Could crude-oil emulsion breaker E-4161 be bought for resale because it remained with the oil after water and brine were removed?

Plain-English summary

Board audit staff asked whether E-4161, an emulsion-breaking chemical added to crude oil, was a taxable manufacturing aid or a component bought for resale. The chemical separated contaminating water or brine and remained with the oil after the water was removed.

The memorandum applied the primary-purpose test. A material bought to help processing remains taxable even if some or all of it stays in the finished product, unless its presence provides a beneficial function after manufacturing ends.

E-4161 appeared to be a taxable manufacturing aid because its purpose was removing water or brine during crude-oil processing. The conclusion was conditional: if the chemical served a specific beneficial purpose in the crude oil after manufacturing was complete, the result could differ.

Citations and references

• Kaiser Steel Corp. v. State Board of Equalization (1979) 24 Cal.3d 188

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/440-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/440-1045.pdf

Original ruling text

State of California

Board of Equalization
Legal Division

440.1045

Memorandum

To

Mr. Rick Kinoshita
Audit Review and Refunds

:

From :

Elizabeth Abreu
Tax Counsel

Subject:

B--- P--- C---, Inc.
SY -- XX-XXXXXX

Date: November 24, 1992

ATSS 454-8208
(916) 324-8208

This is in response to your memorandum dated October 1, 1992, concerning the chemical E-4161. In essence, you are asking whether the chemical E-4161 is a manufacturing aid, in which case it may not be purchased for resale, or whether it becomes a component part of crude oil, in which case it may be purchased for resale. A chemist for B--- P--- describes E-4161 as follows: “In response to your request for information: E-4161 is a blend of oil soluble active ingredients dissolved in a hydrocarbon solvent. In use, E-4161 is added to crude oil where it functions as an emulsion breaker, i.e. it facilitates the separation of crude oil from contaminating water or brine. E-4161 remains with the crude oil component when the water is removed.” To determine whether an item should be treated as a manufacturing aid, the courts look at the primary purpose of the purchase of the item. If the item is purchased as an aid in the manufacturing process, it is taxable despite the fact that some portion remains in the finished product or that an incidental waste or by-product results. On the other hand, if the item is purchased for incorporation as a component part of the finished product, it is not taxable despite the fact that some portion may be lost or otherwise dissipated in the manufacturing process. Kaiser v. State Board of Equalization (1979) 24 Cal. 3d 188.

Mr. Rick Kinoshita

-2-

November 24, 1992
440.1045

Even if all or part of the item remains in the finished product, the item is a manufacturing aid if it was used to aid in the manufacturing process and if it serves no further beneficial purpose to the finished product. For example, fuser agent, which is used in high volume photocopy machines, remains on the paper of the finished copies. It is a manufacturing aid, however, because its purpose is to prevent the paper from jamming during copying and because it serves no further beneficial purpose to the paper after copying is complete. The chemical E-4161 appears to be a manufacturing aid because it is used to remove contaminating water or brine. We assume that this removal occurs during the processing of the crude oil. Unless this chemical serves a specific, beneficial purpose to the crude oil after manufacturing is complete, it is a manufacturing aid and may not be purchased for resale.

EA:cl

cc:

Out-of-State District Administrator