State of Rhode Island - Division of Taxation
Ruling Request No. 2000-03
Request for Ruling
You request declaratory rulings pursuant to s 42-35-8, Rhode Island General Laws ("R.I.G.L.") on behalf of you clients, Partnership X, partnership, Company A, a joint venture organized and existing under the laws of the State of Rhode Island (the "Facility Contractor") and Company B, a Rhode Island Corporation (the "Pipeline Contractor") concerning the treatment for Rhode Island sales and use tax purposes of expenditures for (a) certain machinery and equipment and related items that will be component parts of a 500 megawatt natural gas fired combined cycle independent electric power production facility to be located in Rhode Island (the "Facility") and (b) all pipe conduits, pump stations, site metering equipment, ancillary equipment and related items (the "Effluent Connector") linking the Facility to a Municipal Wastewater Treatment System (the "Treatment System").
The facts set forth in your request for ruling dated July 19,2000, received September 21, 2000, and the exhibits attached thereto are incorporated herein by reference. The salient facts contained in your request are as follows.
Partnership X, and a municipality of this state ("Municipality") are parties to an "Agreement Requiring Effluent Delivery, Use and Recycling Services" dated September 2,1999 (the " Effluent Agreement") that sets forth the Municipality's agreement to provide treated effluent from the Treatment System for use at the Facility and imposes various obligations on the partnership in exchange for that agreement. That partnership under the name of Partnership X also entered into a lease (the "Lease") agreement with Partnership Y wherein Partnership X agreed to lease the Facility to Partnership Y and Partnership Y agreed to act as the agent for Partnership X in connection with the construction of the Facility and the Effluent Connector. Partnership X and Partnership Y will be hereinafter referred to jointly as the "Owner".
Company A, the facility Contractor, has agreed to construct and equip the Facility in accordance with the specifications set forth in the Construction Agreement dated June 21, 2000 and to turn the Facility over the Owner. Company B, the Pipeline Contractor, pursuant to an agreement entered into on September 12, 2000, has agreed to construct and equip for the Owner the Effluent Connector that will link the Facility to the Treatment System. The Owner will use the Facility to produce electric power for sale to customers.
The Facility will be located on 33 acre site of land that was previously used as gravel and excavation site. The site and the surrounding area are part of a Proposed Industrial Park (the "Park"). The Owner has purchased the 33 acre site and will be the first entity located in the Park. It is anticipated that the electrical energy produced by the Facility will be sold to other tenants in the Park and into regional power girds.
The Facility will consist of two identical combustion turbine trains. Each train will consist of a combustion gas turbine rated at approximately 175 megawatts output capacity at 50 F, and a heat recovery steam generator (HRSG) equipped with duct burners. The two HRSGs will feed a single nominal 150 megawatt steam turbine generator. The production of electricity from both a combustion turbine generator and a steam turbine generator together is known as "combined cycle."
The Facility has been designed to use treated effluent as its main water source. The Municipality has agreed to provide the Facility with a source of treated effluent and has agreed to accept at the Treatment System a return of that effluent after it has been used as a cooling source at the Facility. The Owner, in addition to the payments it has agreed to make to the Municipality for the treated effluent, has agreed to design and construct the Effluent Connector and to turn over title to the effluent Connector to the Municipality as soon as the system is constructed. The Owner has agreed to be responsible for operating the Effluent Connector on behalf of the Municipality during the term of that agreement.
It is not anticipated that Owner will take title directly from a vendor for any of the property acquired in connection with the construction of the Facility or the Effluent Connector.
