94-247 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Mining; Drilling, processing, and transportation of natural gas

Topic

Taxability of Persons and Transactions

Date Issued

08-12-1994

August 12, 1994

Re: Request for Ruling: Sales and Use Tax

Dear*****

This will reply to your letter of April 15, 1992 in which you request a ruling regarding the application of the retail sales and use tax to the natural gas drilling, processing, and transportation operations of ******(the "Taxpayer"). I apologize for the delay in responding.

FACTS

The Taxpayer is the operator and partner in a partnership named (the "Partnership"). The Partnership was set up to drill gas wells, produce coal seam gas (methane), deliver the gas through a gathering pipeline system to a field processing facility, and then deliver the gas to another company for further processing in Virginia. The gas is then delivered to West Virginia for further processing prior to sale. The Taxpayer is seeking a ruling as to the retail sales and use tax application to various phases of their operation.

RULING

Va. Code § 58.1-609.3.2(iii) (copy enclosed) provides a sales and use tax exemption for machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy or supplies "used directly" in the processing, refining, mining or converting products for sale or resale. This exemption is further explained by Virginia Regulation (VR) 630-10-65.2 (Mining and Mineral Processing). "Used directly" refers to those activities which are
integral to the production of a product, including reclamation activities required by law on land which has previously been mined. Mining includes gas and oil drilling and other industrial removal of natural resources, minerals, or mineral aggregates from the earth.

For purposes of the sales and use tax exemption as it pertains to the Taxpayer, Segment 1, which begins with the cleaning, dewatering, and separation of the mined methane, and continuing through Segment 3, where additional processing occurs, would be exempt from the tax.

In addressing Segments 4 through 8 set forth in your letter, we must look to VR 630-10-65.1(A)(2) which defines "mineral processing" and states, in part, the following:

- Mining and processing are separate and distinct activities. The mine site and the processing site constitute separate plant sites unless both are owned and operated by the same person and connected by a private transportation system... . If the mine and the processing plant are owned by different entities, private transportation systems... between the two sites will be exempt only if owned by the processing plant operator. (Emphasis added.)

Applying this concept to the facts set forth in your letter, Segment 4, the transportation of processed natural gas via a processor-owned pipeline to an interconnect with an independent (non-processor-owned) pipeline is not an exempt activity (as the transportation systems are owned by different parties). However, Segment 5 is a private transportation system owned by a natural gas processor (and represents part of the handling system for the further processing of the gas) and Segment 6 is the actual processing of the natural gas. Based on the above regulation, Segments 5 and 6 would both qualify for the mineral processing exemption. Segments 7 and 8, as set forth in your letter, include the transportation of the gas via a processor-owned pipeline through Kentucky for further processing in West Virginia. The tax application of Segments 7 and 8 would be the same as for Segments 5 and 6.

If you should have any further questions, please feel free to contact the department.

Sincerely,

Danny M. Payne
Tax Commissioner

Rulings of the Tax Commissioner