DRS: Ruling 2000-5, Sales and Use Taxes / Manufacturing Recovery Act / Electricity Generation

 

STATE OF CONNECTICUT
DEPARTMENT OF REVENUE SERVICES

450 Columbus Blvd
Hartford CT 06103
 
 
 
 
 
 

 
 

 

This Ruling has been revoked in part by Ruling 2004-2

Ruling 2000-5

Sales and Use Taxes
Manufacturing Recovery Act
Electricity Generation


FACTS:

The Company is building a power plant to generate electricity for sale at wholesale to wholesale and retail remarketors. The process of generating electricity will use combustion turbine generators that convert fuel into electrical energy, which will be passed through a step-up transformer near the power plant in order to convert the voltage of the electricity exiting the generators before it is transmitted onto the New England power grid.


ISSUES:

Whether the generation of electricity for sale and delivery at wholesale to wholesale and retail remarketors is the "furnishing of electricity when delivered to consumers through mains, lines or pipes" for purposes of Conn. Gen. Stat. 12-412(18), thus fully exempting purchases of materials, tools and fuel used directly in generating electricity.

Whether the generation of electricity for sale and delivery at wholesale to wholesale and retail remarketors is "processing" within the meaning of the Manufacturing Recovery Act of 1992, Conn. Gen. Stat. 12-412i (the "MRA"), thus partially exempting purchases of machinery and equipment used for generating electricity.


RULING:

The generation of electricity is the "furnishing of electricity when delivered to consumers through mains, lines or pipes" under Conn. Gen. Stat. 12-412(18), and purchases of materials, tools and fuel used directly in generating electricity are fully exempt from sales and use taxes.

The generation of electricity is "processing" within the meaning of Conn. Gen. Stat. 12-412i, and purchases of machinery and equipment for use primarily in generating electricity are partially exempt from sales and use taxes.


DISCUSSION:

Besides exempting purchases of materials, tools and fuel used directly in an industrial plant in the actual fabrication of tangible personal property to be sold, Conn. Gen. Stat. 12-412(18) also exempts purchases of materials, tools and fuel used directly in the furnishing of electricity to be delivered to consumers through mains, lines or pipes. Therefore, purchases of materials, tools and fuel used directly to generate electricity are exempt under this statute, as long the electricity will be sold and delivered to consumers or to a wholesaler or remarketer for sale and delivery to consumers.

Purchases of machinery by a generator of electricity have not been granted similar favorable treatment. In United Illuminating Company v. Groppo, 220 Conn. 749, 601 A.2d 1005 (1992), the Connecticut Supreme Court concluded that the generation of electricity was not manufacturing. The issue in that case was whether the exclusion from the tax on services to commercial, industrial and income-producing real property under Conn. Gen. Stat. 12-407(2)(i)(I) applied to services rendered to machinery and production equipment at an industrial plant. Relying on legislative history and its findings of legislative intent, the Court determined that

[while the generation of electricity may in some sense be a "manufacturing" process, we conclude that the legislature did not intend to exempt businesses engaged in the generation of electricity for public consumption from the tax on services rendered to machinery and production equipment under 12-407 (2) (i) (I).

220 Conn. at 755. Because the generation of electricity is not considered "manufacturing" for purposes of the Connecticut sales and use taxes, purchases of machinery to generate electricity are not eligible for the full exemption under Conn. Gen. Stat. 12-412(34).

The issue now is whether electricity generation may be considered "processing" for purposes of the partial exemption of the MRA. Conn. Gen. Stat. 12-412i(b)(3) defines "processing" as "the physical application of the materials and labor necessary to modify or change the characteristics of tangible personal property." The definition of "tangible personal property" in Conn. Gen. Stat. 12-407(13) includes the distribution, generation or transmission of electricity. By spinning the generator, the Company exposes the wires inside it to a magnetic field, causing the atoms comprising the wires to lose and gain electrons, thus causing an electric current to be created. This activity comes within the definition of "processing" for purposes of the MRA.

Because electricity generation is "processing" under the MRA, purchases of machinery and equipment used primarily (which means chiefly, as defined in Special Notice 93(1.1), The Manufacturing Recovery Act Of 1992 Exemption For Purchases Of Property Used In Manufacturing, Processing And Fabricating) to generate electricity are partially exempt, subject to tax at an effective rate of three percent.

Most of the items described by the Company are either machinery, the component parts of machinery, or equipment, which are partially exempt under the MRA. However, the materials used to construct the smokestacks do not qualify either for full exemption under Conn. Gen. Stat. 12-412(18) or partial exemption under the MRA. (United Illuminating Company v. Groppo, Super. Ct., No. CV 87-0382460 (January 30, 1991); the plaintiff did not appeal this issue to the Connecticut Supreme Court.) The smokestacks are real property, not machinery or equipment, and materials used to construct real property are not covered by any of the manufacturing exemptions.


LEGAL DIVISION

July 13, 2000