Power Plants and Use Taxes

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Publication April 6, 2017

Arizona said an electric cooperative had to pay use taxes on natural gas and coal purchased from out-of-state suppliers to fuel its power plant.

The coop owns a 605-megawatt gas- and coal-fired power plant in Cochise County called the Apache Generating Station. The electricity generated is sold to coop members and in the general electricity market.

Most states collect sales taxes on “tangible personal property” purchased in state, and they collect use taxes on tangible personal property purchased outside the state and brought into the state for use there. Without use taxes, there would be an incentive to buy everything across state lines.

The coop used to pay use taxes on the fuel, but thought better of it and applied for a refund of use taxes it paid from 2003 through 2010. The state tax department declined to refund the money. The coop sued. It lost in the state tax court. A state appeals court said at the end of March that it agrees use taxes should be paid.

The coop made two arguments, both of which the appeals court rejected.

Purchases for resale are not subject to sales or use taxes in Arizona or in most other states. The coop said it was buying the fuel to resell it in effect to its electricity purchasers. The court said the fuel is not resold but rather is consumed by the coop when generating electricity.

Most states also have sales and use tax exemptions for articles used in “manufacturing.” Generating electricity is usually considered manufacturing. However, the Arizona version of this exemption requires the article “directly enter[] into and become[] an ingredient or component part of” the manufactured item. The court said the fuel is not incorporated into the electricity. It is consumed by the coop.

The case is Arizona Electric Power Cooperative, Inc. v. Arizona Department of Revenue.


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