June 22, 2011

You ask for a letter ruling concerning the application of Massachusetts sales tax, G.L. c. 64H, to purchases of a photovoltaic solar energy system (PV system) and machinery used in the construction of the system. In support of your request, you state the following facts.

I. FACTS

********************** (Taxpayer) has been regularly engaged in the business of selling, installing and operating renewable energy systems, including those which use solar power to generate electricity, in Massachusetts since 1988. Taxpayer is the owner and installer of such a PV system located on the roof of an office building owned by *************************** (Corporation), a 501(c)(3) nonprofit organization dedicated to serving the housing needs of Cape and Islands residents that is unrelated to Taxpayer. Corporation, also known as *****************************************, operates homeless shelters for adults and families, administers rental subsidies, offers education and training, and develops new affordable housing. The office building is occupied by ******************* and two other tenants, who are unrelated to Taxpayer and Corporation.

You describe the relationship between Taxpayer and Corporation as follows. Pursuant to a service agreement between Taxpayer and Corporation, Taxpayer leases roof space on the building from Corporation and then sells the power or net metering credits that the PV system produces to Corporation under a Power Purchase Agreement (PPA). While Corporation receives 100% of the net metering credits for the power produced from the PV system, it does not consume 100% of the power. The other two tenants in the building use the remainder of the power. Taxpayer bills each tenant individually. The breakdown of usage is as follows: Corporation accounts for approximately 63% of utility usage. One tenant accounts for approximately 15% of utility usage and the other tenant accounts for approximately 22% of utility usage. The system supplies approximately 20% of the total needs of the building.

During times of underconsumption by the office building, power may be fed via utility lines into the electrical grid (mains) to be used by other consumers. Since there is no way to actually store any excess power produced, the power must be and is consumed as it is produced. At the time of this ruling request, it is unclear whether the site will actually push any excess power out to the utility grid during "off periods" such as weekends or holidays.

II. ISSUE

Are Taxpayer's purchases of the PV system and machinery used to construct the PV system exempt from Massachusetts sales tax under the clause in G.L. c. 64H, § 6(s) exempting "machinery, or replacement parts thereof, used directly and exclusively in . . . the furnishing of gas, water, steam or electricity when delivered to consumers through mains, lines or pipes?"

III. RULING

For reasons set forth below, we rule that Taxpayer's purchase of the PV system is exempt from sales tax as machinery used directly and exclusively in the furnishing of gas, water, steam or electricity when delivered to consumers through mains, lines, or pipes. However, purchases of any other machinery used in the construction of the PV system that does not become a part of the integrated and synchronized system that furnishes the electricity to consumers are not exempt under this clause of G.L. c. 64H, § 6(s).

IV. DISCUSSION

Massachusetts imposes a 6.25% sales tax on all retail sales, which include rentals, of tangible personal property, in Massachusetts, unless otherwise exempt. See G.L. c. 64H, § 2. A complementary use tax is imposed on tangible personal property purchased for storage, use or consumption in Massachusetts, unless otherwise exempt. See G.L. c. 64I, § 2.

The exemptions from sales tax are found in G.L. c. 64H, § 6. Section 6(s) exempts, in relevant part, "sales of machinery, or replacement parts thereof used directly and exclusively in. . . the furnishing of gas, water, steam or electricity when delivered to consumers through mains, lines or pipes." In order for this clause ("the furnishing clause") to apply, the PV system must meet all of the following requirements: It must be 1) machinery; 2) used directly and exclusively; 3) in the furnishing of gas, water, steam or electricity; 4) when delivered to consumers; 5) through mains, lines, or pipes. We briefly examine each requirement below.

1. Machinery

For purposes of G.L. c. 64H, § 6(s), the Massachusetts Supreme Judicial Court has defined "machinery" as "any combination of mechanical means designed to work together so as to effect a given end." Warner Amex Cable v. Broad of Assessors, 396 Mass. 239, 242 (1985). The Massachusetts Appellate Tax Board has defined ""machinery" as:

A mechanical, electrical or electronic device designed to be used and which is used in manufacturing, converting or processing tangible personal property to be sold. It includes not only the basic unit but also any adjunct or attachment necessary for the basic unit to accomplish its intended function. It also includes all devices used or required to control, regulate or operate a piece of machinery, provided such devices are directly connected with or are an integral part of the machinery and are used exclusively for the purposes mentioned.

