Ruling 96-6, Sales and Use Taxes / Gas and Electricity Used in the Fabrication of a Finished Product to be Sold

FACTS:

A company engaged in the fabrication of finished products to be sold and in the research and development of new products (the "Company") has a facility consisting of an administrative office building, a production building, several research and development buildings and a power plant. The local electric utility company (the "Electric Utility") delivers all the facility's electricity to a main switch gear at the power plant. The Company then distributes the electricity to the various areas within the facility. The Electric Utility has one meter at the facility, with which it measures the entire electricity usage of the Company. The Company measures its internal electricity usage with 22 of its own meters located at substations throughout the facility. The local gas utility company (the "Gas Utility") delivers all the facility's natural gas to the Company's power plant, where it is used by the Company to produce energy in the form of high temperature hot water, which is then piped by the Company from its power plant to the buildings of the facility, where it is used to heat them. The Gas Utility has one meter at the facility, with which it measures the entire gas usage of the Company. The Company uses its own meters to monitor gas usage at each of its boilers and also to measure high temperature hot water usage at each building of the facility.

Based on its total 1995 usage, the Company calculates that more than 83.5% of the electricity it purchases from the Electric Utility and more than 87% of the gas it purchases from the Gas Utility is used in space devoted to either fabrication or research and development. The remainder of the electricity and gas is consumed in the administrative offices and in areas of the production building not related to fabrication. The breakdown of electricity usage is approximately as follows: 25% is used in the portion of the production building that is devoted to the fabrication of finished products to be sold, 58.5% is used in the research and development buildings, 15.5% is used in the administrative office building and 1% is used in the portion of the production building devoted to activities other than the fabrication of finished products to be sold. The breakdown of gas usage is approximately as follows: 28% is used in the portion of the production building that is devoted to the fabrication of finished products to be sold, 59% is used in the research and development buildings, 12% is used in the administrative office building and 1% is used in the portion of the production building devoted to activities other than the fabrication of finished products to be sold.

ISSUE:

Whether the electricity and gas purchased by the Company are exempt from sales and use taxes under Conn. Gen. Stat. §12-412(3)(A)(ii) because they are used in the fabrication of finished products to be sold at a "metered building, location or premise at which not less than seventy-five percent of the gas . . . or electricity consumed" is used for such fabrication.

DISCUSSION:

Conn. Gen. Stat. §12-412(3)(A) provides an exemption from sales and use taxes for the sale of gas, including bottled gas, and electricity when delivered to consumers through mains, lines, pipes or bottles for use . . . (ii) directly in agricultural production, fabrication of a finished product to be sold or an industrial manufacturing plant, provided the exemption under this subdivision (ii) shall only be allowed with respect to a metered building, location or premise at which not less than seventy-five per cent of the gas, including bottled gas, or electricity consumed at such metered building, location or premise is used for the purpose of such production, fabrication or manufacturing.

The Department has issued additional guidance on its interpretation of this exemption in PS 94(3.2), Gas, Electricity and Heating Fuel Purchased for Residential Use or for Use in Agricultural Production, in the Fabrication of Finished Products to be Sold, or in an Industrial Manufacturing Plant. On page 1 of 4 of the Policy Statement, under the heading entitled "Buildings, Locations or Premises With Mixed Uses," is the following provision:

When a building, location or premises is served by a single meter and is used for both exempt and non-exempt purposes, the purchaser must establish either (i) that 75% or more of the gas, electricity or heating fuel measured by such meter is used in a location at which agricultural production, fabrication of a finished product to be sold, or production in an industrial manufacturing plant takes place; or (ii) that 75% or more of the gas, electricity or heating fuel measured by such meter is used directly in the agricultural production, fabrication or manufacturing production process itself.

The Policy Statement then provides examples which illustrate that the 75% threshold may be met in two ways: if either 75% or more of the electricity is used in areas devoted entirely to agricultural production, fabrication or manufacturing, or 75% or more of the electricity is actually consumed directly for such purposes even if less than 75% of the area is devoted to those purposes. The Policy Statement also states, on page 2 of 4:

Locations used for pre- or post-production purposes, such as storage, or for research and development activities, will be considered part of the "production area" as long as such locations are in the same building, location or premises in which the agricultural production, fabrication or manufacturing activities take place.

According to the facts of this Ruling, the Company uses over 75% of its electricity in areas devoted to fabrication or research and development, and over 75% of its gas to produce high temperature hot water to heat areas devoted to fabrication or research and development. The Electric Utility and the Gas Utility each maintain a single meter for the Company's entire facility. Although the Company maintains a number of meters of its own to monitor and control electricity and gas usage throughout the facility, the meters referred to in Conn. Gen. Stat. §12-412(3)(A) are only those maintained by the utilities, used to measure retail sales of gas and electricity.

The remaining issue to be examined is whether the Company's facility, consisting as it does of several separate buildings, qualifies as either a "building, location or premise" as those terms are used in the exemption. Obviously, it is not a "building," but a collection of buildings. However, it is a "location," under the dictionary definition of that word, "[a] place where something is or could be located; site . . . ." The American Heritage Dictionary 739 (Second college ed. 1982). The Company's facility is also a "premises," which is defined as "[land and the buildings upon it." Id. at 978.* Therefore, the Company's purchases of gas and electricity qualify for the exemption.

RULING:

The electricity and gas purchased by the Company are exempt from sales and use taxes under Conn. Gen. Stat. §12-412(3)(A)(ii), and will remain so as long as each utility continues to have a single meter at the facility and the Company continues to use more than 75% of the gas and electricity measured by those meters in areas devoted to fabrication of finished products to be sold and research and development of new products.

LEGAL DIVISION

JULY 2, 1996

* "Premises" is a noun that ends with the letter "s" in both the singular and plural. Conn. Gen. Stat. §12-412(3)(A) incorrectly uses the word "premise," which means "[a] proposition upon which an argument is based or from which a conclusion is drawn." The American Heritage Dictionary 978 (Second college ed. 1982).