Exhibit A is a list of the principal items of material and equipment that will be acquired by the Pipeline Contractor in connection with the construction of the Effluent Connector that will be used to convey effluent from the Treatment System to the Facility and return wastewater to the Treatment System (referred to by the Petitioner as the "Municipal Property"). Exhibit B is a list of property that will be acquired by the Facility Contractor which it alleges will be used by the Owner at the Facility directly or indirectly in connection with the production of electrical power to be sold to customers (referred to by the Petitioner as the "Exempt Energy Property"). Exhibit C is a list of property that will be acquired by the Facility Contractor and which it alleges will be used by the Owner directly or indirectly at the Facility partially in connection with the production of electrical energy to be sold to customers (referred to by the Petitioner as the "Partially Energy Property").
(ii) Company A, the Facility Contractor, and Company B, the Pipeline Contractor, will be entitled to receive a Resale Certificate from the Owner in connection with the transfer of the municipal Property described on Exhibit A, in connection with the transfer of the Exempt Energy Property described on Exhibit B a Manufacturers Exemption Certificate; and in connection with the transfer of the Partially Exempt Energy Property described on Exhibit C, a Manufacturers Exemption Certificate to the such property will be used at the Facility for the production of electrical energy for sale to customers. The Owner will be liable for Rhode Island sales and use tax to the extent such property is not used for that purposes;
(iii) Other than as set forth in paragraph (ii) above, the Owner will not be liable for Rhode Island sales and use tax in connection with the transfer to it or its use as set forth herein of the Facility or the Effluent Connector and none of the lease or other payments to be made to Partnership X by Partnership Y in connection with these transactions will be subject to Rhode Island sales and use tax.
(iv) The transfer by the Owner of the Municipal Property to the Municipality will be exempt from Rhode Island sales and use tax under Section 44-18-30(8), R.I.G.L., and
(v) In the future the Owner shall be entitled to furnish to the vendor of any one or more items of property it acquires or repair any item of Municipal Property described on Exhibit C a Resale Certificate and it shall be entitled to furnish to the vendor of any one or more of the items of property it acquires to replace or repair any item of Exempt Energy Property described on Exhibit B (and any item of Partially Exempt Energy Property described on Exhibit C to the extent used directly or indirectly in connection with the production of electrical power for sale to customers) a "Manufacturer's Exemption Certificate" and the Owner will not be subject to Rhode Island sales and use tax in connection with such purchase or the use of such item(s) of property.
Petitioner first requests that Company B, the Pipeline Contractor, and Company A, the Facility Contractor, be allowed to provide their vendors with resale certificates in connection with the purchase of certain property used in fulfilling their respective construction contracts.
Neither Company A nor Company B are retailers of the types of property in issue nor are they acting as retailers in their performance of the construction of the construction contracts. If a company that contracts to perform a job, acquires materials to complete that job, the tax is payable by the contractor at the time it acquires the goods, not when they are delivered to the ultimate customer. Eagle Cornice Co., Inc. v. Clark, AA 90-123 (1995). Section 18.104.22.168. of Company B's construction contract requires it to procure, in its own name as independent contractor and not as agent for the Owner, all labor, materials, supplies for the construction of and incorporation into the Project which are required for completion of the completion of the Project. Company A's contract, section 2.1.3, contains virtually verbatim language. Both Company A and Company B are clearly acting as construction contractors and not retailers pursuant to their respective contracts.
The Petitioner has set forth in Exhibit B assets which it claims are used directly in the manufacturing process, and in Exhibit C, assets which it claims are used indirectly in the production of power.
With regard to Exhibit B, a review of the assets listed therein and their descriptions, support the petitioner's claim of exemption for manufacturing except for the Switchyard, which is part of the distribution process, and the Generation Building and Cooling Tower Chemical Feed Building.. Neither of these buildings fall within the purview of manufacturing exemption.
To the extent that Company A, the Facility Contractor, is purchasing the assets listed in Exhibit B, the Owner may issue a Manufacturer's Exemption Certificate (MEC") to Company A for the purchase of those assets (excluding the Switchyard, the Generation Building and the Cooling Tower Chemical Feed Building and Company A may in turn issue the MEC to its vendor for those purchases.
