What does Missouri LR 8169 conclude about Taxability of Machinery & Equipment for Utility-Scale Solar Farm?

Plain-English summary

Missouri Letter Ruling LR 8169 addresses whether a company building a 200MW utility-scale solar farm can buy its machinery and equipment tax-free under Missouri's manufacturing exemption, Section 144.030.2(5), RSMo. That exemption covers machinery and equipment "used directly in manufacturing... a product which is intended to be sold ultimately for final use or consumption." The Department has previously held, in Missouri Public Service Company v. Director of Revenue, that generating electricity is "manufacturing" in Missouri — so the real question in this ruling was which specific pieces of solar equipment count as being used "directly" in that manufacturing process, versus equipment that merely moves or transforms electricity after it has already been made.

The answer was split. Solar panels themselves are exempt: they are the equipment that actually converts sunlight into DC electricity, so they are directly used in manufacturing. Sun-tracking systems, which physically reposition the panels to face the sun and increase energy output, were also ruled exempt as equipment used directly in the manufacturing process.

Everything downstream of the panels was ruled taxable. Racking and supports (which just hold panels in place), combiner boxes, inverters, solar collection transformers, DC and AC wiring/data cabling, the SCADA control system, and the project substation and interconnection transformer were all found NOT exempt. The Department relied on Utilicorp United, Inc. v. Director of Revenue, 75 S.W.3d 725 (Mo. banc 2001), which held that machinery used to transmit or distribute electricity that has already been manufactured — even if it changes the voltage or amperage — doesn't qualify, because "the essential product... remains fundamentally unchanged from the time and place the electricity was generated." The Department treated all of these components as collecting, converting, or transmitting already-generated electricity rather than manufacturing it.

This is a genuinely mixed ruling: two categories of equipment (panels and trackers) are exempt, and eight categories (racking, combiner boxes, inverters, transformers, both types of wiring, SCADA, and the substation) are taxable.

What this means for you

Solar developers and utility-scale project owners

If you're building a solar farm in Missouri, expect the Department to draw the exemption line right at the panels and any equipment that directly aims them at the sun. Everything that collects, inverts, steps up, or carries the electricity afterward — combiner boxes, inverters, transformers, wiring, SCADA, and the substation — is treated as post-manufacturing transmission equipment and is taxable, per Utilicorp United. Budget sales/use tax into the cost of that equipment; only panels and tracking systems should be purchased exempt under this reasoning.

Accountants and tax professionals

The key legal test is whether equipment is used "directly" in manufacturing the product (electricity) versus used to transmit or distribute electricity already manufactured. Utilicorp United is the controlling precedent Missouri applies to any equipment that changes voltage/amperage or moves current downstream of generation — that includes inverters and transformers even though they perform necessary conversions, because the "essential product" (the electric power) doesn't change. Racking was denied exemption not under Utilicorp but simply because it isn't used "directly" in manufacturing — it's a support structure.

Renewable energy equipment vendors

Since this is a Letter Ruling, it binds the Department only as to the specific Applicant, only for three years from the February 25, 2022 date, and only while the facts and law stay the same. Other developers with materially similar solar projects can look to this ruling for the Department's reasoning, but cannot rely on it directly — each project should confirm its own facts fit before claiming the exemption on panels or trackers.

Common questions

Q: Are solar panels exempt from Missouri sales/use tax when building a solar farm?
A: Yes. LR 8169 concluded solar panels are exempt under Section 144.030.2(5), RSMo, because they're the equipment directly used to manufacture electricity from sunlight.

Q: Is the equipment that mounts and holds the solar panels also exempt?
A: No. Racking and supports were ruled taxable because they are not used directly in manufacturing — they just hold the panels in position.

Q: What about inverters, transformers, and wiring?
A: All taxable. The Department found combiner boxes, inverters, solar collection transformers, DC wiring, AC wiring/data cabling, the SCADA control system, and the substation/interconnection transformer all collect, convert, or transmit electricity that was already generated by the panels, which under Utilicorp United doesn't qualify as "direct" manufacturing use.

Q: Can another solar developer rely on this ruling for their own project?
A: Not directly. Missouri Letter Rulings bind the Department only as to the requesting Applicant, only for three years from the ruling's date, and only while the facts and law remain unchanged. Other developers should request their own ruling if they want certainty, though this ruling shows how the Department is likely to reason.

