Is a Utah 'energy services interlocal entity' exempt from sales tax on gas turbines, condensers, and other power plant equipment installed by a private contractor?

Plain-English summary

An "energy services interlocal entity" — a type of political subdivision created under the Utah Interlocal Cooperation Act — was building a power plant using a private contractor, who would install equipment like gas turbines, condensers, cooling towers, and steam generators. Someone asked the Commission to verify whether the entity truly had a sales tax exemption on that equipment, since a representative had claimed it was exempt (and had misdescribed the basis for it).

The Commission worked through several layers. First, since 2002's S.B. 29 amendments, the Interlocal Act recognizes three types of interlocal entities — Utah interlocal entities, electric interlocal entities, and energy services interlocal entities — all of which are political subdivisions of Utah under § 11-13-203(1). Political subdivisions generally get Utah's sales tax exemption under § 59-12-104(2), but that exemption has exceptions: it doesn't cover (a) most "construction materials" installed by someone other than the subdivision's own employees, or (b) property connected to a "project" or "facilities providing additional project capacity" as defined in the amended Interlocal Act. The Commission found that this second, newer exception didn't apply here, because the statutory definitions of "project" and "project entity" only cover Utah interlocal entities and electric interlocal entities — not energy services interlocal entities like this one. Since the Legislature named two of the three entity types but left the third out, the Commission read that as intentional: an energy services interlocal entity's facilities simply aren't a "project," so this newer exception doesn't strip its exemption.

That left the older "construction materials" exception. Ordinary building materials and equipment that merely serves the function of a building (like HVAC) count as "construction materials," and those stay taxable if installed by a private contractor rather than the entity's own employees — so the entity would owe tax on those. But the gas turbines, condensers, cooling towers, and steam generators are different: the Commission's practice treats equipment that serves the actual business or production process (not just the building) as remaining tangible personal property even after it's bolted down, rather than becoming part of the real estate. Power-generating equipment installed as part of a power plant's generating process falls in that category. So the entity could buy that equipment tax-free — even with a private contractor doing the installation — while paying tax on the ordinary construction materials.

The Commission also corrected a factual misstatement in the request: what the Tax Commission issues to a purchaser is a sales tax license or account number, not an "exemption certificate" (an exemption certificate is something a purchaser gives to a seller). Having a Commission-issued account number doesn't mean everything the holder buys is automatically exempt — exemptions still depend on the purchaser's status, how the property is used, and what's actually being bought.

What this means for you

Interlocal entities, municipalities, and other political subdivisions building facilities

Your general sales tax exemption as a political subdivision doesn't disappear just because you hire a private contractor — but it narrows for "construction materials" that the contractor (rather than your own employees) installs. Check whether your specific type of entity fits the Interlocal Act's "project"/"project entity" definitions, since that determines which exception structure applies to you.

Owners of power plants, factories, or other production facilities

The line between taxable "construction material" and tax-free equipment isn't about how firmly something is attached to the building — it's about whether the item serves the building itself (taxable if contractor-installed) or serves the actual business/production process happening inside it (can stay personal property, and exempt for an exempt purchaser, regardless of who installs it).

Businesses relying on a Utah sales tax account number or license

Don't assume a Commission-issued license or account number is a blanket exemption. It's a registration number, not proof of tax-exempt status — actual exemptions depend on your status as a purchaser, how you use the property, and the type of property or service purchased.

Common questions

Q: Are all political subdivisions in Utah exempt from sales tax on everything they buy?
A: No. The general political-subdivision exemption under § 59-12-104(2) has exceptions — notably for "construction materials" installed by someone other than the subdivision's own employees, and for property connected to a defined "project" for certain interlocal entities.

Q: Why didn't the newer "project" exception apply here?
A: Because the Interlocal Act's definitions of "project" and "project entity" only name Utah interlocal entities and electric interlocal entities, not energy services interlocal entities. The Commission read the Legislature's silence about the third type as intentional exclusion.

