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Sales and Use Tax
October 25, 2016
You request a letter ruling on behalf of xxxxxxxxxxxxx ("Taxpayer") regarding the Massachusetts sales/use tax treatment under G.L. c. 64H to purchases of various items of pollution control equipment to be used in connection with the construction of a peak electric generating unit at the existing xxxxxxxx Generating Station located in xxxxxxxxxxx, Massachusetts. You state the relevant facts as follows:
A. Project Description
Taxpayer is proposing to construct a new, highly efficient, fast-starting, approximately 350 megawatt peak electric generating unit (the "Project") at the existing xxxxxxx Generating Station (the "Station"), in xxxxxxx, Massachusetts. There is an existing, aging, electric power generating plant at the site where the Project is to be built. The Project will supplement the power produced by the existing plant and other sources of electricity that feed into the electric grid. The sole purpose and function of the Project will be to furnish electricity to customers.
The Project will use a rotating generator, similar to those used in conventional electric plants, to generate the electricity. The force causing the generator to rotate will be the exhaust from a gas turbine (very similar to a jet airplane engine) that will be bolted to the generator. The fuel for the gas turbine will generally be natural gas, but liquid fuel can also be used when natural gas supplies are unavailable. The exhaust stream produced by the gas turbine will flow over fan blades attached to the generator causing the generator to rotate, thereby producing electricity by induction. The electricity created by the generator will, after passing through a transformer to increase its voltage, be fed directly into the electric grid and from there to public customers. Because the exhaust from the gas turbine contains pollutants (from the process of combusting the fuel), the Project will not be permitted to operate and produce electricity unless it is designed and operated so as to reduce those pollutants to an acceptable level in accordance with federal and state requirements.B. Description of Property for which exemption is sought
There are seven items of materials or equipment for which exemption from sales tax is being sought, as follows:
1. Dry-low-NOx combustor system. This is a particular type of burner, or "combustor," including a combustion chamber and various nozzles and related equipment that feed the air and fuel mixture into the combustion chamber. It is located within the turbine, and is designed specifically to reduce the emission of the pollutant, nitrogen oxide, from the turbine's exhaust. It operates immediately prior to or contemporaneously with the stage of the process during which the fuel is burned creating the hot exhaust gases that turn the generator.
2. Selective Catalytic Reduction system (“SCR”). This system operates on the exhaust stream to remove nitrogen oxide that remains after the combustion process. The system includes catalysts that react with the exhaust and with ammonia that is injected at this stage to convert the nitrogen oxide to harmless nitrogen gas and water. The SCR operates on the exhaust gases after they have passed over the fan blades which spin the generator, but before these gases enter the exhaust stack. The SCR system is connected in such a way that it receives the exhaust gases directly from the turbine.
3. Ammonia Injection Skid. This is the specific piece of equipment that takes the aqueous ammonia (ammonia dissolved in water) from the tank in which it is stored and injects it directly into the SCR so that it can react with the catalysts and the exhaust gases to reduce the remaining level of nitrogen oxide as described in the paragraph immediately above.
4. Oxidation Catalyst System. This system is necessary to control the pollutants, carbon monoxide and "volatile organic compounds" ("VOC"). These pollutants are the result of incomplete burning of the fuel and are part of the exhaust gases of the turbine. This system will be physically located immediately following the SCR system within the same enclosure. As the exhaust passes over the catalyst with the oxidation catalyst system, the carbon monoxide and VOC will be oxidized to form carbon dioxide and water.
5. Dilution Air System for the SCR and oxidation catalyst systems. These are fans and related equipment that will blow additional air into the SCR housing to cool the exhaust to temperatures low enough for the SCR and oxidation catalyst systems to operate property.
6. Exhaust Stack. The exhaust stack is, like a chimney on a fireplace, necessary to carry the remaining exhaust gases, after processing by the SCR and oxidation catalyst systems into the air above so that they will not interfere with the street-level environment.
7. Aqueous ammonia. This is used and consumed in the process described above in connection with the SCR system.
III. Rulings Requested
1. Taxpayer requests a ruling that each of the items of tangible personal property described in section II. B, subsections (1) through (6) (the Pollution Control Equipment), is exempt from Massachusetts sales and use tax under the clause in G.L. c. 64H § 6(s), exempting machinery used directly and exclusively in the furnishing of electricity when delivered to consumers through mains, lines or pipes.
2. Taxpayer requests a ruling that the sale to Taxpayer of the aqueous ammonia, described in section II. B subsection (7), is exempt from Massachusetts sales and use tax under the clause in G.L. c. 64H § 6(r), exempting materials, tools and fuel used and consumed directly and exclusively in the furnishing of electricity when delivered to consumers through mains, lines or pipes.
