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Is Methane Collection Equipment Eligible For A Recycling Credit?
Posted in Tax and Finance

In Dep’t of Revenue v. Bavarian Trucking Co., Inc., the Kentucky Court of Appeals reversed the decisions of the circuit court and the Kentucky Board of Tax Appeals and held that equipment used in collecting methane gas generated by landfill waste which is later burned to generate electricity is not eligible for the recycling or composting equipment tax credit under the Kentucky Revised Statutes.

In Dep’t of Revenue v. Bavarian Trucking Co., Inc., the Kentucky Court of Appeals reversed the decisions of the circuit court and the Kentucky Board of Tax Appeals and held that equipment used in collecting methane gas generated by landfill waste which is later burned to generate electricity is not eligible for the recycling or composting equipment tax credit under the Kentucky Revised Statutes.

Bavarian Trucking Company, Inc., Waste in Place Trust, and Waste on Wheels Trust (collectively known as “Bavarian”), is a solid waste disposal/landfill company that installed methane gas collection equipment to recover methane emitted from the waste. Bavarian’s facility collects the methane and channels it to a nearby power plant, which burns the methane to generate “green” electricity.

Bavarian’s position was that certain equipment and machinery purchased for and used in its methane collection operation were eligible for the recycling or composting income tax credit provided by the Kentucky Revised Statutes. According to KRS 141.390, a tax credit is granted for certain expenses incurred in a recycling/composting process. This credit specifically applies to equipment purchased and used for recycling or composting “postconsumer waste.”  The statute defines “postconsumer waste” as a “product . . . which has served its intended use, and which has been separated from solid waste for purposes of collection, recycling, composting, and disposition.”

Both the circuit court and the Kentucky Board of Tax Appeals agreed with Bavarian that all of its landfill equipment used in the methane collection process was eligible for the credit because it was used for recycling. The department then appealed the circuit court’s decision to the court of appeals.

The court of appeals found that methane is not “postconsumer waste” as set forth in the statute. The court held that methane is not a product that has served an intended end use, and it cannot be separated from solid waste because, by its very nature, the methane does not exist until generated in the landfill by decomposition. Further, the court determined that the equipment at issue could not be “recycling equipment” that qualifies for the credit because collecting methane for the recovery of energy through combustion is specifically excluded from the definition of “recycling” by KRS 224.01-010(22). As such, the court reversed the prior decisions and held that equipment purchased by Bavarian was not be eligible for the recycling tax credit.

In its opinion, the court of appeals explained that even if the methane gas were to qualify as postconsumer waste, much of Bavarian’s equipment would still not be eligible for the credit because it is not used exclusively to process methane. Much of the equipment at issue was, and still is, used by Bavarian in the same manner both before and after the company began collecting methane from its landfill. Therefore, under the rationale adopted by the court, the only equipment that could be eligible for the tax credit would be modifications installed in order to add methane collection capabilities to the landfill, such as piping and methane safety equipment.

On June 24, 2013, Bavarian filed a motion for discretionary review with the Kentucky Supreme Court, where the case is currently pending.

If you have questions about how this recent judicial decision may affect you or your business, please contact a member of the Tax and Finance Practice Group at Bingham Greenebaum Doll LLP.

Special thanks to Bailey Roese for her assistance with this article.

DISCLOSURE REQUIRED BY CIRCULAR 230. This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service. If this article, including any attachments, contains any federal tax advice, such advice is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Furthermore, any federal tax advice herein (including any attachment hereto) may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party. Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author of this article. Thank you.

  • Partner

    As a Partner and Chair of the Firm’s Tax and Employee Benefits Department, Mark’s practice focuses on resolving clients’ state, local and federal tax issues through planning, audit management, administrative protest ...

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