EDI Prevails Before Ohio’s Tax Commissioner
On April 24, 2015, Thompson Hine persuaded the Ohio Tax Commissioner to reverse his staff and affirm the tax exemption application submitted by our client Energy Developments, Inc. (EDI) on November 15, 2010. This ruling will result in several millions of dollars in tax savings per year for EDI.
EDI is the North American affiliate of Energy Developments, Ltd. (EDL), an international green energy conglomerate headquartered in Brisbane, Australia and publicly traded on the Australian Securities Exchange. With operations in Europe, North American and Australia, EDL and its affiliates annually generate more than 1,000 MW of electricity worldwide.
In the United States, affiliate EDI contracts with municipal solid waste landfills to recover the methane generated by the decaying solid waste within the landfill cells. EDI uses this methane as a fuel source to operate large internal combustion reciprocating engines, which are connected to electrical generating equipment. The electricity generated is sold to users on the “grid.” EDI also receives renewable energy credits for the electricity it generates, which it is able to sell to electrical utilities, allowing them to meet regulatory quotas for electricity generated from renewable sources.
In 1999, EDI entered into a contract with Republic Waste Services LLC to provide certain landfill gas-related services at Republic’s Lorain County Landfill in Oberlin, Ohio. Among other things, EDI contracted to operate the landfill’s landfill-gas extraction and collection system and to make beneficial use of the gas to generate electricity.
In 2001, EDI purchased and installed four large internal combustion reciprocating engines at its Lorain County Landfill power station from Deutz AG. In 2003, EDI purchased and installed two more Deutz reciprocating engines. In addition, EDI also purchased and installed a primary landfill gas treatment system to de-water the landfill gas it recovers from the Lorain County Landfill under its contract with Republic (landfill gas is saturated with water, which makes it difficult to combust) and to remove particulate matter that otherwise would detrimentally impact operation of the Deutz engines.
EDI invested several million dollars in the six Deutz engines and primary gas treatment system it installed at its Lorain Power Station.
After the purchase and installation of the initial four Deutz reciprocating engines and primary gas treatment system at its Lorain Power Station in 2001, EDI submitted a Conversion Facilities Tax Exemption Application to the Ohio Department of Taxation seeking to exempt from real and personal property tax all costs associated with its purchase and installation of the four Deutz engines and primary gas treatment system. EDI amended this application in 2003 to reflect the purchase and installation of the two additional Deutz engines. In due course, the Ohio Tax Commissioner approved EDI’s application for tax exemption, resulting in a tax savings for EDI of several million dollars per year.
Following the installation of the two additional Deutz engines at its Lorain Power Station in 2003, EDI began to experience severe maintenance problems with its Deutz reciprocating engines, including extensive and accelerated engine fatigue and wear, ongoing engine component failures and catastrophic (total) engine failures. These problems resulted in a substantial reduction in the total number of hours the engines could be operated between major servicing and the complete destruction of a number of the engines, requiring their total replacement. After several years of investigation, EDI ultimately concluded that the source of these engine problems was the presence of organosilicates called siloxanes in the landfill gas its Lorain Power Station was recovering from the Lorain County Landfill, the concentration of which had steadily increased over time. At the internal temperatures EDI’s Deutz engines typically operate, these organosilicates liquefy and adsorb onto the internal engine components, giving them a coating of, what is for all intents and purposes, liquid rock.
Siloxanes began to be used in the manufacture of a variety of consumer products in the United States, especially cosmetics, in the 1980s and 1990s. Because of the time it takes for anaerobic digestion of municipal solid waste in a landfill to mobilize the siloxane component of these products into the methane gas generated in the landfill, siloxanes did not begin to appear in the landfill gas produced at the Lorain County Landfill until the middle of the last decade. However, once those siloxanes made their way into the landfill gas stream, their concentrations rapidly increased.
Research Leads to Solution
After several years of intense research, in late 2008 EDI purchased and installed a secondary landfill gas treatment system specifically designed to remove siloxanes from landfill gas by Thompson Hine client Parker Hannifin Corporation at a total cost of $3.6 million. After months of operation, the Parker siloxane removal system resulted in a significant reduction in siloxane concentration in the landfill gas recovered from the Lorain County Landfill, and a corresponding substantial reduction in major engine problems at the Lorain Power Station.
On November 15, 2010, EDI submitted another Conversion Facilities Tax Exemption Application to the Ohio Department of Taxation, this time for the costs associated with the purchase and installation of the Parker siloxane treatment system.
On August 25, 2014, the staff of the Ohio Department of Taxation issued a proposed denial of EDI’s tax exemption application, finding that the costs associated with the purchase and installation of equipment intended to increase production is not entitled to tax exempt status under Ohio law. After Thompson Hine’s timely submittal of a request for reconsideration on behalf of EDI, the Ohio Department of Taxation conducted a hearing in December 2014 at which we submitted evidence that the Parker siloxane removal system was not purchased and installed to increase production (and profit); rather, it was purchased and installed to restore production of electricity to projected levels by reducing the excessive engine wear caused by the unexpected presence of siloxanes in the landfill gas used by EDI to fuel its Deutz reciprocating engines.
Ultimately, the Tax Commissioner agreed, and on April 24, 2015 issued his order reversing the proposed denial of EDI’s tax exemption application. This will result in an estimated savings of several million dollars per year in taxes that EDI would otherwise have owed relating to the installation of the six Deutz reciprocating engines (and the associated primary and secondary gas treatment systems) that comprises Phase I of the company’s Lorain Power Station. Since EDI subsequently expanded its Lorain Power Station to include additional reciprocating engines and associated gas treatment equipment, and because it has similar operations (with associated gas treatment systems) at other Ohio landfills, EDI’s anticipated yearly tax savings as a consequence of this victory is several times what the Company will save as a consequence of the Commissioner’s decision to reverse his staff on the exempt status of the Parker siloxane removal system that EDI installed during Phase I of the Lorain Power Station.