As to the assets in Exhibit C, it is determined that those assets are comprised of buildings essentially for general storage and mechanical systems unrelated to the production of power for sale. Therefore the assets listed on that exhibit are not exempt.
With regard to the pipeline, petitioner advances the argument that the materials and supplies acquired in connection with the construction of the Effluent Connector are exempt pursuant to RIGL 44-18-30(8). That section reads as follows:
Petitioner also cites B.G. Construction Co. v. Norberg, 524 A.2d 595 (1987) in support of its argument that the materials and supplies acquired in connection of the Effluent Connection should be exempt. Petitioner's on B.G. Bailey, supra, is also misplaced.
In B.G. Bailey, Amica, as contractor, entered in a contract with the State of Rhode, an exempt entity, for the building of an airplane hangar on state property. The contract called for all materials incorporated into the project to be turned over to the State after completion. The hangar was then to be leased back to Amica. Amica subcontracted with B.G. Bailey Construction Company to build the hangar on its behalf.
RIGL 44-18-30(5)(ii) provides that a contractor who contracts with the state or a municipality may purchase materials and supplies essential to the project tax free. The Division of Taxation took the position since B.G. Construction Company did not contract with the state exemption did not apply.
The Supreme Court held a regulation of the Tax Division, the term "contractor" also applied to "subcontractors." The court stated that since Amica's purchases would have been tax exempt under the state contract, its subcontract (B.G. Bailey) was also entitled to purchase the materials tax free.
In the matter herein, Company B has a contract with Partnership X, a taxable entity, for the construction of an effluent system. The municipality is not a party to that contract. There is therefore no exemption that can be bestowed on the materials purchased under the contract between Company B and Partnership X.
Partnership X does have an agreement with the Municipality under which the Municipality will sell to Partnership X the supply of water necessary for the needs of the power plant and accept return water from the plant. Under that agreement Partnership X will pay the Municipality a structured fee for the supply of water necessary for its needs and upon completion of the pipeline, ownership will transferred to the Municipality.
The fact that Partnership X will ultimately turn over title to the pipeline to the Municipality under a separate agreement does not effect the construction contract between Company B and Partnership X. In fact, the agreement between Partnership X and the Municipality state under Paragraph 22 that "Nothing in this Agreement shall be construed as creating any relationship between the Parties other than that of independent contractors for the sale and purchase of Project Water, Project Return and related Services."
(1) Company A, the Facility Contractor, and Company B, the Pipeline Contractor, may not provide their vendor with resale certificates in connection with the purchase of any property listed in Exhibit, Exhibit B or Exhibit C, nor may the Facility Contractor and the Pipeline Contractor be entitled to receive a resale certificate form the owner in connection with the transfer of the property described in Exhibit A, Exhibit B or Exhibit C.
(2) Company A, the facility Contractor, will be entitled to receive a Manufacturer's Exemption Certificate ("MEC") from the Owner in connection with the transfer of property described in Exhibit B, excluding, the Switchyard, Generation Building and the Cooling Tower Chemical Feed Building.
The Facility Contractor will then be entitled to pass the MEC to its vendor. The Owner will be liable for Rhode Island sales and use tax to the extent such property is not used for manufacturing purposes.
(3) To the extent that the Owner has paid a tax on cost of all items of tangible personal property which are not manufacturing machinery and equipment, there will be no tax due on the lease charge for that equipment. Therefore, there will be no need to apportion the tangible personal property form the land and building under the lease in order to determine a tax due on the lease charge made to Partnership X by Partnership Y.
(4) The transfer by the Owner of the Municipal Property, upon which tax been previously paid, to the Municipality is exempt from the sales and use tax.
(5) The future, the Owner shall be entitled to furnish the vendor a MEC for any one or more of the item it acquires to replace or repair any item of property listed in Exhibit B excluding the Switchyard, Generation Building, and the Cooling Tower Chemical Feed Building. The Owner will be liable for Rhode Island sales and use tax such property is not used for manufacturing purposes.