Q: Is power plant equipment always treated as personal property, never as part of the building?
A: In this ruling, yes for equipment serving the power-generating process specifically (turbines, condensers, cooling towers, steam generators) — but equipment or materials that just serve the building's own function (like HVAC) are treated as construction materials, which is a different category with different tax treatment.

Citations and references

Statutes:

• Utah Code Ann. § 11-13-101 et seq. (Interlocal Cooperation Act)
• Utah Code Ann. § 11-13-203(1)-(4) (interlocal entities as political subdivisions; three entity types)
• Utah Code Ann. § 11-13-103(10), (11) ("project" and "project entity" definitions — energy services interlocal entities excluded)
• Utah Code Ann. § 59-12-104(2) (political subdivision sales tax exemption and its exceptions)
• Utah Code Ann. § 59-12-102 (definition of "construction materials")

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/04-011.pdf

Original ruling text

REQUEST LETTER

04-011

NAME
ADDRESS
PHONE
FAX

Dear Commissioner:

Enclosed find an excised portion of a letter from NAME, TITLE, 1ST COMPANY) for your
review.

In his letter, NAME claims a sales tax exemption on equipment installed by a private contractor
(2ND COMPANY”) on their CITY, Utah power plant.

I request the commission research the basis of this exemption and determine if 1ST COMPANY
is exempt from sales tax on equipment purchased and installed in their facility.

This equipment would include such things as gas turbines, condensers, cooling towers, steam
generators etc. The plant is projected to cost $$$$$$$.

I would appreciate the benefit of your research in a private letter.

Thank you.

Sincerely,
NAME

                      *** EXCERPTS FROM NAME LETTER ***

3. Please state whether 1st COMPANY has a sales tax exemption on equipment installed by
   2ND COMPANY in the CITY Plant.

    Yes, 1ST COMPANY is a Utah energy services interlocal entity organization under the
    Utah Interlocal Act. Utah Code Ann. §§ 11-13-101 et seq. As an energy services
    interlocal entity, 1ST COMPANY is exempt from payment of sales tax on its purchases of
    tangible personal property. See id § 59-12-104. The Interlocal Act defines “project” as an
    “electric generation and transmission facility owned by a Utah interlocal entity or an
    electric interlocal entity.” Id. § 11-13-103(10). Facilities owned by an energy services
    interlocal entity, are not addressed by the Utah Code. As defined by the Utah Code,
    facilities owned by an energy services interlocal entity do not constitute a project Under
   

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   Section 11-13-103 and, as a result, sales of tangible personal property to an energy
   services interlocal entity are generally not subject to sales and use tax.

   Moreover, the Utah State Tax Commission has issued 1ST COMPANY a sales tax
   exemption certificate, which 1ST COMPANY has been relying on for the last several
   weeks.


                                 RESPONSE LETTER

                                                  May 5, 2004

NAME
ADDRESS

RE: Private Letter Ruling Request – Sales and Use Tax Exemption for 1ST COMPANY

Dear NAME,

   You have requested the Commission research sales and use tax issues relating to the 1ST

COMPANY. We understand that 1ST COMPANY is an “energy services interlocal entity” that is
organized under the Utah Interlocal Cooperation Act (“Interlocal Act”) and that it is building a
power plant in Utah. Specifically, you ask whether 1ST COMPANY is exempt from Utah sales
and use tax on its purchases of equipment, such as gas turbines, condensers, cooling towers,
steam generators, etc., that will be installed by a private contractor in the plant. Before
addressing the specific sales tax exemptions that may apply to 1ST COMPANY, we must first
address determine certain issues that relate to recent changes in the Interlocal Act.

