April 20, 2019

Colorado Court of Appeals: The Purchase of Machinery to Generate Electricity for Sale is Exempt from Taxation because Electricity is Tangible Personal Property

The Colorado Court of Appeals issued its opinion in Public Service Co. of Colorado v. Colorado Dep’t of Revenue on September 15, 2011.

Sales and Use Tax—Electricity—Tangible Personal Property—Manufacturing.

Defendants, the Colorado Department of Revenue and M. Michael Cooke, in her official capacity as executive director of the department (collectively, Department), appealed from the judgment of the trial court reversing the Department’s final determination that plaintiff, Public Service Company of Colorado (taxpayer), was not entitled to a refund of sales and use taxes it paid on the purchase of machinery and machine tools used in the generation and distribution of electricity. The judgment was affirmed.

The Department argued that the district court erred in finding that electricity is tangible personal property and not subject to sales and use taxes. The parties stipulated that electricity is a commodity that is traded as a commodity on futures exchanges. Because electricity falls within one of the regulation’s clearly delineated categories of tangible personal property, the purchase of machinery and machine tools used in the manufacturing or generation of electricity, for sale or profit, is exempt from taxation under the machinery exemption and the enterprise zone machinery exemption.

The Department also argued that the generation of electricity is not manufacturing within the meaning of the sales and use tax statutes and regulations. However, the generation of electricity is manufacturing within the meaning of the sales and use tax statute and regulations, even though neither coal, gas, nor nuclear energy is physically incorporated into the finished product. Therefore, the production of electricity is manufacturing for purposes of the machinery and enterprise zone machinery exemptions.

The Department further contended that the step-up and step-down transformers must be excluded because they are used only for transmission and not for manufacturing, and that manufacturing is limited to a “contiguous plant site.” The manufacture of electricity, however, is not completed until the electricity is in a form usable by the retail customer, which occurs at the last step-down transformer prior to entering the consumer’s meter. Thus, the transformers are a necessary part of the generation or manufacture of electricity for use by the retail customers of the taxpayer for purposes of the machinery and enterprise zone machinery exemptions.

This summary is published here courtesy of The Colorado Lawyer. Other summaries for the Colorado Court of Appeals on September 15, 2011, can be found here.

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