11-10-5r, has been requested regarding the sales tax consequences of the construction and operation of a fluidized bed cogeneration facility in West Virginia. For purposes of this ruling, the following facts were submitted. Taxpayer is a newly formed partnership and has not engaged in business in West Virginia. The partnership was organized to construct, own and operate a cogeneration facility in West Virginia. The proposed cogeneration facility will generate electric power and saleable steam utilizing a fluidized bed coal and coal refuse burning technology. It is anticipated that taxpayer will employ individuals to fulfill various functions incidental to the ownership of the facility and will utilize a contract operator to operate the plant on behalf of the taxpayer. Electric power generated at the facility will be transported to a point in West Virginia and sold to a power company which is a West Virginia public utility. Taxpayer and its partners are not affiliated with the power company. Neither taxpayer or any of its partners holds itself out to be a regulated public utility. Taxpayer and its partners are not regulated by the West Virginia Public Service Commission. Steam generated at the facility will be transported through pipelines to a public institution of higher education and sold to the institution for purposes of heating various buildings belonging to the institution. Taxpayer is not affiliated with the institution and will not sell steam to any party other than the public institution of higher education. Taxpayer's activities regarding the transportation and sale of steam are not regulated by the West Virginia Public Service Commission. Taxpayer proposes to directly purchase from suppliers or manufacturers various items of tangible personal property during the construction of the facility. Such items may include the boiler, the turbine, and property to be integrated into the electric transmission line. Such purchases may be made as early as 1989, although the cogeneration facility will not become operational until at least 1991. Taxpayer requests that the State Tax Department make the following rulings pursuant to W.

Va. Code §

11-10-5r, with respect to the facts as set forth above: 1. Pursuant to West Virginia Code §

11-15-9(v) the taxpayer may during the construction of the facility purchase exempt from the imposition of the West Virginia Consumers Sales and Service Tax tangible personal property and services (other than gasoline or special fuel) both directly or not indirectly used or consumed in its business of generating or producing electric power. 2. Pursuant to West Virginia Code §

11-15-9(g), the taxpayer may during the construction of the facility purchase exempt from the imposition of the West Virginia Consumers Sales and Service Tax tangible personal property and services (other than gasoline and special fuel) directly used or consumed in the activity of manufacturing steam and electric power (by its own employees and/or through the efforts of a contract operator). 3. Pursuant to West Virginia Code §

11-15A-3(a)(2) and (4) any and all purchases by the taxpayer, exempt from Consumers Sales and Service Tax by virtue of West Virginia Code §

11-15-9(v) or §

11­15­9(g), are correspondingly exempt from West Virginia Use Tax. Taxpayer is engaged in two separate business activities in a cogeneration project, the manufacture of electricity and the manufacture of steam. The manufacture of electricity is subject to West Virginia Business and Occupation Tax under the W.

Va. Code §

11-13-2m classification. Production of steam is also a manufacturing activity as manufacturing is defined for purposes of sales tax in W.

Va. Code §

11-15-2(p) as "a systematic operation or integrated series of systematic operations engaged in as a business or segment of a business which transforms or converts tangible personal property by physical, chemical or other means into a different form, composition or character from that in which it originally existed." The change in state of water from its liquid state to its gaseous state clearly meets this definition. The dichotomy in business activities is significant as it applies to sales tax analysis because there are two sales tax exemptions of differing scope which apply. The exemption for manufacturing applies to only those purchases directly used in the actual manufacturing process, while the exemption applicable to businesses taxable under W.

Va. Code §

11-13-1 et seq. applies to all purchases used in the business activity. The manufacturing exemption and the exemption for businesses subject to business and occupation tax under W.

Va. Code §

11­13­2m are contained in W.