    I. Political Subdivision. In 2002, the Legislature amended the Interlocal Act (§§ 11-13-

101 et seq.) in S.B. 29 to allow for the creation of three different types of “interlocal entities”
instead of the one type authorized prior to amendment. Utah Code Ann. §11-13-203(1) provides
that an “interlocal entity” created under this section is a political subdivision of the state, with
subsection 203(2) providing for the creation of a “Utah interlocal entity,” subsection 203(3) for
an “electric interlocal entity,” and subsection 203(4) for an “energy services interlocal entity.”
NAME has stated in the excerpts of his letter that you provided that 1ST COMPANY is an energy
services interlocal entity. Assuming this assertion to be correct, Section 11-13-203(1) provides
that 1ST COMPANY would therefore be a political subdivision of the State of Utah. We note that
should this assumption be incorrect, our determination for regarding exemptions would be
different.

    II. Sales Tax Exemption for Political Subdivisions: S.B. 29 also amended Section 59-

12-104(2), which provides that the following sales are exempt, with certain exceptions, from
taxation (new language is underlined):

   (2) sales to the state, its institutions, and its political subdivisions; however, this
   exemption does not apply to sales of:

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    (a) construction materials except:
        (i) construction materials purchased by or on behalf of institutions of the public
        education system as defined in Utah Constitution Article X, Section 2, provided
        the construction materials are clearly identified and segregated and installed or
        converted to real property which is owned by institutions of the public education
        system; and
        (ii) construction materials purchased by the state, its institutions, or its political
        subdivisions which are installed or converted to real property by employees of
        the state, its institutions, or its political subdivisions; or
    (b) tangible personal property in connection with the construction, operation,
    maintenance, repair, or replacement of a project, as defined in Section 11-13-103, or
    facilities providing additional project capacity, as defined in Section 11-13-103;
    Prior to the 2002 amendments provided in S.B. 29, entities created under the Interlocal Act,

as political subdivisions, received the same sales and use exemption as the State of Utah and its
other political institutions (except for certain educational institutions). Under that exemption, all
sales of tangible personal property to an entity created under the Interlocal Act were exempt except
for “construction materials” that were not converted into real property by the entities’ own
employees.

   However, S.B. 29 then added an additional exception to the political subdivision sales tax

exemption found in Section 59-12-104(2). The new exception applies to purchases of tangible
personal property in connection with a “project” or “facilities providing additional project capacity,”
as defined in the amended Interlocal Act. Accordingly, we must first determine whether 1ST
COMPANY’ power plant is considered either a “project” or “facilities providing additional project
capacity” before we can determine the extent of 1ST COMPANY sales and use tax exemption under
the amended law.

    Definition of “project” and “facilities providing additional project capacity.” The

specific sales tax exemption applicable to 1ST COMPANY depends on whether 1ST COMPANY is
considered a “project entity” and its facilities considered a “project” under the amended Interlocal
Act.

      Prior to S.B. 29, “project entity” was defined to mean “a legal or administrative entity

created under this chapter which owns a project . . .” (Section 11-13-3(7).) “Project” was defined to
mean “an electric generating and transmission project owned by a legal or administrative entity
created under this chapter . . .” (Section 11-13-3(6).) S.B. 29 amended “project entity” to mean “a
Utah interlocal entity or an electric interlocal entity that owns a project.” (Section 11-13-103(11).)
“Project” was amended to mean “an electric generation and transmission facility owned by a Utah
interlocal entity or an electric interlocal entity” and includes “a project entity’s ownership interest in
. . . facilities that provide additional project capacity. . . .” (Section 11-13-103(10).)

     Presently, the definitions of “project entity” and “project” specifically refer to and include

facilities owned by only two of the three types of entities created under S.B. 29: 1) a Utah interlocal
entity; 2) and an electric interlocal entity. These definitions, however, are silent with respect to
ownership of a facility by the third type, an energy services interlocal entity. This is the type of

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entity NAME represents to be 1ST COMPANY designation. Because the Legislature specifically
designated the other two types of interlocal entities as “project entities” but did not include an
energy services interlocal entity in the definition, we believe that the Legislature intended an energy
services interlocal entity not to be a “project entity” and, accordingly, its facilities not to be a
“project” or “facilities that provide additional project capacity.”

