Gross Receipts Tax Exemption for Equipment Installed in a Wastewater Treatment Facility Opinion Number

Transcription

1 STATE OF ARKANSAS REVENUE LEGAL COUNSEL Department of Finance Post Office Box 1272, Room 2380 Little Rock, Arkansas and Administration Phone: (501) Fax: (501) April 24, 2018 Re: Gross Receipts Tax Exemption for Equipment Installed in a Wastewater Treatment Facility Opinion Number Dear, Your request for a legal opinion concerning the taxability of equipment being installed at a wastewater treatment facility has been referred to me for reply. In your letter, you state that. (the Taxpayer) is performing engineering service for the (the Client) for improvements to their Water Reclamation Facility (the Facility). You have cited to Arkansas Code Annotated (a)(3)(A)(Supp. 2015) and (a)(3), which provide a tax exemption for the sale of machinery and equipment required by state or federal law or regulations to be installed and utilized by manufacturing plants or facilities, cities, or towns in this state to prevent or reduce air or water pollution or contamination that might otherwise result from the operation of the plant, facility, city, or town. In addition, you provided written documentation from the Arkansas Department of Environmental Quality (ADEQ) that the machinery and equipment in question will be used in a city wastewater treatment plant as required under Arkansas Gross Receipts Tax Rule GR-66(A)(2). 1 You also stated that GR-66(E)(1) exempts from taxation machinery and equipment used in a city wastewater treatment plant if it is used to remove contaminants from wastewater. You state that the primary goal of the project is to increase the peak capacity of the Facility to help the Client mitigate sanitary sewer overflows. The improvements are also intended to improve the Facility s capability to comply with its National Pollutant Discharge Elimination System (NPDES) permit (the Permit) limits. Your request raises the question of whether five (5) types of equipment will be subject to sales and use tax. Your letter describes each of these equipment types as follows: (1) Aeration Improvements 1 The letter from ADEQ notes that any ancillary plant improvements, such as yard piping modifications, flow metering, valves, and gates which are used for controlling the flow of wastewater into the facility are not exempt. Page 1 of 5

2 (a) Aeration System Improvements The Facility s aeration system requires modification to achieve consistent compliance with an anticipated Ammonia Nitrogen Limit. The aeration system improvements will include new blowers and diffusers along with all required ancillary equipment such as aeration piping & valves and blower electrical drives. Blowers and diffusers are specifically listed in GR-66 E(3) as being exempt from Arkansas sales tax. (b) Aeration Basin Mixing Systems The Facility s aeration basins require the addition of anoxic zone mixing systems to achieve consistent compliance with an anticipated Ammonia Nitrogen Limit. The primary function of the low dissolved oxygen anoxic zones is to promote denitrification. Denitrification is essential to achieve the required settleability in a facility that nitrifies. The aeration basin mixing system will include compressors, diffusers, and required ancillary equipment such as air piping and valves, control panels, and electrical equipment. (2) Clarification Improvements (a) Secondary Clarifier Equipment Your letter states that the Facility's secondary clarifiers require improvement to achieve consistent compliance with an anticipated Ammonia Nitrogen Limit. The Facility will have to be operated at a MLSS greater than what the existing draft tube style clarifiers can process in order to achieve full nitrification. For these improvements, the existing clarifier scraper equipment will be demolished and new equipment will be installed in the existing concrete basins. The new secondary clarifier equipment will include solids concentration and removal equipment, scum removal equipment, weirs, weir covers, and all required ancillary equipment. (b) RAS Biosolids System You state that the Facility s Return Activated Sludge (RAS) System requires improvement to achieve consistent compliance with an anticipated Ammonia Nitrogen Limit. The Facility will have to be operated with a recycle rate greater than what the existing RAS pumps can produce in order to achieve full nitrification. For these improvements a new RAS pump station will be constructed. The RAS biosolids equipment will include three (3) submersible RAS pumps and all required ancillary equipment such as a pump wetwell, piping, valves, flow meters, and required pump electrical drives. (3) Parallel Treatment Improvements - Cloth Media Filtration System

