United States

Georgia: Power Company’s Transmission and Distribution System Not Exempt Manufacturing Equipment

Jan 12, 2015
From KPMG TaxWatch

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The Georgia Tax Tribunal recently denied a taxpayer’s refund request for sales taxes paid on purchases of equipment incorporated into an electricity transmission and distribution system. The taxpayer, a Georgia electric public utility, was informed by the Department of Revenue (Department) in the 1960’s that electricity constituted “tangible personal property” and therefore its production of electricity qualified as manufacturing. At that time, it was also the Department’s position that transforming, switching, and transmission equipment and structures were taxable. Several years later, in 2008, the legislature broadened the manufacturing exemption to apply to purchases of machinery or equipment “necessary and integral” to the “manufacture of tangible personal property in a manufacturing plant.” Prior to the law change, generally only equipment “used directly” in manufacturing was exempt. In 2009, the Department made several amendments to its manufacturing exemption regulation, including, but not limited to, providing that entities classified under North American Industrial Classification Systems (NAICS) Code 22111 (Electronic Power Generation) were considered manufacturers. After these changes, the taxpayer filed for refunds of sales and use taxes paid on transmission and distribution system equipment. After the Department denied the taxpayer’s refunds, the taxpayer appealed to the Georgia Tax Tribunal.

In the lengthy opinion, the Tribunal denied the taxpayer’s petitions. The Tribunal first concluded that although the taxpayer’s transmission and distribution system was highly integrated with its generating facilities, there was no manufacturing occurring in the system. The energy was fully manufactured at the generating plant, and the transmission and distribution system functioned only to “safely, efficiently, and reliably deliver” the energy that had already been manufactured to the ultimate consumer. The transmission and delivery system was therefore not integral or necessary to the production of energy as it did not result in the manufacture of different or more electricity than was produced at the generating plant. The taxpayer’s transmission lines were also used to distribute power that had been generated by other power companies which, in the Tribunal’s view, showed conclusively that the transmission lines were not “necessary and integral” for manufacturing of electrical energy.  The Tribunal rejected the taxpayer’s contentions that it was “manufacturing” in the transmission system when it (1) sold electricity at different voltages to different customers and (2) “processed” electrons.

The Tribunal also noted that there was a specific NAICS code for power transmission and distribution systems apart from the NAICS code adopted into the Department’s regulations applicable to generating facilities. In the Tribunal’s view, this evidenced that generation and distribution were two distinct activities. In addition, if the taxpayer’s refund request was granted, operators of pure transmission and distribution systems would likewise be entitled to the manufacturing equipment exemption although such companies were not actually engaged in manufacturing.

Finally, the Tribunal rejected the taxpayer’s position that its generation facilities and the transmission and distribution system constituted a single “manufacturing plant.” If it were to accept the taxpayer’s argument, the Tribunal noted this would turn the “bulk of the state of Georgia” into a single plant, which is not within the usual and customary understanding of the term.  Please contact Ben Cella at 404-979-2012 with questions on Georgia Power Company v. MacGinnitie.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.