Did section 6353 exempt natural gas that was delivered through mains, compressed, stored in cylinders, and then sold into vehicle tanks?

Plain-English summary

A utility proposed taking natural gas from its regular distribution mains at about five PSI, compressing it to roughly 3,500–4,000 PSI, storing it in high-pressure cylinders, and then dispensing it into vehicle tanks.

Tax counsel agreed that section 6353 exempted the utility's sale of uncompressed natural gas to a person operating the compressor. The memorandum also said the Board should not assert sales tax when that operator compressed the gas and sold the resulting CNG.

The reasoning was that the main, line, or pipe remained the essential delivery mode even though the gas underwent processing and temporary cylinder storage. Compression under pressure did not substantially change the gas. The memorandum separately warned that a person using the fuel in vehicles operated on highways would be subject to use-fuel tax.

Citations and references

• California Revenue and Taxation Code section 6353 (as cited)
• Sparklett's Drinking Water Corporation v. State Board of Equalization, unpublished decision (as cited without a reporter citation)
• Principal Tax Auditor Glenn A. Bystrom's October 29, 1990 memorandum asking about CNG charges and proposing a conclusion — memorandum referenced and conclusion discussed but not reproduced in the official PDF
• Redacted utility property-tax administrator's letter and proposed-facility diagrams — letter quoted in part and diagrams referenced but neither reproduced in the official PDF
• Earlier discussion between senior tax counsel and the principal tax auditor concerning the CNG question — discussion referenced without date, notes, participants beyond the two officials, or separate record in the official PDF
• Natural-gas main, five-PSI input, small lines and compressor, 3,500-to-4,000-PSI output, cascade storage cylinders, fueling post, and vehicle delivery — facts supplied; complete diagrams, engineering specifications, ownership, metering, flow, storage, safety, operating, and transaction records not reproduced in the official PDF
• Conflicting source descriptions of storage and direct injection: the utility letter allowed either, while the auditor understood all gas entered storage first — conflict printed without facility records resolving actual operation
• Source-printed statement “when G&E sells equipment” immediately before exempting G&E's uncompressed-gas sale — wording preserved; equipment contract, gas contract, billing, title, and clarification not supplied in the official PDF
• Unidentified use-fuel-tax authority for highway vehicle use — tax consequence stated without statute, regulation, return, rate, or agency guidance in the official PDF
• Official Annotation 275.0127's stored-CNG and fueling-post summary — annotation supplies no additional facility, transaction, title, billing, engineering, or implementation record
• Possible facility construction, sale, use-fuel-tax reporting, audit, assessment, refund claim, appeal, operational change, or other agency action — no follow-up or final outcome supplied in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/275-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/275-0127.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. Glenn A. Bystrom
Principal Tax Auditor

From:

Ronald L. Dick
Senior Tax Counsel

Subject:

Taxability of Compressed Natural Gas

275.0127

Date:

December 20, 1990

This is in reply to your October 29, 1990 memorandum regarding the application of sales tax to charges for Compressed Natural Gas (CNG) when sold and delivered into vehicles through a delivery system connected to a natural gas main. Mr. J--- S. G---, Jr., Property Tax Administrator for [city] Gas & Electric (G&E), sent copies of diagrams of a proposed such facility. We understand that G&E produces the CNG by taking natural gas from G&E’s regular distribution system of gas mains which pumps the gas at five pounds per square inch (PSI) of pressure. G&E feeds the natural gas through small lines into a small gas compressor which boosts the pressure to about 3,500 to 4,000 PSI and pumps the gas into a cascade of high pressure storage cylinders. You note that, although Mr. G---’s letter states, “The resulting CNG is stored in a cascade of high pressure storage cylinders or injected directly into vehicles through a fueling post.”, you understand that all the gas is pumped into the storage cylinders, and none of it is pumped directly from the compressor to the vehicle tank. We agree with your conclusion that, when G&E sells equipment to persons who use their equipment to compress the gas, section 6353 applies to exempt G&E’s sale of the uncompressed gas. A person who compresses the natural gas would be subject to use fuel tax on the use of the fuel in vehicles operated on highways. As we discussed earlier, in light of the court’s unpublished decision in the case of Sparklett’s Drinking Water Corporation v. State Board of Equalization, we believe that the Board also should not attempt to assert tax on the sales by a person who uses the compressor to convert the natural gas to CNG and sells the CNG. As was the case in Sparkletts, the essential mode of delivery is a main, line, or pipe, regardless that some processing of the gas occurs. In the Sparkletts case, the court found that there was no substantial change in the water when the

Mr. Glenn A. Bystrom

-2-

December 20, 1990
275.0127

machine removed impurities. In this case, compressing the gas under pressure does not result in a substantial change in the gas. We hope this answers your question; however, if you need further information, feel free to contact me directly.

RLD:sr