Alabama – Taxpayer Did Not Qualify for the Pollution Control Facility Exemption

SALT Report 1884 – The Alabama Department of Revenue issued a Revenue Ruling regarding whether a coal refining plant qualified as a pollution control facility.  Specifically at issue, was a foreign Taxpayer’s proposed business venture in the U.S. that involved using new technologies to turn low grade western coals into low moisture, high Btu value fuel.

Through the use of new technologies, the Taxpayer’s coal refinement process was designed to produce coal that increases the energy efficiency generated by the burning of coal while at the same time reducing the air and water pollution associated with coal processing.

To implement this, the Taxpayer, proposed to construct a plant that would be used to perform various tests to determine whether the coal refinement technology could generate the desired outcome.  Upon completion of the plant, the facility would be used to refine the coal through the processes of dehydration, pyrolysis, dry distillation, and cooling of the raw coal.  Initially, the plant’s production would be limited to 30 tons of coal per day; therefore, it would not be operating at a commercial level.

The Taxpayer requested guidance as to whether the proposed coal refinement plant qualified as a structure “built primarily for the control, reduction, or elimination of air and water pollution” and the applicable exemption from sales and use tax provided in Alabama Codes §§40-23-4(a)(16) and 40-23-62(18).

The Department determined that the Taxpayer’s coal refinement plant did not qualify as a pollution control facility because the exemption does not apply to property acquired and used as part of a profit-oriented business, even if the property reduces or controls pollution. The exemption only applies to the additional costs of buying non-productive equipment necessary to comply with pollution laws.

Further, the Taxpayer implied that the plant was to be used on an untested technology that was experimental in nature.  Therefore, the Taxpayer could not guarantee that the technology would increase energy efficiency or reduce pollution.  Alabama law states that qualifying structures must be built primarily for the control, reduction, or elimination of air and water pollution.

Further, the regulation requires that any profits derived from the goods or services produced from one of these facilities must be secondary to the primary purpose of pollution control.  In the Taxpayer’s case, the coal refining plant was intended to be the source from which the Taxpayer’s profits would be derived.

Based on the above facts, the Department ruled that the Taxpayer’s proposed facility did not qualify as a “pollution control facility” and was not exempt from sales and use taxes.

For Further Information:

Alabama Department of Revenue – Revenue Ruling No. 2012-001