United States

Arizona: Electric Generator did not Purchase Coal and Natural Gas for Resale

Apr 03, 2017
From KPMG TaxWatch

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The Arizona Court of Appeals recently addressed whether a taxpayer was entitled to a refund of use taxes paid on purchases of coal and natural gas used in generating electricity. The taxpayer, a non-profit electric cooperative, purchased coal and natural gas from out of state companies that did not collect Arizona Transaction Privilege Tax. The taxpayer originally paid use tax on the purchases, but later argued that it was entitled to a refund. After the Department of Revenue and the tax court rejected the taxpayer’s refund claims, the matter came before the appeals court. On appeal, the taxpayer first argued that its purchases were exempt as purchases for resale. In other words, the taxpayer argued that its electricity generation facilities converted the chemical energy in the coal and natural gas into electrical energy for resale. It would appear that the taxpayer’s argument was that it was essentially buying and reselling energy. The Department’s expert disagreed, contending that the taxpayer consumed the coal and natural gas to generate electricity. The court, finding that the taxpayer’s expert did not adequately establish that the taxpayer was “holding” coal and natural gas for sale, held that the taxpayer “clearly” used or consumed the coal and natural gas and was not eligible for the resale exemption. The taxpayer also argued that its purchases were exempt from use tax under an exemption for “tangible personal property that directly enters into and becomes an ingredient or component part of any manufactured, fabricated or processed article, substance or commodity for sale in the regular course of business.” Under the Department’s regulations, fuel used or consumed in a manufacturing process is taxable and is not considered to be incorporated into the manufactured product.” The court, noting that departmental regulations are entitled to deference and looking in part to a California case addressing the issue, held that the fuels at issue were consumed in the process of generating electricity. They did not directly enter into or become an ingredient or component part of the electricity as required. As such, the taxpayer did not qualify for the exemption. Please contact Brian Phillips at 858-750-7295 with questions on Arizona Electric Power Cooperative, Inc. v. Dep’t of Revenue.


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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.