96-049
Response
March 8, 1996
Request
Dear
XXXXX:
We
have several oil and gas clients which purchase tangible personal property
which is added to an oil and gas stream during the production and/or
transportation of the products for sale. Based on the following facts please
verify whether these products quality for your state's sales and use tax
component part exemption.
Facts:
XXXXX
which is added to an oil and gas stream to ultimately extract water from the
stream. This chemical removes
impurities and increases product marketability.
XXXXX
which is added to an oil and gas stream to keep it from freezing in a
line. This chemical becomes a component
part of the final product.
XXXXX
(carbon dioxide) and nitrogen used in tertiary injectant projects to thin oil
in the formation.
Oil
soluble chemicals which are injected down-hole and are commingled with oil and
gas in the formation. These chemicals become
a component part of the final product.
Injection
services to pump chemicals down the wellbore. I
Electricity
used at an oil and gas well site and in the transportation of oil to a
processing plant.
Based
on these facts, please provide a written response regarding the taxability of
the products/services.
If
you have any questions please call me at XXXXX.
Very
truly yours,
XXXXX
By
XXXXX
XXXXX
RE:
Advisory Opinion sales tax on items of tangible personal property added to an
oil and gas stream.
Dear
XXXXX
We
have received your request for an opinion regarding the application of sales
tax to items added to oil and gas streams during production or transportation
and to services used in conjunction with those processes. Your request letter does not offer
sufficient detail about how each item is used to allow us to make a definitive
determination regarding each item's taxability. However, on the basis of our
past experience with oil and gas producers, we offer the following general
guidance:
Whether
an item added to an oil and gas stream is eligible for a resale exemption as an
ingredient of the final product depends upon the primary use of the item. If the item is purchased as a raw material
to be blended or compounded with other ingredients to make the final taxable
product, the item qualifies for the resale exemption. If the item is purchased and consumed in the production process,
it is not eligible for the resale exemption even if it becomes an incidental
ingredient of the final product.
1.
XXXXX is usually added to the gas or oil stream to remove water and
impurities. The glycol drops out of the
final product during processing and it is not an ingredient of the final
refined product. Because XXXXX is consumed
by the oil and gas producer in the production or refining process, the oil and
gas producer must pay sales tax on his purchase of the chemical.
2.
XXXXX when XXXXX is added to an oil and gas stream to remove excess water
or to keep the stream from freezing during production or transportation, the
XXXXX is considered to be consumed by the oil and gas producer in the
production or transportation processes.
As such, methanol is ineligible for the resale exemption. An exception may exist if methanol is
purchased primarily for its use as a additive in the final product.
3.
XXXXX and nitrogen are generally injected into the well or formation to
increase oil production in a secondary recovery process. The CO2 and nitrogen are purchased for their
use in the production process. These
chemicals are refined out of the final product and they are not intended to be
an ingredient. Therefore, the oil and
gas producer's purchase of these chemicals is taxable.
4.
Oil soluble chemicals are generally injected into the formation to
increase productivity or to preserve and maintain the well itself. These chemicals are refined out of the final
product and they are not intended to be an ingredient. Therefore, the oil and gas producer's
purchase of these chemicals is taxable.
5.
Injection services if the oil and gas producer is paying for injection
services, the transaction typically involves an outside party who furnishes
specialized equipment and specially trained operators who perform the
work. So long as the outside party
controls and directs the injection operation, the transaction is nontaxable as
a purchase of services. If the well
owner/operator merely contracts for the use of the equipment, and he retains
control over the injection operation, the transaction is considered a taxable
rental of equipment, even if the outside party provides an employee to observe
or monitor the use of the equipment.
If
the oil soluble chemicals are purchased in conjunction with injection services
(that is, the charge for the injection service includes a charge for the
chemicals, the non-taxable portion of the service must be separately stated on
the invoice or receipt or the entire charge is taxable.
6.
Electricity Utah law allows a sales tax exemption for electricity sold
for industrial use. The industrial use
exemption extends to mining and mineral extraction. To interpret the meaning of those terms, we rely on the Standard
Industrial Classification Manual which states that oil and gas extraction
includes exploration, drilling, completing and equipping wells; operation of
separators, emulsion breakers, desilting equipment and field gathering lines
for crude petroleum; and all other activities in preparation of oil and gas up
to the point of shipment from the producing property. On that basis, the mining activity ends when the oil or gas
enters the pipeline for transportation from the producing property. If a client engages in both qualifying and
non-qualifying activities at a given location and electricity is furnish to
that location through a single meter, the predominant use of the electricity is
determinative of its eligibility for exemption.
The
exemption for industrial use of electricity also extends to certain
manufacturing activities. For instance, establishments recovering liquefied
petroleum gases incidental to petroleum refining or to the manufacturing of
chemicals, and establishments recovering helium from natural gas are classified
as manufacturers. If you have
additional questions about these activities, please feel free to contact us for
further clarification.
Please
let us know if you have any other questions.
For
the Commission,
Alice
Shearer
Commissioner