Citations and references

Statutes and regulations:

• Section 144.020.1, RSMo (imposes sales tax on retail sellers)
• Section 144.610.1, RSMo (imposes use tax on storage, use, or consumption of tangible personal property)
• Section 144.030.2(5), RSMo (exempts machinery and equipment used directly in manufacturing a product for final sale)
• Section 144.615(3), RSMo (mirrors the section 144.030.2 exemptions for use tax purposes)
• Section 536.021.10, RSMo, and 12 CSR 10-1.020 (letter ruling authority and procedure)

Case law cited in the ruling:

• Missouri Public Service Company v. Director of Revenue, 733 S.W.2d 448, 449 (Mo. banc 1987) (electricity generation is "manufacturing" in Missouri)
• Utilicorp United, Inc. v. Director of Revenue, 75 S.W.3d 725 (Mo. banc 2001) (equipment used to transmit or distribute already-manufactured electricity does not qualify for the manufacturing exemption)

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8169

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated October 6, 2021.

The facts as presented in your letter ruling request are summarized as follows:

Applicant will be purchasing machinery and equipment (" M&E ") for its development of a utility-scale solar farm in Missouri (the " Solar Project ").  The proposed Solar Project will be a 200MW solar farm, consisting of approximately 600,000 solar panel modules. The solar modules will be electrically combined into blocks of approximately 4MW and converted from DC power when collected from the sun to utility-grade AC power through utility-scale inverters. Each inverter will be paired with a co-located, skid-mounted medium voltage transformer to step up the voltage from approximately 690V to 34.5 kV.  Anywhere from five to eleven inverter-transformer combinations will be electrically connected into one feeder, bringing power to a centrally located substation.  The substation will collect approximately eight feeders and step up the voltage from 34.5kV to the transmission interconnection voltage. Once the energy produced has been stepped up to transmission interconnection voltage, it is ready to be sold to utility companies for resale to consumers.

As part of the Solar Project, the Specific equipment outlined below will be procured and integrated into the solar farm's manufacturing process for the production of sellable high-voltage AC power required by utility companies for the ultimate resale to consumers for their consumption.  The function and use of each of the individual components in the manufacturing process of the Solar Project follows.

Applicant at this time has not finalized any offtake arrangements or power purchase agreements relating to the solar farm with any utilities, commercial, or industrial customers.

a)      Solar panels

Solar panels are fundamental pieces of equipment in the Solar Project and the manufacture of electricity.  The solar panels are made up of solar cells, which react when the sun shines on the panel.  This reaction causes electrons to move within the solar cells and the connecting wires in the form of direct current (" DC ") energy.

b)      Solar panel racking and supports

Solar panels are mounted and affixed to the solar panel racking and supports.  Ground-mounted solar systems anchor to the ground and hold a large number of stacked panels.  Two rails usually support each panel, whether oriented in landscape or portrait.

c)      Tracking system

To improve energy output, tracking systems (attached to the racking systems) are employed to facilitate the ability of the solar panels to track the sun throughout the day, ensuring the panels are facing the sun at all times.  When solar panels are exposed to sunlight, the angle at which the sun's rays meet the surface of the solar panel (known as the "angle of incidence") determines how well the panel can convert the incoming light into electricity.  The narrower the angle of incidence, the more energy a photovoltaic panel can produce.  Solar trackers help to minimize this angle by working to orient panels so that light strikes them perpendicular to their surface, thus maximizing the energy produced by the solar panels.

d)      Combiner boxes

A combiner box is the first piece of equipment connected to the output of the solar panels.  The combiner box resides between the solar panels and inverter.  The role of the combiner box is to bring the output of several solar panels together, and the output of the fused inputs are combined onto a single conductor that connects the box to the inverter.  Solar combiner boxes consolidate incoming power into one main feed that integrates with a solar inverter, with the combiner boxes engineered to provide overcurrent and overvoltage protection to enhance inverter protection and reliability.  When optimally positioned in the solar power system, it can also limit power loss during the manufacturing production process.

e)      Inverters

A solar inverter (a power inverter designed explicitly for use with photovoltaic cells), converts the DC energy from the solar panel to alternating current (" AC ") energy, which is the required form of power needed to sell to a utility supplier.  Solar inverters must adapt to continually differing environmental conditions, such as temperature and solar irradiation, which causes peaks and troughs in a solar panel's DC output.  Therefore, to maximize the amount of power at any given moment, the solar inverter also employs a conditioning system so that the resistance can be adjusted to an optimum level, which will subsequently optimize the power output coming from the solar panel.

