United States

Arkansas: Coal Used to Operate Pollution Control Equipment Not Exempt from Sales and Use Tax

Jan 15, 2018
From KPMG TaxWatch

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Recently, the Deputy Director and Commissioner of Revenue of the Arkansas Department of Finance and Administration denied a taxpayer’s request to revise an administrative decision. A Hearing Officer had previously determined that the taxpayer was not entitled to a refund of sales and use taxes paid on coal used to operate coal-fired boilers at a manufacturing plant. Under Arkansas law, a sales and use tax exemption applies to purchases of pollution control machinery and equipment. The exemption extends to pollution control catalysts and chemicals when consumed or used “by manufacturing or processing plants or facilities in the state to prevent or reduce air or water pollution or contamination which might otherwise result from the operation of the plant or facility.” Per a regulation, a “substance prevents or reduces air or water pollution if it acts directly on the air or water to remove or alter an impurity in the air or water.” An example in the regulation mentioned chlorine that was added to wastewater to remove impurities.

It was undisputed that the coal-fired boilers, in which the coal at issue was used, qualified as pollution control devices because in addition to being used in the manufacturing process, they were used to incinerate liquid chemical waste. The taxpayer argued that the coal used to fire the boilers was a chemical with a specific chemical formula and the boilers were used to incinerate the waste/pollutants. Therefore, the taxpayer argued, the coal qualified for exemption as a pollution control catalyst or chemical when used to fire the boilers. However, the Hearing Officer had determined that the only chemicals that qualified for the exemption were those that acted directly on air or water to remove or alter impurities in the air or water. Unlike coal, the chlorine in the example was exempt because it was added to the wastewater and acted directly on the wastewater to remove or alter any impurities. The coal at issue was consumed as fuel in the boilers and did not act directly on either air or water to remove or alter impurities in the air or water. Therefore, the Hearing Officer’s decision was sustained. Please contact Brandon Fulmer at 214-840-2497 with questions.

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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.