June 6, 1988

You request a ruling on behalf of (the Owner/Operator), a Massachusetts limited partnership, as to whether certain transactions are exempt from the sales and use tax under G.L. c. 64H, §§ 6(r) and (s). 1

Facts

The Owner/Operator will contract with (Contractor) to build a functional cogeneration power plant (Plant) in Massachusetts. 2 The land on which the Plant will be built will be leased to the Owner/Operator from (the Corporation). You describe the contract as a "turn-key contract," meaning that the Contractor will purchase all of the materials needed to build the Plant and all of the machinery necessary to operate the Plant. The Contractor will then turn over a totally operational Plant to the Owner/Operator. The Plant will produce steam and electricity.

The electricity will be sold to Company. The steam will be sold to the Corporation for use in the paper mill which it operates in Massachusetts. The Corporation is classified pursuant to G.L. c. 58, § 2, as a foreign manufacturing corporation. For purposes of this ruling we assume that the paper mill is an "industrial manufacturing plant" within the meaning of G.L. c. 64H, §§ 6(r) and (s).

Briefly, the process of producing steam and electricity is as follows. The plant will consist of machinery housed in a single sound-proof building. Natural gas will be piped into the plant from a high pressure gas line, where it will enter the combustion chamber of a gas turbine. It will then be mixed with high pressure air from the compressor section of the turbine and combusted. Hot gases will be expanded through the blades of the gas turbine producing mechanical shaft power which, in turn, will produce electricity. Hot exhaust gases from the gas turbine will pass to the heat recovery boiler to produce steam. The steam will then pass at high pressure to a condensing extraction steam turbine where the low-pressure steam will be extracted for use in the Corporation's paper mill. The remaining steam will be exhausted from the condenser to the steam turbine to produce additional electricity. Makeup water to the boiler will be treated in the water treatment system (cooling tower system), and used to cool the generator and turbines.

The particular items about which you ask are the following:
  1. Input systems: gas lines, water lines
  2. Gas turbine
  3. Steam Turbine
  4. Heat recovery boiler
  5. Electrical system and transformers
  6. Water treatment system
  7. Computer controls
  8. Cooling system: cooling tower and accessory equipment
  9. Sound-proof building.

We conclude that:

1. The transfer of the building from the Contractor to the Owner/Operator will not be subject to the sales or use tax. 2. The sales or use tax will apply to purchases by the Contractor of all materials, supplies and machinery to be used in fulfilling the construction contract.

Discussion

General Laws Chapter 64H, Section 2 imposes a sales tax on sales at retail of tangible personal property by any vendor. The sale of the building is a sale of real estate and not of tangible personal property. Accordingly, the transfer of the building from the Contractor to the Owner/Operator will not be subject to the sales or use tax.

A "sale at retail" is defined in Section 1(13) as a sale of tangible personal property for any purpose other than resale in the regular course of business. A contractor is generally considered the consumer and not a purchaser for resale of the materials, supplies and machinery purchased for use in fulfilling a lump-sum contract. Ace Heating Service Inc. v. State Tax Commission, 371 Mass. 254 (1976); Salem Glass Co., v. State Tax Commission, ATB Docket No. 60903 (1974); Letter Ruling 80-44, 82-45, 82-121 and 87-16. Accordingly, the Contractor must pay the sales or use tax as the consumer upon the purchase of all materials, supplies and machinery used in fulfilling the construction contract.
You contend that the purchases by the Contractor are exempt under G.L. c. 64H, §§ 6(r) and (s). The claims of exemption under §§ 6(r) and (s) for property "used directly and exclusively in the furnishing of power to an industrial manufacturing plant; [and] in the furnishing of gas, water, steam or electricity when delivered to consumers through mains, lines or pipes..." do not apply to sales to a construction contractor who does not furnish anything to anyone. S.J. Groves & Sons v. State Tax Commission, 372 Mass. 140, 141, 145 (1977); Ace Heating Service, Inc. v. State Tax Commission, 371 Mass. 254 (1976).

You state that the Contractor will be "furnishing" steam and electricity during the several weeks prior to turning over the Plant to the Owner/Operator. These activities constitute "performance testing," and are labeled as such in the contract between the Owner/Operator and the Contractor. These activities do not constitute "furnishing" within the meaning of the statute.
We conclude, in summary, that the exemptions under G.L. c. 64H, §§ 6(r) and (s), do not apply here. To the extent that Letter Ruling 83-7 and 84-85 are inconsistent with this Ruling, they are hereby revoked.

Very truly yours,
Stephen W. Kidder
Commissioner of Revenue
June 6, 1988
LR 88-11