f)       Solar Collection Transformers

The solar collection transformer steps up voltage from approximately 690V (AC output of Inverter) to 34.5kV.  Unlike regular distribution transformers, solar photovoltaic transformers operate under a specific load profile and only during a fraction of the day.  These solar transformers can be weather-resistant and have different sizes based on the load profile requirements of the solar farm.  These transformers are often located within the same skid as the inverter.

g)      Electrical DC wiring

Cables and wires are critical to any solar power system as they move the energy throughout the manufacturing production process, from the initial sunlight collected by the solar panels to the end product of the high voltage electricity being delivered to the utility grid.  Within the solar array, there are three types of DC wiring - string jumpers, string wiring, and DC homerun cables.  String jumpers connect several solar modules in series.  This essentially turns several modules into a string.  String wiring brings the power from a string to the combiner box.  DC homerun cables bring power from the combiner box to the inverter.  These cables are required to bring solar module panels together and to the inverter.

h)      AC Electrical wiring and data cabling

34.5kV AC wiring is trenched underground in order to bring power from the inverters to the collection substation.  The wiring is also bored under roads, railroad tracks, waterways, etc.  Along with the 34.5kV wiring, each trench contains a copper clad steel grounding conductor and a fiber cable.  The grounding conductor provides a path to ground throughout the collection system to ensure proper safety protection during the manufacturing process, and the fiber cable allows communication throughout the plant to control the manufacturing process.  The fiber cable must allow communication between the SCADA system (described below) and inverter to let the inverter know how much power to produce.  The fiber cable must also gather weather station data for the operation of the site.

i)       SCADA system control center

Supervisory Control and Data Acquisition (" SCADA ") systems control the overall production of energy during the manufacturing process, while also monitoring data from a plethora of devices, including solar panels, meters, inverters, weather stations, trackers, and substation equipment.  These systems determine how much energy is to be produced by the particular solar panels and also collects information on the Solar Project equipment performance during the manufacturing process by identifying offline and malfunctioning equipment.  The SCADA system uses all of this information to control the overall manufacturing process and provide system feedback.

j)       Project substation & interconnection transformer

In order to interconnect to the utility at transmission voltage levels above 35kV, a substation must collect power from all of the inverters and then a substation transformer must step up the voltage during the solar power system's production process to the appropriate interconnection voltage.  In order to collect and transmit power safely and reliably, the substation will have a few medium voltage feeder breakers, a few medium voltage switches, one or two high voltage breakers, two or three high voltage switches, several instrument transformers, and steel structures.  Arguably, the most important component of the substation is the substation transformer because power cannot be sold until the voltage is stepped up to interconnection voltage.  Furthermore, the Solar Project cannot restart the production of electricity without reversing the flow of electricity back through the transformers to step down the electricity for use in the manufacturing process.  Standard nameplate power ratings for substation transformers range from 50 megavolt-amperes (MVA) to 200 MVA.  A 200MW solar collection substation would likely have two substation transformers with top ratings of approximately 125 MVA.  Substation transformers are larger, and they have more complex controls and higher insolation levels to accommodate the higher voltages necessary to produce the sellable high voltage electricity.

ISSUE 1 :

Is Applicant's purchase of solar panels exempt from Missouri sales or use tax?

RESPONSE 1 :

Yes.  Applicant's purchase of solar panels would be exempt from Missouri sales or use tax.  Section 144.020.1, RSMo provides "tax is hereby levied and imposed... upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state." Section 144.610.1, RSMo, provides "[a] tax is imposed for the privilege of storing, using or consuming within this state any article of tangible personal property[.]"

Section 144.030.2(5), RSMo exempts:

Machinery and equipment, and parts and the materials and supplies solely required for the installation or construction of such machinery and equipment, purchased and used to establish new or to expand existing manufacturing, mining or fabricating plants in the state if such machinery and equipment is used directly in manufacturing, mining or fabricating a product which is intended to be sold ultimately for final use or consumption.

Section 144.615(3), RSMo, exempts from Missouri use tax "[t]angible personal property, the sale or other transfer of which, if made in this state, would be exempt from or not subject to the Missouri sales tax pursuant to the provisions of subsection 2 of section 144.030[.]"

The production of electricity is manufacturing in Missouri. See Missouri Public Service Company v. Director of Revenue , 733 S.W.2d 448, 449 (Mo. banc 1987). Applicant's purchases of solar panels are exempt under section 144.030.2(5).

