Georgia Tax Tribunal Rules that Sales Tax Applies to Electric Utility’s Machinery Used in Transmission & Distribution

In Georgia Power Company v. MacGinnitie, Docket No. Tax-S&UT-1403540 (Ga. Tax Tribunal, Jan. 5, 2015), the Georgia Tax Tribunal held that machinery and equipment used in Georgia Power Company’s (hereinafter “Georgia Power”) electricity transmission and distribution system are subject to Georgia sales & use tax.

Georgia Power filed monthly sales and use tax returns with the Georgia Department of Revenue in 2009 and 2010. Tangible personal property used in the construction, maintenance, and operation of Georgia Power’s transmission and distribution system was treated as taxable on those returns. Georgia Power timely filed claims for refund for sales and use tax paid on those items in December 2012 and February 2013, respectively.  Georgia Power claimed a refund in the amount of $8,176,424 for 2009 and a refund in the amount of $10,269,678 for 2010.

In its claims for refund, Georgia Power took the position that the machinery and equipment used in its transmission and distribution system is exempt from Georgia sales & use tax under the manufacturing exemption in O.C.G.A. § 48-8-3(34) (2009) (recodified as O.C.G.A. §§ 48-8-3.2(a)(3), -(a)(7), -(a)(15), -3.2(b)).  Under O.C.G.A. § 48-8-3(34) machinery or equipment which is “necessary and integral” to the manufacture of tangible personal property in a Georgia manufacturing plant is exempt from Georgia sales & use tax.

The Georgia Department of Revenue denied Georgia Power’s refund claims and Georgia Power filed its refund action with the Georgia Tax Tribunal on July 26, 2013.  The Tax Tribunal considered two key issues in the case.  The first is whether the items included in the claim for refund are used for “manufacturing” electrical energy sold by Georgia Power within the meaning of O.C.G.A. §§ 48-8-3(34) and (34.3).  The second is whether Georgia Power’s electricity generating facilities are a single “manufacturing plant” under the same statute.

Georgia Power and the Georgia Department of Revenue each presented expert testimony discussing the role of the transmission and distribution system in the electricity generation process.  Georgia Power’s expert testified that the transmission and distribution system changes the character of the electrons passed from the generation facility.  The expert also testified that the source of the energy is the electrical generator located at a power plant.

The Georgia Department of Revenue’s expert testified that the movement of electrons from one location to another in response to voltage is how electrical energy is transmitted; the actual electricity generation occurs at the plant.  The Department of Revenue’s expert testified that the transmission and distribution system does not change the amount of electrical energy generated in a plant, but rather it controls how the electrical current is distributed to customers.

Judge Beaudrot reviewed Ga. Comp. R. & Regs. § 560-12-2-.62(2)(h) defining “manufacturing as an operation to change, process, transform, or convert industrial materials by physical or chemical means, into articles of tangible personal property for sale or further manufacturing that have a different form, configuration, utility, composition, or character.”  Judge Beaudrot held that Georgia Power’s manufacturing of electricity is the production of electrical energy, which “begins and ends” at Georgia Power’s generating plants. Judge Beaudrot cited several cases with similar factual circumstances decided in other jurisdictions supporting his conclusion including Niagara Mowhawk Power Corp. v. Wanamaker, 144 N.Y.S. 2d 458 (N.Y. App. Div. 1955), Peoples Gas and Electric Co. v. State Tax Comm’n, 28 N.W. 2d 799 (Iowa 1947), and Utilcorp United Inc. v. Dir. of Revenue, 75 S.W. 3d 725 (Mo. 2001).

Judge Beaudrot also rejected Georgia Power’s argument that its transmission and distribution system covering almost the entire state of Georgia is part of a single manufacturing plant generating electricity. Judge Beaudrot held that while Georgia Power’s transmission and distribution system is “highly integrated” with its generation facilities it is not necessary for the manufacturing of electricity that takes place at the generating plants.  Thus, the Tax Tribunal upheld the Georgia Department of Revenue’s denial of Georgia Power’s claim for refund.

