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
Page 2 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: 1. 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. 2. MACHINERY AND EQUIPMENT FOUNDATIONS AND PLATFORMS EXEMPT. 3. TURBINE AND CONNECTED GENERATORS EXEMPT. 4. STEAM GENERATOR EXEMPT. 5. CHILLED WATER PLANT EXEMPT. 6. 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. 7. COOLING TOWER EXEMPT. 8. 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.
Page 3 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
Page 4 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.
Page 5 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?
Page 6 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.)
Page 7 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. 1 st 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 property 1 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.
Page 8 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.
Page 9 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