Western Electric Co., Inc. v. Commissioner of Revenue, A.T.B. Docket No. 113779 (1984).

The Commissioner has issued two recent rulings applying this analysis to fact patterns somewhat analogous to the facts you present. See Letter Rulings 10-4 (Sales Tax Exemption for Anaerobic Digestion Systems) and10-3 (Sales Tax on Machinery Used to Construct a Wind Turbine). In Letter Ruling 10-3, the Department examined the same clause of G.L. c. 64H that is at issue here and concluded that the sale of certain machinery used in the construction of a wind turbine project ( i.e., the wind turbine, a tower and its components, as well as its supporting foundation), qualified as machinery that was directly and exclusively used in furnishing electricity that is delivered to consumers through mains, lines, or pipes. In Letter Ruling 10-4, the Commissioner concluded that all of the items comprising an anaerobic digestion system also fell within the definition of machinery which was used directly and exclusively in two separately exempt functions. However, for reasons outlined in those rulings and prior authorities cited therein, we also concluded that sales of any other machinery used in the construction of the exempt machinery were not exempt from sales tax under G.L. c. 64H, § 6(s) "unless such machinery becomes a part of the integrated and synchronized system that furnishes the electricity to consumers."

We conclude here that the PV system at issue qualifies as "machinery" under the above analyses. Any other machinery used in the construction of the PV system does not qualify unless it is part of the integrated and synchronized system that furnishes the electricity to consumers.

2. "Directly and exclusively"

The Commissioner has previously discussed the "directly and exclusively" requirement under various clauses of G.L. c. 64H, §§ 6(r) and (s) in a number of public written statements. See, e.g., Research and Development regulation, 830 CMR 64H.6.4 (9)(c); Letter Rulings 10-4 and 05-02 (Water Desalination Plant ); Directive 99-8 (Cranberry Growers-Sales and Use Taxes on Equipment Used in Production ). Without repeating the analysis here, we conclude that based on the facts stated by the Taxpayer, the PV system meets this requirement of the exemption because it is used directly and solely to furnish electricity in the manner exempted by "the furnishing clause" of G.L. c. 64H, § 6(s), as further discussed below.

3. The "furnishing clause" of G.L. c. 64H, § 6(s)

In evaluating the part of G.L. c. 64H, § 6(r), (s) that exempts materials and machinery that "are used directly and exclusively in . . . the furnishing of gas, water, steam or electricity when delivered to consumers through mains, lines or pipes. . ." the Commissioner has noted that this part of the exemption is less restrictive than the clause of section 6(s) exempting items used "in an industrial plant in the actual manufacture of tangible personal property to be sold." See, e.g., Letter Ruling 05-2. Compare Lowell Gas Co. v. Commissioner of Corporations and Taxations, 377 Mass. 255, 259 (1979) (finding that the furnishing of gas denotes operations that are distinct from such terms as "manufacturing" and "production", used elsewhere in the same exemptions; the term "furnishing" includes the distribution function) with Associated Testing Laboratories, Inc. v. Commissioner of Revenue, 429 Mass. 628, 630 (1999) (delineating the five elements of the "manufacturing" piece of the exemption, including that the exempt items must be used in actual manufacture, conversion, or processing).

The Commissioner has issued a number of letter rulings that have addressed whether purchases of certain items of tangible personal property and machinery qualified for exemption under the "furnishing clause" of G.L. c. 64H, § 6(s). See, e.g., Letter Rulings 10-4; 10-3; 05-2; 83-25 (Transformer and Emergency Generators; Utility Corporation and Electric Company Defined); and 79-6 (Machinery Used to Furnish Electricity).

For example, in Letter Ruling 79-6, the Department examined whether purchases of certain machinery by a contractor who was engaged by the purchaser to build a hydro-electric plant were subject to tax. Upon completion of the project, the entire electrical output was to be sold by the purchaser to a power company. The power company resold the electricity to retail utilities which, in turn, delivered it to ultimate consumers. Based on those facts, the Commissioner ruled that the sale of machinery used in the furnishing of electricity was exempt from sales tax under the clause exempting sales of machinery used in the furnishing of electricity when delivered to consumers through mains, lines, or pipes, and was also exempt from use tax under G.L. c. 64I, § 7(b).