Read the full opinion here:  Georgia Power Company v. MacGinnitie, Docket No. Tax-S&UT-1403540 (Ga. Tax Tribunal, Jan. 5, 2015)

Famous Fridays: Leona Helmsley, Angry Employees Strike Back

Helmsley Photo 1Leona Helmsley became a household name in the 1970’s for her lavish lifestyle and marriage to billionaire hotelier Harry Helmsley.  Perhaps she is best known for disinheriting two grandchildren and leaving $12 million to her Maltese, Trouble, after her death in 2007.  During her lifetime Helmsley was known for her harsh treatment of Helmsley Hotel employees and appearing in ads as the perfectionist “queen” wanting nothing but the best for her guests.  She didn’t just get the “Queen of Mean” nickname by treating her employees poorly; she also sued her son’s estate after his death evicting her daughter-in-law shortly after the funeral.

The Helmsley’s were once among the largest property holders in the United States.  Their property portfolio included the Empire State Building, Helmsley Palace, Hotel St. Moritz and many other hotels and buildings across the world.  Despite their tremendous wealth, the Helmsley’s constantly fought with contractors and vendors over payments.  Their mistreatment of employees and squabbles over bills are the stuff of legend and left prosecutors rife with eager witnesses when it came time for trial.

Helmsley was just as arrogant about her taxes, famously telling her housekeeper: “We don’t pay taxes, only the little people pay taxes.”  Helmsley participated in several schemes to avoid paying millions of dollar in income and sales taxes. 

In 1985, Helmsley testified in front of a grand jury about her elaborate sales tax avoidance scheme with jewelry store, Van Cleef & Arpels.  Attempting to avoid New York sales tax, she worked with Van Cleef & Arpels employees to purchase millions of dollars in jewelry and have it shipped to another state.  Helmsley was granted immunity in exchange for her testimony.

The Helmsley’s also were creative with their approach to income taxes.  In 1983, they purchased Dunnellen Hall, a mansion in Greenwich, Connecticut for $11 million, and proceeded to spend over $8 million remodeling the home.  The renovations included a marble dance floor, a swimming pool enclosure, and a $130,000 sound system.  When they refused to pay for the renovations, the contractors reported Helmsley and testified that she instructed them to bill the renovations to Helmsley Hotels so that she could treat them as business expenses. In 1988, Rudy Giuliani, then U.S. Attorney, indicted Leona and her husband on 188 counts of sales tax fraud, state and federal tax evasion, and extortion.

Helmsley was convicted and sentenced to 16 years in prison.  On appeal, 180 counts of the charges were dismissed and her sentence was reduced.  She ended up spending 18 months in federal prison and paid an $8 million fine.

District Court: Colorado Use Tax is Unconstitutional

In an unusual ruling from a U.S. District Court on a state tax matter, the U.S. District Court for the District of Colorado has struck down as unconstitutional a Colorado statute requiring out-of-state retailers to file information reports on sales made to Colorado customers for which no Colorado sales or use tax was collected. The District Court claimed jurisdiction to hear the claim under 28 USC 1331 (federal question) and gave standing to the Direct Marketing Association (DMA) on behalf of their members who businesses and organizations market products directly to consumers via catalogs, magazine and newspaper advertisements.

On motions for summary judgment, the DMA argued that the Colorado’s use tax reporting requirement discriminates against interstate commerce and places an undue burden on interstate commerce both of which violate the dormant commerce clause of the United State Constitution. The DMA sought a declaratory judgment finding that the Colorado statute was unconstitutional and an injunction preventing enforcement of the statute’s requirements.

The district court, in an order by Judge Blackburn, ruled in favor of the DMA on both claims finding that the Colorado act discriminated against interstate commerce and placed an undue burden on interstate commerce. The court granted both the declaratory and injunctive relief sought by the DMA.

Read the court’s order here:
Direct Marketing Assoc. v. Huber, No. 10-cv-10546-REB-CBS (D.C. Colo., March 30, 2012)