Va. Code §§

11-15-9(g) and 11­15­9(v) respectively as follows: (g) Sales of property or services to persons engaged in this state in the business of contracting, manufacturing, transportation, transmission, communication or in the production of natural resources: Provided, That the exemption herein granted shall apply only to services, machinery, supplies and materials directly used or consumed in the businesses or organizations named above, and shall not apply to purchases of gasoline or special fuel: Provided, however, That on and after the first day of July, one thousand nine hundred eighty-seven, the exemption provided in this subsection shall apply only to services, machinery, supplies and materials directly used or consumed in the activities of contracting, manufacturing, transportation, transmission, communication or the production of natural resources in the businesses or organizations named above and shall not apply to purchases of gasoline or special fuel; (v) Notwithstanding the provisions of subsection (g) of this section or any provisions of this article to the contrary, sales of property and services to persons subject to tax under article thirteen, thirteen-a or thirteen-b of this chapter: Provided, That the exemption herein granted shall apply both to property or services directly or not directly used or consumed in businesses, the gross receipts from which are subject to tax under such articles but shall not apply to purchases of gasoline or special fuel; Although these exemptions apply to "persons engaged in the activity of .

.

. manufacturing" and to "persons subject to tax under article thirteen," it is the position of the State Tax Department that purchases made prior to the actual start of business are also exempt under these exemptions provided the taxpayer will be engaging in an exempt activity at the time the property is placed into service or use. Should the business not start up however, or the purchases be used at a later point in time in a non-exempt manner, those purchases will be subject to use tax once actual use in a nonexempt manner is determined. The taxpayer requests a ruling regarding whether purchases of services or tangible personal property, specifically including, the boiler, turbine and components of the electric transmission lines, by the taxpayer directly from suppliers and manufacturers of such property during construction of the cogeneration facility are exempt from consumers sales and service tax. All purchases of services or tangible personal property used in the construction of the manufacturing facility, which will be directly used in the manufacturing activity, and all purchases directly used in the manufacturing activity, regardless of whether the manufacturing activity is the manufacture of steam or electricity, are exempt under W.

Va. Code §

11-15-9(g). Such purchases would specifically include the boiler and the turbine. The definition of directly used or consumed in W.

Va. Code §

11­15­2(n) provides as follows: (n)(1) "Directly used or consumed" in the activities of contracting, manufacturing, transportation, transmission, communication or the production of natural resources shall mean used or consumed in those activities or operations which constitute an integral and essential part of such activities, as contrasted with and distinguished from those activities or operations which are simply incidental, convenient or remote to such activities. (2) Uses of property or consumption of services which constitute direct use or consumption in the activities of contracting, manufacturing, transportation, transmission, communication or the production of natural resources shall include only: (A) In the case of tangible personal property, physical incorporation of property into a finished product resulting from manufacturing production or the production of natural resources or resulting from contracting activity; (B) Causing a direct physical, chemical or other change upon property undergoing manufacturing production or production of natural resources or which is the subject of contracting activity; (C) Transporting or storing property undergoing transportation, communication, transmission, manufacturing production, or production of natural resources or which is the subject of contracting activity; (D) Measuring or verifying a change in property directly used in transportation, communication, transmission, manufacturing production or production of natural resources or contracting activity; (E) Physically controlling or directing the physical movement or operation of property directly used in transportation, communication, transmission, manufacturing production or production of natural resources or contracting activity; (F) Directly and physically recording the flow of property undergoing transportation, communication, transmission, manufacturing production or production of natural resources or which is the subject of contracting activity; (G) Producing energy for property directly used in transportation, communication, transmission, manufacturing production or production of natural resources or contracting activity; (H) Facilitating the transmission of gas, water, steam or electricity from the point of their diversion to property directly used in transportation, communication, transmission, manufacturing production or production of natural resources or contracting activity; (I) Controlling or otherwise regulating atmospheric conditions required for transportation, communication, transmission, manufacturing production or production of natural resources or contracting activity; (J) Serving as an operating supply for property undergoing transmission, manufacturing production or production of natural resources or which is the subject of contracting activity or for property directly used in transportation, communication, transmission, manufacturing production or production of natural resources or contracting activity; (K) Maintenance or repair of property directly used in transportation, communication, transmission, manufacturing production or production of natural resources or contracting activity; (L) Storage, removal or transportation of economic waste resulting from the activities of contracting, manufacturing, transportation, communication, transmission or the production of natural resources; (M) Pollution control or environment quality or protection activity directly relating to the activities of contracting, manufacturing, transportation, communication, transmission or the production of natural resources and personnel, plant, product or community safety or security activity directly relating to the activities of contracting, manufacturing, transportation, communication, transmission or the production of natural resources; or (N) Otherwise be used as an integral and essential part of transportation, communication, transmission, manufacturing production or production of natural resources or contracting activity. (3) Uses of property or services which would not constitute direct use or consumption in the activities of contracting, manufacturing, transportation, transmission, communication or the production of natural resources shall include, but not be limited to: (A) Heating and illumination of office buildings; (B) Janitorial or general cleaning activities; (C) Personal comfort of personnel; (D) Production planning, scheduling of work, or inventory control; (E) Marketing, general management, supervision, finance, training, accounting and administration; or (F) An activity or function incidental or convenient to transportation, communication, transmission, manufacturing production or production of natural resources or contracting activity, rather than an integral and essential part of such activities. All items purchased for use exclusively in a business subject to a gross receipts tax, i.e., B&O tax, severance tax or telecommunications tax under W.

