State tax laws are constantly in flux, particularly for taxpayers in the energy and resources industries. From the income tax implications of commodity hedging to limits on petroleum production taxes, these changes have wide-reaching implications for businesses located within a state's borders as well as those outside. This legal update, part of a monthly series, outlines some of the developments in state tax that occurred during July 2012 and that affect taxpayers in the energy and resources sectors.
Wind turbine components exempt from sales tax in Massachusetts
The Massachusetts Commissioner of Revenue recently ruled that component parts used to construct a wind turbine to supply electrical power to a manufacturing facility are exempt from sales tax. The taxpayer, a semiconductor manufacturer, contracted to have a 2.5 MW wind turbine constructed at its facility. All of the electricity generated by the turbine will be used solely to provide power to the facility and will not be sold to third parties.
Machinery and materials used directly and exclusively in furnishing power to an industrial manufacturing plant are exempt from sales tax. Because the taxpayer expected 75% of the turbine's output to be used directly in its manufacturing process, the turbine qualifies as exempt machinery. Sales of materials, tools, fuel, and machinery that become part of the turbine are exempt. However, items used by the contractor that do not become part of the wind turbine itself are not exempt.
Florida advises on income tax apportionment for commodity hedges
The Florida Department of Revenue recently issued technical guidance regarding the corporate income tax treatment of various commodity hedging transactions. The taxpayer was an electricity trading and marketing company which sold electricity produced by unregulated affiliates, procured natural gas and oil used in its affiliates' power generating process, and managed the risk of price fluctuations for the group. The taxpayer engaged in two main types of trading: input hedging, i.e., hedging the purchase price of natural gas and oil; and output hedging, i.e., hedging the wholesale price of electricity from specific power plants.
Like many states, Florida uses an apportionment formula to determine what portion of a corporation's income is attributable to and taxable in Florida. Part of Florida's apportionment formula is a sales factor, and whether the receipts from hedging transactions qualify as "sales" determines how much tax will be owed. The Department advised that both gross and net receipts from input and output hedging are generally excluded from the sales factor since they are essentially insurance and a cost of goods sold. However, where the taxpayer is in the business of selling electricity and sells its excess electricity on the open market, the net receipts from output hedging are included in the sales factor and attributed to the specific power plant to which the sale pertains.
Alaska establishes limit and credits for oil and gas production tax
The Alaska legislature recently enacted legislation limiting the oil and gas production tax to four percent of gross value at the point of production for commercial production outside of Cook Inlet and south of 68 degrees North latitude. The four-percent limit is effective as of January 1, 2013, and runs until December 31, 2021.
The legislation also provided a new transferable credit against oil and gas production tax for drilling the first four exploration wells that are located within certain areas of the state and for the first four seismic exploration projects that occur within those areas. The amount of the exploration well credit is the lesser of $25 million or 80 percent of the total qualified exploration drilling expenditures. The amount of the seismic exploration credit is the lesser of $7.5 million or 75 percent of the total qualified seismic exploration expenditures. Exploration work eligible for the credits must be performed between June 1, 2012, and July 1, 2016, though the legislation is not effective until January 1, 2013.
Indiana issues pair of decisions regarding industrial processing exemption
The Indiana Department of Revenue recently issued a pair of decisions applying a sales tax exemption for manufacturers and processors. The first decision involved a limestone processor's purchases of a crusher and several loaders used its operations. An audit determined that the taxpayer did not qualify for an industrial processor exemption because the taxpayer did not substantially change the raw limestone. The Department instead found that limestone slabs have limited economic value before crushing, and multiple types of product result from the taxpayer's process. The Department ruled that the crusher was exempt from tax, but the loaders were taxable because they merely mixed already formed aggregate rather than creating a new product.
In the second decision, a slag processor argued that its process began when it applied water to hot slag in a steel mill's slag pits and was not complete until the processed slag was sorted. The Department agreed that the taxpayer's process changed molten slag into a granular material usable in cement and other applications. Because the taxpayer qualified as an industrial processor, its purchases of a bulldozer used to move hot slag and loaders, dump-trailers, and bucket scales directly used in the production process qualified for the manufacturing and processing exemptions from sales tax.
Mining equipment again exempt in Illinois
Effective July 9, 2012, the exemption from Illinois sales tax, use tax, service occupation tax and service use tax for certain mining equipment has been reenacted by the Illinois legislature. The exemption statute, which was previously in effect until July 1, 2003, exempts equipment used in coal and aggregate exploration, mining, off-highway hauling, processing, maintenance and reclamation, including replacement parts and equipment purchased for lease. The exemption does not, however, apply to vehicles required to be registered under the Illinois Vehicle Code.
Petroleum products delivery fee announced in Texas
The Texas Comptroller recently issued a notice that as of July 1, 2012, a petroleum products delivery fee must be collected by bulk facility operators, e.g., rail, pipeline, barge, and refinery terminals. The Texas legislature made the previously-temporary fee permanent. The fee is collected upon the withdrawal of petroleum products into cargo tanks or barges and on petroleum products imported into Texas. The fee varies according to the net total gallons of petroleum products withdrawn, and a special rate applies to certain gasoline deliveries.