MCI found a way to eliminate sales and use taxes on construction costs for a project

MCI found a way to eliminate sales and use taxes on construction costs for a project

January 01, 1999 | By Keith Martin in Washington, DC

The company is building a telecommunications switching station in Westchester County. The county industrial development authority will own the project and lease it to MCI with an option for MCI to buy the project at the end of the lease. In the meantime, MCI will act as the IDA’s agent for purposes of arranging construction of the project. New York normally collects sales and use taxes on equipment purchased for use in the state. However, equipment purchases by governmental entities are exempted from tax. The exemption may be claimed by anyone acting as an agent for a governmental entity.

The New York Department of Taxation and Finance issued an “advisory opinion” to MCI recently confirming that no taxes need be paid on the project, including the rents and purchase option price that MCI will pay to the IDA under the lease.

LANDFILL GAS PRODUCERS want a tax credit for companies that consume landfill gas.

A lawyer for the Solid Waste Asociation of North America, or SWANA, sent the US treasury a draft bill in December to ask its support. The bill would allow a credit of 1.7¢ for each 12,159 Btus of landfill gas that a company consumes as fuel. The facility using the gas would have to be placed in service during a brief window period that ends in June 2004. Credits would run for 10 years from when the facility is placed in service.

WATER UTILITIES CHARGE that the US government reneged on a deal involving tax treatment of water interties.

Homeowners require both a main water line and a wastewater line to connect to the utility. Real estate developers building new subdivisions usually reimburse the utility for the cost. The IRS is studying whether water utilities should report the payments as income. This is clearly the correct treatment for electric and gas interties. However, water utilities worked out a special deal with Congress in 1996 where they were supposed not to have to report certain amounts as income in exchange for less generous tax depreciation on their assets. There is disagreement over whether the deal covered these particular payments.

The National Association of Regulatory Utility Commissioners, or NARUC, sent a resolution to Treasury in mid-December endorsing the utility position.

NEW JERSEY ENACTED LEGISLATION REQUIRING MUNICIPAL UTILITIES to pay corporate business tax if they make sales within a franchise area served by another electric utility.

Municipal utilities with eroding customer bases due to deregulation are under pressure to look outside city limits to ensure they retain a large enough revenue base to pay debt service on outstanding bonds. The debate has spilled over into Congress. Congress is expected to consider this year to what extent munis selling outside municipal boundaries should be forced to forfeit access to tax-exempt financing for their facilities.


AN EXECUTIVE WHO AGREES TO ACT AS THE “RESPONSIBLE PERSON” for payment of local taxes for his employer in a foreign country may be in for trouble.

Carl Shen managed the branch office of Leo A. Daly Co. in Taiwan. He registered as the “responsible person” for payment of Taiwan taxes. Leo A. Daly Co. closed its Taiwan office in 1992 and terminated Shen. Shen remained in the country in an effort to start his own business. In 1995, Taiwan assessed Leo A. Daly Co. for back taxes for 1991 and 1992 and refused to let Shen leave the country until the taxes were paid. Shen eventually got an injunction in the US courts ordering Leo A. Daly Co. to pay the taxes, but it took over two years.

A federal district court ruled in Nebraska ruled last month on a series of cross motions in Shen’s lawsuit against the company for breach of contract and “false imprisonment.” The case is still pending.


TEXAS confirmed that manufacturing companies in the state do not have to pay sales taxes on natural gas they purchase to generate their own electricity. The advice came in a “taxability letter” the comptroller’s office issued recently to a manufacturing company that makes plastic injection molding.

The state exempts from sales taxes natural gas and electricity “used in processing tangible personal property for sale as tangible personal property.” In this case, the gas is effectively an input in manufacture of the plastic molding.

Texas told the owner of a petrochemicals refinery in a separate “taxability letter” that no sales taxes would be triggered by a sale-leaseback of the refinery because the transaction was really just a secured financing, even though it was set up as a sale-leaseback in form.

Keith Martin