4. "When delivered to consumers"

A number of authorities have addressed the general applicability of the "furnishing clause" to certain transactions. None of these rulings has focused specifically on the meaning of the term "consumers" as used in this clause. Nevertheless, in Letter Ruling 10-3, the Commissioner found that the exemption applied where 5% of the electricity was sold directly to a particular consumer, while the remainder was to be sold to a local utility for use by other consumers. In Letter Ruling 10-4, it was not clear what portion would be sold to the power grid. The Commissioner nonetheless indicated that the machinery at issue qualified for exemption "because [emphasis added] a portion of the electricity generated is sold to the power grid which delivers it to consumers other than the taxpayer."

In contrast to the facts present in Letter Rulings 10-3 and 10-4, where at least some portion of the electricity generated was transferred to a local utility grid, Taxpayer here currently sells the electricity generated by its machinery predominantly to a building owner and other tenants located in the building. Letter Ruling 83-25 addressed the applicability of the furnishing clause under somewhat similar facts. There, the owner of a building purchased a transformer and had it installed in the building because he purchased electricity from the local utility at a high voltage. The transformer reduced the voltage of the electricity passing through it to the proper voltage for use by the building's tenants. The owner also purchased an emergency generator and installed it therein to supply power for the operation of elevators, water pumps, emergency lights and alarms in the event of an interruption of regular electric service.

The Commissioner ruled that "[t]his exemption applies to qualifying purchases of machinery by suppliers of electricity to consumers, but does not apply to machinery purchased by a consumer." Id. The Commissioner then ruled that sales of step-down transformers and emergency generators used to supply power to a commercial or residential building were subject to tax, unless the transformers and generators were to be used exclusively to provide electricity to be sold to the building's tenants.

Although Letter Ruling 83-25 did not expressly discuss the meaning of the term "consumers," implicit in its conclusion is that the tenants of the building qualified as "consumers". Similarly, here, we conclude that the requirement that electricity be delivered to "consumers" is met, whether or not any excess electricity is pushed out to the grid for use by any other consumers. Our conclusion is supported by the fact that Taxpayer separately bills Corporation and its other tenants for the electricity they use, Taxpayer is unrelated to Corporation and the other building tenants, and Taxpayer is regularly engaged in the business of installing and operating PV systems and selling the power generated by those systems to its customers.

5. " Through mains, lines, or pipes"

With respect to the requirement that electricity is exempt when delivered to consumers "through mains, lines, or pipes," the Massachusetts Supreme Judicial Court (SJC) has recognized that this phrase is intended to distinguish entities that employ main, line or pipe delivery systems from those that use other delivery systems, such as bottling systems. See Lowell Gas Company et al v.Commissioner of Corporations & Taxation, 377 Mass.255,259 (1979). As long as electricity is ultimately delivered to consumers through mains, lines or pipes, as opposed to some other delivery system, the statutory requirement is satisfied." Id. See also Letter Ruling 05-2, citing Tennessee Gas Pipeline Co. v. Commissioner of Revenue, A.T.B. Docket Nos.171876-171879 and 194866-194869 (1998). We conclude that is the case here.

In Lowell Gas, the SJC examined the scope of the "mains, lines, or pipes" requirement. Acknowledging that the scope of sales and use tax exemptions as related to gas distribution system components was somewhat uncertain, the Court expressly indicated that there is no requirement that this exemption be interpreted narrowly. See Lowell Gas at 259 and cases cited therein. Thus, in view of this decision and our conclusion in Letter Ruling 83-25, we conclude that the electricity supplied to the Corporation and the other tenants of the building meets the requirement that it be delivered through mains, lines or pipes, regardless of whether it is delivered through the lines of a larger electricity furnishing system such as one operated by a utility or directly by the Taxpayer through the PV system.

V. CONCLUSION

We conclude that the PV system purchased by Taxpayer qualifies for exemption under G.L. c. 64H, § 6(s) as machinery that is used directly and exclusively in furnishing electricity that is delivered to consumers through mains, lines, or pipes. However, purchases of any other machinery by Taxpayer used to construct the PV system that do not become a part of the integrated and synchronized system that furnishes the electricity to consumers are not exempt under this provision. Taxpayer must collect sales tax on sales of electricity to its customers, unless another exemption applies, such as G.L. c. 64H, § 6(e) exempting sales to 501(c)(3) organizations.

Very truly yours,

/s/Navjeet K. Bal

Navjeet K. Bal
Commissioner of Revenue

NKB:MTF:wrd

LR 11-7