United States

Wyoming: Chemicals Used in Generating Electricity Not Exempt Under Manufacturing or Processing Exemption

Feb 08, 2016
From KPMG TaxWatch

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Recently, the Wyoming State Board of Equalization addressed whether generating electricity qualified as “manufacturing” or “processing,” and if so, whether certain chemicals were used “directly” in manufacturing or processing. The taxpayer, an electric utility company operating four coal-fired electric generation facilities in Wyoming, used certain chemicals to maintain its equipment, aid in pollution control activities, and for other purposes. Under Wyoming law, sales of tangible personal property that become an ingredient or component of tangible personal property manufactured or processed for sale, are exempt from sales and use tax. The exemption extends to chemicals used directly in manufacturing or processing that are consumed or destroyed during that process. The taxpayer at issue requested a ruling from the Department that certain chemicals used at its electrical generation facilities qualified for the exemption. The taxpayer also filed a sales tax refund based on the same claim. After the Department denied both the ruling and refund request, the taxpayer appealed both denials to the Board.

The Board first considered whether generating electricity qualifies as “manufacturing.” Under Wyoming law, manufacturing is generally the act of changing a material into a different state or form. The taxpayer argued that when it generated electricity, it changed coal into electricity. However, the Board determined that the coal was not “transformed” into electricity; rather, it was consumed to generate steam to fuel turbines to spin magnets in a generator that produced the electricity. In the Board’s view, it was the spinning of the magnets and the copper coils that created the electricity, not the burning of the coal. After determining that generating electricity was not manufacturing under Wyoming law, the Board bolstered its conclusion by noting that it is presumed that the legislature intends to use the ordinary meaning of chosen terms and electricity is ordinarily referred to as generated, not “manufactured.” The Board also observed that there was a separate exemption for boiler fuel used in generating electricity, which would be rendered unnecessary if generating electricity was considered manufacturing (i.e., because the fuel would be exempt under the manufacturing exemption).

Next, the Board ruled that the generation of electricity did not qualify as “processing.” A processor transforms tangible personal property into a different state or form to become part of the processed product. The taxpayer first argued that it transformed coal into electricity. The court acknowledged that the taxpayer processed coal into a different state (ash and emissions), but the coal did not become part of the processed electricity. The taxpayer also argued that it transformed the energy in coal into different forms of energy resulting in electricity. The Board acknowledged that it may be “scientifically myopic” to ignore changes in energy forms, but its job was to construe legislation, not reach the most scientifically accurate result. The Board concluded that the legislature likely did not consider a change in energy form to constitute “processing” when it enacted the exemption statute. In any event, the Board determined that the various energy forms did not become ingredients or components in electricity, as required by statute.

Finally, the Board concluded that even if generating electricity qualified as “manufacturing” or “processing,” the chemicals the taxpayer claimed were exempt were not “used directly” and “consumed or destroyed” in the process of generating electricity. The taxpayer claimed the exemption for chemicals used to prevent corrosion of its equipment, to treat discharged waste water, and to treat emissions from burning coal to comply with federal and state pollution. In the Board’s view, the chemicals were not directly used or consumed in the process of generating electricity. Rather, they were used to help maintain the equipment and for pollution control purposes. The Board also rejected the taxpayer’s argument that the chemicals were purchased for resale. For more information on In re PacifiCorp Inc. please contact Stephen Metz at 303-382-7177.

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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.