   IV. Sales and Use Tax Exemption Applicable to 1ST COMPANY. The Legislature has

provided certain exceptions to the exemption for sales of tangible personal property to a political
subdivision of the State of Utah. The new exception from the sales tax exemption provided in
Section 59-12-104(2)(b) only applies to certain transactions relating to “projects” and “facilities
providing additional project capacity.” Because S.B. 29 does not lead us to consider 1ST
COMPANY’ facilities to be a “project” or “facilities providing additional project capacity,” we do
not find the new exception to the sales tax exemption to apply to purchases made by 1ST
COMPANY.

    Consequently, 1ST COMPANY is still subject to the same general exceptions as the State of

Utah and most of its other political subdivisions. Therefore, 1ST COMPANY is exempt on its
purchases of tangible personal property except for, in accordance with Section 59-12-104(2)(a)(ii),
“construction materials” that are not converted to real property by COMPANY’ own employees. (As
COMPANY is building a new power plant and has hired a private contractor to build it, COMPANY
is not exempt on its purchases of “construction materials” that become part of the realty for sales and
use tax purposes.)

    However, you have asked specifically whether certain equipment, such as gas turbines,

condensers, cooling towers, and steam generators, are exempt. Any exemption for these items
depends on whether they are considered “construction materials” and whether they are converted to
real property by other than COMPANY own employees. The definition of “construction materials,”
as found in Section 59-12-102, was unchanged by S.B. 29 and means “any tangible personal
property that will be converted into real property.” (We note that this definition has not been
affected by the enactment of the Streamlined Sales Tax provisions that become effective July 1,
2004). Under current practice, the Commission considers “construction materials” to include
materials and items that go into the construction of a building or structure, as well as equipment that
serves the function of that building or structure. COMPANY may not purchase construction
materials tax-free, however, if they are converted into real property by a private contractor. That is,
tangible personal property incorporated into the buildings and structures at COMPANY power plant,
as well as the equipment that becomes part of the realty and serves the function of the buildings and
structures (such as HVAC systems), are taxable if they are constructed or installed by a private
contractor and rather than COMPANY own employees.

   The Commission, however, does not consider items, including equipment, that serve the

business or production process located in the building or structure to be “construction materials.”
Furthermore, the Commission considers equipment, which is installed in a power plant as part of the
power generating process, to remain personal property after its installation. Accordingly, equipment,
including gas turbines, condensers, cooling towers, and steam generators, installed to serve
COMPANY power generating process, remain tangible personal property for sales and use tax

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purposes after their installation. Therefore, COMPANY may purchase these items of equipment used
in the power generating process tax-free, even if they are installed by a private contractor.

    Before concluding, we should clarify a statement made in the excerpt from NAME letter.

NAME indicated that “the Utah State Tax Commission has issued 1ST COMPANY a sales tax
exemption certificate, which 1ST COMPANY has been relying on . . . .” An “exemption
certificate” is a certificate issued by a purchaser to a seller, not something issued by the Tax
Commission to a purchaser to facilitate claims of tax exemption. What the Tax Commission
issues is a “license” or “sales tax account number.” Neither that license nor the account number
should be viewed as granting some kind of broad or automatic sales tax exemption. The actual
exemptions are still generally based on the status of the purchaser, the use or disposition of the
property or service by the purchaser, and/or the actual type of property or service being
purchased. It is not uncommon for a company having been issued a sale tax account number to
wrongly believe that it has an exemption for everything it purchases.

   Hopefully, the information in this letter will clarify which purchases 1ST COMPANY

may make tax-free and which ones it cannot. Should you have any other questions, please
contact us.

                                                 For the Commission,



                                                 Marc B. Johnson
                                                 Commissioner

MBJ/KC
04-011