereby granting your request for a TAA.
FACTS PRESENTED
Taxpayer is a XXXX of XXXX. Taxpayer is planning to construct a new combined heating and power
(“CHP”) plant in XXXX. Experts consider CHP plants to be the most efficient method for generating
power and useful thermal (i.e., steam) energy. The Taxpayer’s CHP plant will integrate gas turbine

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technology with heat recovery system and support equipment, which enables the Plant to recover and
beneficially use most of the exhaust heat generated by the gas turbine. This technology avoids significant
losses and emissions produced by utility central station power generation systems that most energy plants
use.
The CHP plant Taxpayer is building will use natural gas to fuel a XXXX gas turbine (the “Turbine”). The
Turbine will generate approximately 19.8 MW of electric energy 8,400 hours annually. The Turbine will
drive a generator which will produce 19.8 net MW of electricity at 13.8 kV. A step-up transformer will
increase the voltage of that electricity to 69 kV to place on the electric grid for sale to XXXX (“XXXX”),
another XXXX of XXXX, which will distribute the power to XXXX.
The exhaust heat from the Turbine will be routed to a XXXX Heat Recovery Steam Generator (the “Steam
Generator”) to produce “160 psig steam” for sale to an industrial client. The revenues from the steam sold
are credited against the fuel cost for the Turbine. This reduces the ultimate cost to XXXX customers.
The necessary major equipment and components to construct the CHP plant are listed below.


Machinery and Equipment Foundations and Platforms: Machinery and equipment foundations and
platforms include support structure and foundations for the machinery and equipment in the CHP
plant. These include, but are not limited to, steel and concrete pilings, platforms and the
superstructure required to hold and support the primary equipment, ductworks and systems that
comprise the CHP plant’s systems.



XXXX Gas Turbine



XXXX Heat Recovery Steam Generator



Chilled Water Plant: The chilled water plant includes a chiller, associated pumps, heat exchanger,
building module, controls, wiring, piping and associated equipment all of which are required to
cool inlet air to the turbine to improve turbine performance and make the power production
process cost effective.



Cooling Tower: The cooling tower and associated piping, heat exchangers, foundations and
pumping is required to provide essential machine cooling for turbine and generator making up the
CHP system. The CHP plant cannot function without these systems to provide cooling.



Electrical Building and Control Room: The electrical building and control room contain necessary
generator switchgear, electrical equipment and the controls for all of the machinery and equipment
in the CHP plant. All references in this Request to “Electrical Building and Control Room” shall
include the equipment contained therein. The CHP cannot function without the electrical building,
control room, and related equipment.

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

Pipe Bridge and Associated Piping: The pipe bridge is the supporting structure including
foundations and pilings holding the piping to bring the essential water, feedwater and demin water
required for the production of steam. These systems are essential to the production of steam and
electricity from the CHP, and also include drainage, blowdown, demin supply and return,
feedwater, and makeup water lines all required for the CHP’s operation.



Natural Gas Lines: The natural gas lines deliver natural gas fuel from the XXXX meter point to the
Turbine and Steam Generator supplemental burner in the CHP plant. The CHP systems cannot
function without the lines.



Switchyard and Step Up Transformer with associated structure and foundations: The step up
transformer increases voltage from the generator powered by the Turbine from 13.8 kV to 69 kV to
enable the sale of electricity produced at the CHP plant to XXXX for resale to its customers.



Miscellaneous Equipment and Machinery:
o Electrical equipment including equipment wiring and conduit, controls, drives, panels,
switches, transmitters, instrumentation, and metering;
o Equipment pump, motors and drives;
o Equipment tanks, piping, and pressure reduction valves and other control valves; and,
o Ancillary electrical and mechanical components associated with major equipment that
support the CHP systems.
REQUESTED ADVISEMENT

Based upon the facts presented above, Taxpayer requests advisement on the following issues:

1. Are the labor and other services associated with the construction of the CHP plant exempt from
   Florida sales tax?
2. Are the machinery and equipment foundations and platforms exempt from Florida sales tax?
3. Are the Turbine and connected generator exempt from Florida sales tax?
4. Is the Steam Generator exempt from Florida sales tax?
5. Is the chilled water plant exempt from Florida sales tax?
6. Is the steam pipeline from the CHP plant to an industrial client exempt from Florida sales tax?
7. Is the cooling tower, which is integral to the operation of the chilled water plant and generator
   cooling systems, exempt from Florida sales tax?
8. Are the Electrical Building and Control Room exempt from Florida sales tax?