3 A new cloth media filtration system is required to provide the Parallel Treatment defined in Paragraph 8 of Part II of the Permit. This filter will remove solids from the wastewater stream prior to disinfection. The cloth media filter system will include four (4) 15 MGD disc filter systems and all required ancillary equipment such as filter basins, backwash pumps, flow meters, piping, controls, electrical drives, valves, actuators, and gates. (4) Disinfection Improvements - U. V. Disinfection System As discussed in Paragraph 8(E) of Part II of the Permit, an expansion of the Facility s disinfection system is required to achieve the design peak flow of 94 MGD. The disinfection system will include new ultraviolet disinfection systems and all required ancillary equipment such as UV channels, flow metering, gates, control systems, and associated electrical components. (5) Plant Piping, Valves, Gates, and Appurtenances. To support the detailed improvements outlined in the preceding paragraphs, several ancillary plant improvements will be required. These improvements include yard piping modifications, flow metering, valves, and gates. Following a general discussion of the applicable law, I will address each issue in turn. Discussion Arkansas Code Annotated (a)(3)(A) provides an exemption from sales and tax for sales of machinery and equipment used to prevent or reduce air or water pollution. Arkansas Gross Receipts Tax Rule GR-66 provides that sales of pollution control machinery and equipment are exempt from tax if (1) the machinery and equipment is utilized, either directly or indirectly, by manufacturing or processing plants or facilities or cities or towns in Arkansas to prevent or reduce air or water pollution or contamination which might otherwise result from the operation of the plant or facility and (2) the machinery and equipment is required by Arkansas or federal law or regulation to be installed and utilized to control pollution or contamination as evidenced by written documentation from the Arkansas Department of Environmental Quality or the United States Environmental Protection Agency. With regard to a city wastewater treatment plant, Arkansas Gross Receipts Tax Rule GR-66(E) provides that machinery and equipment qualifies for this exemption if the machinery and equipment is used to remove contaminants from wastewater during the treatment process. The treatment process begins when solids are first removed from the wastewater and ends when all solids and other contaminants are removed from the wastewater. Arkansas Gross Receipts Tax Rule GR- 66(E)(3) states that the following items are examples of exempt machinery and equipment provided that the items are used during the water treatment process: pipes, pumps, valves, screens, screen baskets, gates, blowers, fans, skimmers, aerators, diffusers, equalization basins, concrete flumes, conveyor belts, flow meters, grit separators, grit removal equipment, back flow preventers, chlorination equipment, digester equipment, vacuators and air eductors.

4 I. Aeration Improvements a) You state that the aeration system improvements will include new blowers and diffusers along with ancillary equipment such as piping and valves. The purchase of this equipment is specifically exempted under GR-66(E)(3) and is not subject to sales and use tax. b) You state that the primary function of the Facility s aeration basin mixing systems is to promote denitrification of low dissolved oxygen zones in order to achieve the required settleability in the wastewater that the Facility nitrifies. The aeration basin includes compressors, diffusers, and required ancillary equipment. You did not specify whether the project will replace or expand the Facility s aeration basin. However, it is my understanding that the terms aeration basin and equalization basin are interchangeable. If that is the case the purchase of improvements to or replacement of the basin are specifically exempted under GR-66(E)(3). The purchases of diffusers are specifically exempted under GR-66(E)(3) and are not taxable. The purchase of the compressors is not specifically exempted; however, the list is not exclusive. As you have described this equipment to be essential to comply with wastewater treatment requirements, the purchase of the compressors is also exempt to the extent that they are required by ADEQ. II. Clarification Improvements a) Your letter states that the Facility s secondary clarifiers require improvements to comply with the anticipated Ammonia Nitrogen Limit, which the existing clarifiers cannot process. The new clarifier equipment will include solids concentration and removal equipment, scum removal equipment, weirs, weir covers and all ancillary equipment. The new clarifier equipment will be used directly in the wastewater treatment process to remove contaminants and therefore the purchase of said equipment will be exempt from sales and use tax. b) You state that the Facility s Return Activated Sludge (RAS) System requires improvement to achieve compliance with the anticipated ammonia nitrogen limit. The Facility will have to operate at a recycle rate greater than the capacity of the current RAS, and a new pump station will be constructed. The equipment will include three (3) RAS pumps and all ancillary equipment. The purchase of pumps is specifically exempted under GR-66(E)(3) and is not subject to sales and use tax.

5 III. Parallel Treatment Improvements You state that a new cloth media filtration system is required to provide Parallel Treatment as defined in the Permit. The filter will remove solids from the wastewater prior to disinfection. The system will include four-disc filter systems and ancillary equipment such as filter basins, backwash pumps, meters and piping. The equipment described herein is either explicitly exempted under GR-66, or is otherwise directly utilized in the reduction or prevention of pollution as defined under Ark. Code Ann (a). As such the purchase of these items will be exempt from sales and use tax. IV. Disinfection Improvements You state that the Permit requires an expansion of the Facility s disinfection system to achieve the designed peak flow rate. The system will include new ultraviolet disinfection systems and all required ancillary equipment such as UV channels, flow metering, gates, control systems, and electrical components. Based on the information provided the purchase of these items will qualify for the exemption either specifically under GR-66 or Ark. Code Ann (a) and will not be subject to sales and use tax. V. Plant Piping, Valves, Gates and Appurtenances These items will be used to support the improvements detailed in the above-discussed improvements (ancillary equipment). The purchase of all ancillary equipment that is necessary for the proper operation of the wastewater treatment is exempt, except those that will be used for controlling the flow of wastewater into the facility. In accordance with Arkansas Gross Receipts Tax Rule GR-75, this opinion is based upon my understanding of the facts as set out in your inquiry and as current Arkansas laws and rules govern those facts. Any changes in the facts or law could result in a different opinion. This opinion will not be binding upon the Department for any topic not specifically addressed herein. You may seek a supplemental opinion should you desire guidance in any topic not addressed within this opinion or if you have additional questions after reading this opinion. Please be advised that this opinion may only be relied upon by the specific and identified requestor, and will only be binding upon the Department for three (3) years from the date of issuance. See Arkansas Gross Receipts Tax Rule GR-75. A copy of the Arkansas Gross Receipts Tax Rules referenced in this letter is available online at Sincerely, Greg Ivester, Attorney Revenue Legal Counsel Enc.