October 1, 2013

Kentucky Board of Tax Appeals Finds Demonstration Facility Qualified for Pollution Control Certificate

Written By

By Erica Horn

In Eco Power Solutions (USA) Corp. v. Commonwealth of Kentucky Finance and Administration Cabinet et al., Kentucky Board of Tax Appeals, File No. K12-R-19, Order No. K-23086 (July 11, 2013), the Board of Tax Appeals (“Board”) considered whether a taxpayer’s demonstration facility, built to showcase its pollution control equipment, qualifies as a “pollution control facility,” entitling the taxpayer to a pollution control certificate for purposes of the sales and use tax.

The taxpayer, Eco Power Solutions (USA) Corp. (“Eco Power”), offers customers pollution control solutions designed to recapture energy and reduce emissions. Eco Power’s primary customers are large coal and natural gas users. In order to showcase its pollution control equipment, Eco Power built a demonstration facility in Louisville. The facility contains two fossil fuel burning emission units that create pollution. Eco Power’s on-site pollution control equipment, called “COMPLY 2000 units”, significantly reduce the air pollution produced by the emission units.

Eco Power applied for a pollution control certificate, which would enable Eco Power to purchase materials and equipment for its demonstration facility without paying sales or use tax. Pursuant to KRS 139.480(12), property designated as a “pollution control facility” is exempt from sales and use tax. A “pollution control facility” is defined by KRS 224.1-300(1) as “[a]ny property designed, constructed, or installed as a component part of any commercial or industrial premises for the primary purpose of decreasing air pollution”. The Department of Revenue (“DOR”) denied Eco Power’s request for a pollution control certificate on the basis that the primary purpose of the COMPLY 2000 units was to market and demonstrate Eco Power’s product, not to reduce air pollution.

The Board concluded otherwise and reversed the DOR’s ruling noting, “[t]here is no

distinction in the statute for air pollution which is the byproduct of a manufacturing process and air pollution which is the byproduct of a demonstration process.” The Board further stated:

There is no qualification in the statute that the pollution being reduced must come from an industrial process before the component equipment can qualify—pollution is pollution under the statute. There is no question that the sole function of the equipment for which certification is sought is to reduce the existing pollution, from whatever source that pollution may derive. The property in question was designed for pollution control and is being used for that purpose.

The Board found the statute granting exemptions from sales and use taxes to pollution control facilities was not ambiguous, and that it was immaterial whether the pollution reduced by the equipment was created for demonstration purposes or was a result of the industrial process. Thus, the Board reversed the DOR’s ruling and directed the DOR to grant Eco Power’s application for a pollution control certificate for its demonstration facility.

The DOR has appealed the Board’s decision to the Franklin Circuit Court and briefing is underway. The authors’ firm represents Eco Power.