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9. Is the pipe bridge and associated feedwater and other piping exempt from Florida sales tax?
10. Are the natural gas lines running to the CHP plant exempt from Florida sales tax?
11. Are the switchyard and the “First Step Up” transformer, which transmits power produced by the
    CHP plant onto the power grid, exempt from Florida sales tax?
12. Are internal transformers, which are necessary to regulate power voltages in the power plant,
    exempt from Florida sales tax?
13. Are the miscellaneous equipment and machinery listed above exempt from Florida sales tax?
    APPLICABLE LAW AND DISCUSSION
    Unless specifically exempt, ss. 212.05 and 212.06, F.S., provide the sale or use of tangible personal
    property in Florida is subject to tax. Section 212.08(5)(c), F.S., provides that the purchase of machinery
    and equipment for use at a fixed location in which the machinery and equipment are necessary in the
    production of electrical or steam energy resulting from the burning of fuels other than residual oil is
    exempt from tax. Such electrical or steam energy must be primarily for use in manufacturing, processing,
    compounding, or producing for sale items of tangible personal property in Florida.
    The benefit of the exemption inures to an eligible 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 vendors 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 a qualifying taxpayer to its contractor. The contractor, in turn,
    would then issue its own affidavit to any 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. (See Attachment for a suggested format for the
    affidavit.)

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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 integrated plant theory recognizes that it is unrealistic to break down a plant into theoretically distinct
stages and provides that all machinery and equipment, and integral components used in the process of
generating, but not distributing, electricity and steam by a plant that is exempt from sales tax are also
exempt from sales tax as part of the plant.
As stated, 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. It is understood that the CHP
plant will be burning natural gas in the process of generating electrical energy. The natural gas that will
be burnt at the CHP facility is not a residual oil. 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. Electrical energy is the tangible personal property1 that is produced for sale.
Accordingly, since the facility does not burn residual oil and electrical energy is produced for sale,
machinery and equipment at the CHP facility will qualify for the exemption.
Based on the above referenced statutes, the findings of the court in Jacksonville Electric Authority v.
Department of Revenue, supra, and the identified purchases for the CHP plant, the Department finds the
following major components, excluding those items specifically identified as being taxable, fully qualify
for tax exemption:

14. Labor and Other Services (inclusive of any materials used) that are associated with construction of
    the CHP plant are exempt only to the extent they are for a building or subsurface directly related to
    qualifying machinery and equipment. For these transactions the affidavit procedures can be used
    by the contractor to exempt the otherwise applicable tax. Construction activities for real property
    improvements that are not for a building or subsurface integral to exempt machinery and
    equipment are taxable pursuant to the provisions of Rule 12A-1.051, F.A.C., applicable to real
    property contractors. Professional services only (surveyors, engineers, etc.) are not subject to tax.
    See s. 212.08(7)(v), F.S.
    1

See Rule 12A-1.063(1), F.A.C.

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15. Machinery and Equipment Foundations and Platforms – Exempt.
16. Turbine and Connected Generators – Exempt.
17. Steam Generator – Exempt.
18. Chilled water plant – Exempt.
19. Steam Pipeline from the CHP plant to an industrial client - Taxable.
    Section 212.08(5)(c), F.S., is limited to machinery and equipment used in the production of
    electrical or steam energy. Distribution of the electricity or the steam energy does not qualify for
    the exemption.
20. Cooling Tower – Exempt.
21. Electrical Building and Control Room – Exempt.
    Structures or facilities whose sole purpose is to enclose, provide shelter, or control environments
    for qualifying items of machinery and equipment are considered to be an integral part of qualifying
    machinery and equipment. See Jacksonville Electric Authority v. Department of Revenue, supra.
22. Pipe Bridge and Associated Feedwater Piping – Exempt.
23. Natural Gas Lines from the metering station to the plant – Exempt.
24. Switchyard and the “First Step Up” Transformer - Exempt.
    However, any step-up transformers serving to further distribute power do not qualify for the
    exemption. 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. Section 212.08(5)(c), F.S., is limited
    to machinery and equipment used in the production of electrical or steam energy.
25. Internal Transformers which are necessary to regulate power voltages in the power plant that apply
    to systems up to, and including, the first step-up transformer – Exempt.
26. Miscellaneous Machinery and Equipment listed above to the extent that they are for systems up to,
    and including, the first step-up transformer - Exempt.
    This response constitutes a Technical Assistance Advisement under s. 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 s. 213.22, F.S. Our response is predicated on those facts and the specific situation summarized above.

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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 and 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.
Kind Regards,
Alan R. Fulton
Tax Law Specialist
Technical Assistance & Dispute Resolution
850-717-6735
ARF\tadrstaff
Record ID: 208317