For reasons discussed below, we rule as follows:
1. The sale to Taxpayer of the items enumerated in section II. B, subsections (1)-(6) qualify for exemption as machinery used directly and exclusively in the furnishing of electricity when delivered to consumers through mains, lines, or pipes under G.L. c. 64H, § 6(s).
2. The sale to Taxpayer of aqueous ammonia listed in section II. B, subsection (7) qualifies for exemption as a material, tool, or fuel consumed and used directly and exclusively in the furnishing of electricity when delivered to consumers through mains, lines or pipes under G.L. c. 64H, § 6(r), provided that it meets the statutory requirements that its normal useful life is less than one year, or its cost is allowable as an ordinary and necessary business expense for federal income tax purposes.
Massachusetts imposes a 6.25% sales tax on all retail sales 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 provided in G.L. c. 64H, § 6. The exemptions from the use tax are found in G.L. c. 64I, § 7. In general, items exempt from sales tax under G.L. c. 64H, § 6 are also exempt from use tax under G.L. c. 64I, § 7. See G.L. c. 64H, § 7(b). In this ruling, we consider the exemption clauses in G.L. c. 64H, §§ 6(r) and (s) relating to sales of tangible personal property consumed and/or used directly and exclusively in the furnishing of electricity to consumers through mains, lines or pipes (the "furnishing clauses").A. Statutory standard for exemption under the furnishing clause of G.L. c. 64H, § 6(s)
Under the furnishing clause of G.L. c. 64H, § 6(s), the pollution control equipment 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. The Massachusetts Supreme Judicial Court (“SJC”) and the Commissioner have addressed each of these requirements under various factual scenarios. See, e.g., Lowell Gas Co. v. Commissioner of Corps. & Taxation, 377 Mass. 255 (1979); Letter Ruling 11-7 (Sales Tax on Photovoltaic Solar Energy System). We briefly review these requirements.
For purposes of G.L. c. 64H, § 6(s), the SJC 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). Machinery has also been defined to include not only the basic unit but also any adjunct or attachment necessary to the basic unit to accomplish its intended function. It also includes all devices 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 applied this analysis to various fact patterns under the furnishing clause of G.L. c. 64H, § 6(s). 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. In Letter Ruling 10-3, the Department 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. However, 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.” Id.  We conclude that the items listed in section II B, subsections (1) through (6) qualify as exempt machinery for purposes of the furnishing clause.
2. "used directly and exclusively"
The Commissioner has previously addressed the “directly and exclusively” requirement under various clauses of G.L. c. 64H, §§ 6(r) and (s) in a number of public written statements.  As the Commissioner has noted, "[i]t is not practical to divide a generating plant into ‘distinct’ stages. It was not built that way, and it does not operate that way. The words ‘directly and exclusively’ should not be construed to require the division into theoretically distinct stages of what is in fact continuous and indivisible." See Letter Ruling 05-2, and the authorities cited therein. We conclude that based on the facts stated and an analysis of the operations of the Project as a whole, the equipment meets this requirement of the exemption because it is used directly and exclusively in the overall process of furnishing electricity to consumers in the manner exempted by “the furnishing clause” of G.L. c. 64H, § 6(s), as further discussed below.
3. "furnishing of gas, water, steam or electricity"
In evaluating whether an item of property is exempt from sales tax under the furnishing clauses of G.L. c. 64H, § 6(r) and (s), the SJC has not required that the item itself actually furnish the gas, water, steam or electricity. Instead, the SJC in Lowell Gas applied what it described as the functional approach set forth in Niagara Mohawk Power Corp. v. Wanamaker, 286 App. Div. (N.Y.) 446, 449 (aff'd) 2 N.Y. 2d 764 (1955) and Courier Citizen Co. v. Commissioner of Corps. & Taxation, 358 Mass. 563, 579 (1971), which focuses in part on the following question: "Does the disputed item operate harmoniously with the admittedly exempt machinery to make an integrated and synchronized system?" Lowell Gas, 377 Mass. at 260. Here, we conclude that the pollution control equipment at issue operates harmoniously with the exempt machinery to make an integrated and synchronized system that is being used in furnishing electricity.
