The Mississippi Supreme Court (“Court”) has ruled that the Mississippi Department of Revenue (“MDOR”) regulation for the exemption of pollution control equipment contradicts the plain language of the statutory exemption. In Mississippi Department of Revenue v. Mississippi Power Company, No. 2013-CA-01234-SCT (Miss. August 7, 2014), the Court upheld the finding of a lower court that the MDOR interpretation of Miss. Code § 27-65-101(1)(w) was incorrect. The case arose from an audit by the MDOR of Mississippi Power Company’s 2007 through 2009 state tax returns. The MDOR assessed use tax on the purchase of burners that Mississippi Power had claimed as pollution control equipment. The audit assessment was appealed to the MDOR’s internal Board of Review and then to the Board of Tax Appeals, both of which upheld the assessment on the equipment. Mississippi Power Company filed a Petition for Appeal and Review in the Chancery Court of Harrison County, who ruled in favor of Mississippi Power Company. The MDOR then appealed that ruling to the Court.
The relevant statute, Miss. Code § 27-65-101(1)(w), provides (emphasis added):
From and after July 1, 2001, sales of pollution control equipment to manufacturers or custom processors for industrial use. For the purposes of this exemption, “pollution control equipment” means equipment, devices, machinery or systems used or acquired to prevent, control, monitor or reduce air, water or groundwater pollution, or solid or hazardous waste as required by federal or state law or regulation.
MDOR had interpreted the statute, contained in Miss. Regs. § 35.IV.7.03(302), as follows (emphasis added):
Purchases of pollution control equipment by manufacturers and custom processors are exempt from sales or use tax. The term “pollution control equipment” means equipment, devices, machinery or systems used exclusively and directly to prevent, control, monitor or reduce air, water or ground water pollution, or solid or hazardous waste as required by federal or state law or regulation. Although the main use of the equipment must be pollution control, the incidental use for other purposes would not result in the exemption being disallowed.
Federal regulations required Mississippi Power Company to either lower nitrous-oxide emissions or purchase emissions credits. When Mississippi Power Company decided to invest in low nitrous-oxide burners, MDOR determined that they owed use tax on the purchase because the burners were used for both production and pollution control. Therefore, according to MDOR, the burners were not used exclusively and directly for pollution control. The Court held that the burners were acquired for pollution control and therefore qualified for the exemption. MDOR, in requiring equipment to be used exclusively and directly in pollution control, had rewritten the exemption in Miss. Regs. § 35.IV.7.03(302) to prevent what they called, “an exemption free for all.” However, the Court determined that MDOR had outreached its statutory authority to promulgate rules and regulations that are not inconsistent with the law.
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Jeremiah T. Lynch