97-021
Response
April 21, 1997
April
2, 1997
Dear
Irene Rees:
COMPANY
A is an independent XXXXX company engaged in the drilling of oil and gas wells in
the state of Utah. As such, we request an advisory opinion letter to determine
whether the purchases of emulsion breakers that are injected with our drilling
fluids would qualify for the resale exemption. The emulsion breakers become a
component of the oil and gas stream production by the removal of the impurities
from our product, crude oil, and also facilitates the oil movement.
The
emulsion breakers are initially blended into the crude oil to perform the
process of breaking up emulsions hence, to separate oil from water or other
contaminants through the lowering of the viscosity of the emulsion. Upon the
introduction and into the flow lines, the emulsion breakers becomes an
essential compound or ingredient with product, crude oil, and does not drop out.
This makes our product, the crude oil, more marketable to our customer, the
refinery.
I
would appreciate, if you could evaluate and determine an applicable advisory
opinion for the above. If appropriate, please send the necessary papers to
process a tax refund or the instructions to inform our vendors, regarding the
outcome to the letter of ruling, that would permit us to obtain credit memos.
If you have any questions regarding this request, please do not hesitate to
phone at XXXXX or write me at the letterhead address. Once again, thank you for
your time and cooperation in this matter.
Sincerely,
AUDITOR
April
21, 1997
NAME
ADDRESS
CITY STATE ZIP
Advisory Opinion - Application of sales tax to
emulsion breakers
Dear NAME,
We
have received your request for an opinion regarding the application of sales
tax to emulsion breakers added to oil streams during production or
transportation. We offer the following
guidance:
Under
Utah law, property purchased for resale as an ingredient or component part of
the final product are exempt from sales tax. Whether an item 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 primarily 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 or transportation process, it is not
eligible for the resale exemption even if it becomes an incidental ingredient
of the final product.
The
exemption for ingredient or component part has been narrowly construed by the
Commission and by the courts. The
exemption goes hand in hand with the sales tax, with the purpose of placing the
tax burden on the ultimate consumer of the finished product. (See, e.g.,
Nucor Corp. v. State Tax Comm'n, 832 P.2d 1294 (Utah 1992)
("the plain meaning of the words 'purchased for resale' implies that a
company's purpose in buying an item must be to resell that item.”)) Whether emulsion breakers are entitled to
exemption depends upon the purpose for which they are purchased and used. The fact that the emulsion breakers may, for
a time, remain a part of the crude is not determinative of this issue.
Your
letter provides very little description of the particular emulsion breakers in
question. However, as we understand it,
emulsion breakers are used to break down and separate compounds. Oil producers typically use emulsion breakers
to separate water and other impurities from the crude. They may be used to increase production from
the well. They may be used to reduce
the waxy consistency of crude that interferes with transportation of the
product via a truck or pipeline. They
may be used to remove excess water and impurities from a product that is
normally sold by volume. In any of
these cases, the emulsion breakers are purchased primarily for their use
in processing or transporting crude and not for resale as an ingredient of the
final product. In fact, the refinery
processes emulsion breakers and other chemical additives out of the finished
taxable product. XXXXX, then, is the
last consumer in the property chain who can be taxed on this purchase. Therefore, XXXXX is liable for sales tax on
its purchases of these items.
We
appreciate your sending us additional materials from other states, but they do
not persuade us to change our position.
Colorado, Kansas and Wyoming statutes specifically exempt sales of items
consumed in production. Utah law
does not. The Texas Administrative Code specifically grants a limited exemption
for oil soluable chemicals that remain in the product flow after
injection. Again, Utah law has no
comparable exemption.
Please
let us know if you have other questions.
For
the Commission,
Joe
B. Pacheco,
Commissioner