ISSUE 2:

Is Applicant's purchase of solar panel racking and supports exempt from Missouri sales or use tax?

RESPONSE 2:

No. Applicant's purchases of solar panel racking and supports are not exempt from Missouri sales and use tax as parts and machinery used directly in manufacturing, mining, fabricating or producing a product that is intended to be sold ultimately for final use or consumption. The items at issue are not used directly in manufacturing.  See response 1 regarding the application of section 144.030.2(5).

ISSUE 3:

Is Applicant's purchase of tracking systems that aim the solar panels toward the sun exempt from Missouri sales or use tax?

RESPONSE 3:

Yes. Applicant's purchases of tracking systems would be exempt from Missouri sales and use tax as parts and machinery used directly in manufacturing, mining, fabricating or producing a product which is intended to be sold ultimately for final use or consumption as the items at issue help aim the photovoltaic modules towards the sun. See response 1 regarding the application of section 144.030.2(5).

ISSUE 4:

Is Applicant's purchase of combiner boxes exempt from Missouri sales or use tax?

RESPONSE 4:

No. Applicant's purchase of combiner boxes would not be exempt from Missouri sales or use tax.

In Utilicorp United, Inc., v. Director of Revenue, 75 S.W.3d 725 (Mo. banc 2001), the Missouri Supreme Court ruled that purchases of machinery and equipment used to transmit or distribute electricity that has already been manufactured do not qualify for the exemption under section 144.030.2(5). The combiner boxes collect and combine electricity that has already been manufactured by the solar panels. The court in Utilicorp stated that,

"[t]he product-electricity-may have its voltage increased, and thereby its amperage reduced, for transmission across distances. And its voltage may be reduced and its amperage thereby increased near the customer's meter to deliver electricity at a voltage suitable for the customer's needs. But the essential product, and the total electric power expressed in watts, remains fundamentally unchanged from the time and place the electricity was generated." (at 728-729)

The DC combining equipment and the associated cables and conduits collect and transmit electricity that was already manufactured by the photovoltaic modules.

ISSUE 5:

Is Applicant's purchase of inverters and spare inverters used to invert the electricity from DC to AC exempt from Missouri sales or use tax?

RESPONSE 5:

No. Applicant's purchase of inverters are not exempt from Missouri sales or use tax. See response 4 regarding Utilicorp United, Inc. v. Director of Revenue , 75 S.W.3d 725 (Mo. banc 2001).

ISSUE 6:

Is Applicant's purchase of solar collection transformers exempt from Missouri sales or use tax?

RESPONSE 6:

No. Applicant's purchase of solar collection transformers are not exempt from Missouri sales or use tax. See response 4 regarding Utilicorp United, Inc. v. Director of Revenue , 75 S.W.3d 725 (Mo. banc 2001).

ISSUE 7:

Is Applicant's purchase of electrical DC wiring exempt from Missouri sales or use tax?

RESPONSE 7:

No. Applicant's purchase of electrical DC wiring are not exempt from Missouri sales or use tax. See response 4 regarding Utilicorp United, Inc. v. Director of Revenue , 75 S.W.3d 725 (Mo. banc 2001).

ISSUE 8:

Is Applicant's purchase of electrical AC wiring and data cabling exempt from Missouri sales or use tax?

RESPONSE 8:

No. Applicant's purchase of electrical AC wiring and data cabling are not exempt from Missouri sales or use tax. See response 4 regarding Utilicorp United, Inc. v. Director of Revenue , 75 S.W.3d 725 (Mo. banc 2001).

ISSUE 9:

Is Applicant's purchase of the SCADA system control center exempt from Missouri sales or use tax?

RESPONSE 9:

No. Applicant's purchase of the SCADA system control center is not exempt from Missouri sales or use tax. See response 4 regarding Utilicorp United, Inc. v. Director of Revenue , 75 S.W.3d 725 (Mo. banc 2001).

ISSUE 10:

Is Applicant's purchase of a project substation and interconnection transformer exempt from Missouri sales or use tax?

RESPONSE 10:

No. Applicant's purchase of a project substation and interconnection transformer is not exempt from Missouri sales or use tax. See response 4 regarding Utilicorp United, Inc. v. Director of Revenue , 75 S.W.3d 725 (Mo. banc 2001).

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals.  If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change.  For this reason, the interpretation set forth above should be reviewed on a regular basis.  Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Managing Counsel Christopher R. Fehr, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475 (phone 573-751-0961), or me.

Sincerely,

Wayne Wallingford