4. "when delivered to consumers"
The Commissioner has addressed this requirement in a number of letter rulings. See generally, LR 83-85 (Transformers and Emergency Generators: Utility Corporation and Electric Company Defined);  10-3; 10-4; 11-7. Most recently, in Letter Ruling 11-7, the Commissioner ruled that a photovoltaic solar energy system qualified as machinery used directly and exclusively in the furnishing of electricity when delivered to consumers through mains, lines, or pipes. Based on the facts presented in that letter ruling, we concluded that the equipment at issue met the requirement that the electricity must be delivered to "consumers", rather than to a single consumer. Here, we conclude that the Project’s operations meet the requirement of furnishing electricity to consumers.
5. "through mains, lines, or pipes"
The SJC has recognized that the phrase "through mains, lines, or pipes" 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, 377 Mass. at 259. ”As long as [gas] 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.B. Statutory standard for exemption under the furnishing clause of G.L. c. 64H, § 6(r)
The furnishing clause in G.L. c. 64H, § 6(r), exempts materials, tools, and fuel consumed and used directly and exclusively in the furnishing of electricity when delivered to consumers through mains line or pipes, provided that the materials, tools and fuel have a normal useful life of less than one year, or its cost is allowable as an ordinary and necessary business expense for federal income tax purposes. With respect to the aqueous ammonia, based on the facts presented we conclude that it qualifies for exemption under § 6(r) as a material, tool or fuel that is consumed and used directly and exclusively in the furnishing of electricity to consumers through mains, lines or pipes. Provided that its normal useful life is less than one year or that its cost is allowable as an ordinary and necessary business expense for federal income tax purposes, purchases of the aqueous ammonia are exempt from sales tax.
For the foregoing reasons, we rule that the items described in Section II B, 1 through 6 are exempt as machinery that is used directly and exclusively as part of the integrated and synchronized system that furnishes electricity to consumers through mains, lines, or pipes. We also rule that the aqueous ammonia described in Section II B.7 is exempt from sales/use tax as a material, tool, or fuel that is consumed and used in the furnishing of electricity to consumers through mains, lines, or pipes, provided that its normal useful life is less than one year, or its cost is allowable as an ordinary and necessary business expense for federal income tax purposes.
Very truly yours,
/s/Michael J. Heffernan
Michael J. Heffernan
Commissioner of Revenue
 The SJC and the Commissioner have addressed the sales tax treatment of pollution control equipment under the "manufacturing clauses" of G.L. c. 64H, §§ 6(r) and (s). See Commissioner of Revenue v. V.H. Blackinton & Co., 420 Mass. 259 (1995); Letter Rulings 01-6 (Sales Tax Treatment of Certain Clean Room Equipment); 83-89 (Pollution Control and Safety Equipment Purchased by Manufacturer); Directive 87-07 (Pollution Control Equipment Used in Manufacturing in an Industrial Plant). These clauses, which exempt sales of materials, tools, fuel and machinery used… directly and exclusively in the actual manufacture of tangible personal property to be sold, contain different, stricter requirements for exemption. Here, the applicability of the "manufacturing clauses" is not at issue. Thus, the analysis in Blackinton and Letter Ruling 01-6 is not directly on point with respect to the analysis and conclusion in this ruling.
 See also Letter Rulings 10-4 (Sales Tax Exemption for Anaerobic Digestion Systems), 10-3 (Sales Tax on Machinery Used to Construct a Wind Turbine); 05-2 (Water Desalination Plant … Sales and Use Tax Issues); 83-25 (Transformers and Emergency Generators); 79-6 (Machinery Used to Furnish Electricity); and the authorities cited therein.
 See, e.g., Letter Rulings 11-7, 10-3, 10-4, 06-5, and 05-2, and the authorities cited therein.
 While the pollution control equipment may be legally required as part of the taxpayer’s overall manufacturing and electricity generation operations, legal necessity alone is insufficient for purposes of qualifying for exemption under G.L. c. 64H, §§ 6(r) and (s). Only if all of the particular requirements of these exemption provisions are met do the materials and machinery qualify for exemption.
 See, e.g., Research and Development regulation, 830 CMR 64H.6.4(9)(c); Letter Rulings 10-4 and 05-02; Directive 99-8 (Cranberry Growers-Sales and Use Taxes on Equipment Used in Production).
 The SJC in Lowell Gas, 377 Mass. at 260, acknowledged that "[w]hile the courts in Niagara Mohawk Power Corp. and Courier Citizen Co. were interpreting provisions exempting from sales tax equipment used in production, and manufacturing, respectively, the functional analysis employed in those cases for determining which items warranted exemption is no less applicable to the furnishing clause.” Lowell Gas, 377 Mass. at 263, footnote 9.
 In Letter Ruling 83-25 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. 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."