The Georgia Tax Tribunal has held that an electric utility’s transmission and distribution equipment was not “necessary and integral to the manufacture of tangible personal property” and thus did not qualify for an exemption from Georgia sales and use tax. See Georgia Power Company v. MacGinnitie, Dkt. No. Tax-S&UT-1403540 (Ga. Tax Tribunal, Jan. 5, 2015). This is the latest in a string of cases addressing whether certain transmission equipment is used in a manufacturing process.

Background

In 2008, Georgia amended its manufacturing exemption, replacing the historically narrow “directly used” standard with a broader standard requiring that exempt machinery and equipment only be “necessary and integral to the manufacture of tangible personal property.” However, the revised exemption continues to require that an exempt item is used during manufacturing and in a “manufacturing plant.”

Electricity generation has been characterized as the manufacture of tangible personal property in Georgia since 1965. Subsequent to the change in the exemption standard, Georgia Power claimed that its transmission and distribution equipment qualified for the manufacturing exemption because it was necessary and integral to the manufacture of tangible personal property. The issues in this case were whether this equipment was used during manufacturing and whether the entire generation and distribution network constituted one single integrated manufacturing plant.

The Tribunal’s Decision

In today's decision, the Tribunal held that the Transmission and Distribution System (the System) was not exempt, as the manufacturing process was completed at the generation plants and the System was used only to distribute (not manufacture) the product. In reaching this conclusion, Judge Beaudrot concluded that:

  • The production of electrical energy begins and ends at the generating plants;
  • The activity within the System does not result in the “manufacture” of a different kind of electric energy from what is produced at the manufacturing plant;
  • The fact that generation is tightly integrated with transmission and distribution does not mean that the System is necessary and integral to the manufacturing of the electric energy;
  • Step-up transformers within the System function entirely to deliver electrical energy generated at the plant in a more efficient and economical manner, but not to “manufacture” additional electrical energy (the parties had agreed that nothing in the System changed the amount of electrical energy generated at the plants); and
  • Under the taxpayer’s argument, any electric membership corporation that purchases and transmits electricity, but does not generate electricity, could qualify for the exemption even though it is not a manufacturer.

Judge Beaudrot also held that the System was not part of a single integrated machine or “manufacturing plant” along with the generation facilities. Rather, each generating facility was its own manufacturing plant.

Decisions of Other States

The decision addresses a number of cases from other states and compares and contrasts them to the taxpayer’s facts. For instance, the Tribunal rejected the reasoning by a Michigan Court of Appeals that found that an electric company qualified for the exemption because the power is being “processed” as it is distributed, and thus the equipment qualified for the “industrial processing” exemption. Detroit Edison Co. v. Dep’t of Treas., 844 N.W.2d 198 (Mich. Ct. App. 2014). The Tribunal determined that the record in the Michigan court did not show that some customers receive electrical energy delivered to them at voltages equal to a generating plant’s output as does the record in this case.

The Tribunal also relied on several other decisions, including Niagara Mohawk Power Corp. v. Wanamaker, 144 N.Y.S.2d 458 (N.Y. App. Div. 1955); Peoples Gas & Electric Co. v. State Tax Comm’n, 28 N.W. 2d 799 (Iowa 1947); andUtilicorp United Inc. v. Dir. of Revenue, 75 S.W.3d 725 (Mo. 2001).

Sutherland Observation:

The issue of whether certain generation, transmission, and distribution equipment qualifies as manufacturing may also be important outside of the sales tax context. For example, the classification could be relevant for determining whether the equipment is eligible for an investment tax credit (see Brooklyn Union Gas Co. v. Tax Appeals Tribunal, No. 514825 (NY App. Div. 2013)); whether the taxpayer is generally regarded as a manufacturer in states that have different income tax apportionment rules applicable to manufacturers; or whether certain expenses attributed to the transmission of electricity are eligible for Texas’ cost of goods sold deduction from the Texas Margins Tax (see Nextera Energy Power Marketing, LLC v. Combs, Cause No.D-1-GN-12-001372 (Travis County District Court 2013)).

his ruling represents the nineteenth decision in the Tax Tribunal’s short two-year history. To date, none of the Tax Tribunal’s decisions have been appealed to Superior Court.