State Tax Developments for Energy & Resources

State tax laws are constantly in flux, particularly for taxpayers in the energy and resources industries. From the taxability of extraction equipment to revamped energy tax credits, these changes have wide-reaching implications for businesses located within the state's borders as well as those outside. This legal update outlines some of the recent developments in state tax that affect taxpayers in the energy and resources sectors.

Petroleum extraction equipment not exempt from sales tax in Texas

Texas imposes sales tax on all sales of tangible personal property in Texas, though an exemption exists for manufacturing equipment that "directly makes or causes a chemical or physical change to ... the product being manufactured, processed or fabricated for ultimate sale." Many other states rely on similar tests to determine whether equipment is used in manufacturing and qualifies for exemption.

In Southwest Royalties, Inc. v. Combs, the court found that equipment used by a taxpayer to bring petroleum to the surface did not qualify for a manufacturing exemption from Texas sales tax. The Texas court found that petroleum undergoes a physical change during the oil and gas recovery process, but that the physical change in the petroleum was caused by changes in temperature and pressure. Because the taxpayer's equipment only indirectly caused the changes, the equipment did not qualify for exemption from sales tax.

Wisconsin explains Biodiesel Fuel Production Credit

The Wisconsin Department of Revenue recently issued a notice explaining the biodiesel fuel production credit which applies to corporate franchise and income taxes. The credit is available for taxable years beginning after December 31, 2011, and before January 1, 2015, and is equal to 10 cents per gallons of biodiesel fuel produced in Wisconsin, up to $1 million per year. To qualify for the credit, the taxpayer must produce at least 2.5 million gallons of biodiesel fuel in Wisconsin during the taxable year, and the fuel produced must be pure biodiesel without any petroleum, additives or foreign materials.

Idaho Mine License Tax expanded to include more minerals

The Idaho State Tax Commission recently expanded its definition of valuable mineral, the mining of which is subject to Idaho's 1 percent mine license tax. The list previously included gold, silver, copper, lead, zinc, coal, phosphate and limestone, but is now expanded to include calcium carbonate, garnet, granite, pumice, quartzite, scoria, shale, slate, ornamental stone and any other substance that is not gaseous or liquid in its natural state that makes real property more valuable by reason of its presence. However, sand and gravel are not included in the expanded definition.

Florida reinstates renewable energy credits and sales tax exemptions

The Florida legislature recently reinstated the lapsed income tax credits for renewable energy technology investments and renewable energy production. The investment credit allows taxpayers to offset costs incurred in the production, storage and distribution of renewable fuels like biodiesel and ethanol, while the production credit is available for facilities that generate and sell electricity from renewable energy and is set at one cent per kilowatt-hour. The credits are limited to $1 million per taxpayer and $5 million to $10 million for all taxpayers per fiscal year. The legislation also provided for a sales and use tax exemption for renewable energy machinery and equipment, particularly equipment used in the distribution of renewable fuels. The exemption, however, is limited to $1 million for all taxpayers per fiscal year.

Utah revamps alternative energy development tax credits

The Utah legislature recently repealed its Alternative Energy Development Act and replaced it with the Alternative Energy Development Tax Credit Act and the Alternative Energy Manufacturing Tax Credit Act. Under the new acts, certain alternative energy producers that enter agreements with the Governor's Office of Economic Development may claim corporate income tax credits for investment in the state. An alternative energy project is eligible for the credit if it involves utility-scale alternative energy generation or extraction of alternative fuels. Further, the producer must certify that the project will generate new state revenues and will produce at least two megawatts of electricity or 1,000 barrels per day of a crude oil equivalent.

Alabama reinstates Coal Severance Tax retroactively

After allowing its coal severance tax to expire in October 2011, the Alabama legislature has reinstated the tax. The tax is imposed at a rate of $0.135 per ton of coal severed in Alabama. The legislation also imposes the tax retroactively to all periods since October 1, 2011. A report from each coal producer indicating the number of tons of coal severed for each month from October 2011 through July 2012 must be remitted with the retroactive tax payment by August 20, 2012.

Kentucky Utility Gross Receipts License Tax applies to any entity furnishing utility services

The Kentucky Court of Appeals recently addressed whether Kentucky's utility gross receipts license tax applies to any entity furnishing utility services. In Dept. of Revenue v. St. Joseph Health System, Inc., et al., the taxpayer was a broker furnishing natural gas to a hospital corporation. A lower court found that because the broker was not regulated as a public utility, the legal incidence of the tax did not fall to the broker. On appeal, the Court held that "any entity, whether regulated as a public utility or not, that furnishes services ... derives utility gross receipts from the furnishing of those utility services and thus, is subject to the imposition of the utility tax." Therefore, the natural gas broker was liable for the tax.

Georgia includes alternative energy manufacturers in tax credits

The Georgia General Assembly recently amended several income tax credits to include manufacturers of alternative energy products. Businesses involved in the manufacturing of alternative energy products for use in solar, wind, battery, bioenergy, biofuel and electric vehicles are now explicitly included in the definition of business enterprises eligible for tax credits related to increased port activity and job creation in certain counties and census tracts.