Va. Code §§

11-13-1 et seq., 11­13A­1 et seq. and 11-13B-1 et seq. respectively, are exempt pursuant to W.

Va. Code §

11-15-9(v) whether directly or not directly used in the taxable gross receipts activity. This would specifically include components of the electric transmission lines. The State Tax Department policy remains that manufacturing ends at the point where the finished product is produced. All expenses related to the transportation or transmission of the finished product, such as the construction by the taxpayer of pipes to carry the steam to the customer, would be beyond the scope of the exemption in W.

Va. Code §

11-15-9(g). The scope of the exemption in W.

Va. Code §

11-15-9(v), however, extends to the entire business activities of the taxpayer which result in a business and occupation tax liability, and hence would include the cost to the taxpayer of constructing and operating the electric transmission lines, as the manufacture of electricity is subject to the W.

Va. Code §

11-13-2m tax. For purchases of services and tangible personal property used by the taxpayer in both business activities, which use does not constitute direct use, the taxpayer must apportion such purchase price pursuant to W.

Va. Code §

11-15-9e between exempt and non-exempt use. One acceptable method of making such apportionment is to apply the ratio of gross receipts from the exempt activity to gross receipts from the non-exempt activity and apply that same ratio to the purchase price. See West Virginia Consumers Sales and Service Tax and Use Tax Regulations, 110 C.S.R. 15, §

9d. The West Virginia Use Tax, set forth in West Virginia Code §

11-15A-1 et seq., is imposed upon the use of tangible personal property and taxable services in West Virginia. Exemptions from use tax are set forth in section 11-15A-3 which provides in relevant part as follows:(a) The use in this state of the following personal property and services is hereby specifically exempted from the tax imposed by this article to the extent specified:(2) Tangible personal property or services, the gross receipts from the sale of which are exempt from the sales tax by the terms of article fifteen, chapter eleven of the code .

.

. and the property or services are being used for the purpose for which it was exempted.(3) Tangible personal property or services, the gross receipts or the gross proceeds from the sale of which are required to be included in the measure of the tax imposed by article fifteen, chapter eleven of the code .

.

. and upon which the tax imposed by said article fifteen has been paid.(4) Tangible personal property the sale of which in this state is not subject to the West Virginia consumers sales tax. Accordingly, so long as an item is or could be purchased exempt from consumers sales and service tax and is not used in a manner inconsistent with the consumers sales and service tax exemption, no use tax is imposed upon the use of such item in West Virginia. For purchases either totally or partially exempt under W.

Va. Code §§

11-15-9(g) or 11-15-9(v), the exemption may be exercised in accordance with the provisions of either W.

Va. Code §§

11-15-9b, 11-15-9d, 11-15A-3b or 11-15A-3d. For those purchases to which the provisions of W.

Va. Code §

11-15-9e apply, an exemption certificate may not be issued, notwithstanding the provisions of W.

Va. Code §

11-15-9c. No exemption certificate may be issued in such cases because the exemption would not apply to the entire purchase, therefore the purchaser would be required to use his direct pay permit or pay the tax and apply for a refund where the purchase is subject to the allocation provisions of W.

Va. Code §

11-15-9e. ______________________________ Bradley A. Crouser State Tax Commissioner Date: January 13, 1989