Could a cracking-catalyst maker buy ammonia and sulfuric acid for resale when only about 2% remained, and did caustic soda receive the same treatment?

Plain-English summary

A manufacturer used ammonia, sulfuric acid, and caustic soda to make cracking catalysts sold to the petroleum industry. About 2% of the ammonia and sulfuric acid remained as ammonium ion and sulfate, which were necessary for the catalyst to crack petroleum; the rest was washed out or discarded because the reaction proceeded slowly.

Ammonia and sulfuric acid qualified for resale. Their primary purpose appeared to be incorporating the necessary remainder into the sold catalyst, and the large process loss was a consequence of accomplishing that incorporation.

Caustic soda received the opposite preliminary treatment. The submitted documents conflicted on whether sodium remained, and staff research indicated that sodium normally reduced catalyst stability and activity and was removed. Unless the taxpayer proved a different purpose, caustic soda was a taxable manufacturing aid.

Citations and references

• California Sales and Use Tax Regulation 1525 (as cited)
• California Sales and Use Tax Annotations 440.0740 and 440.2380 (as cited)
• P. Emmett, Catalysis, volume 7, page 51 (1966) (as cited)

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/440-2516.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

440.2516

To:

Downey – Auditing (SRK)

From:

Headquarters – Staff Counsel (JEM)

Subject:

Classification of Ammonia, Sulfuric Acid and Caustic Soda Used in Manufacturing Cracking Catalysts for the Petroleum Industry.

Date:

September 6, 1977

Your memo of August 23, 1977, to Headquarters – Principal Auditor, has been referred to this office. The documents you sent with your memo contain the following assertions: Ammonia, sulfuric acid and caustic soda are sued in the manufacture of cracking catalysts. About 2 percent of the ammonia and sulfuric acid remain in the finished catalyst as ammonium ion and sulfate, and their presence is necessary for the catalyst to be effective in cracking petroleum. The other 98 percent of these chemicals is washed out or dumped during the manufacturing process. Such large excess quantities of the ammonia solution are apparently necessary in the manufacturing process because the reaction which produces ammonium ion proceeds slowly. With respect to the caustic soda (i.e., sodium hydroxide), Document “C” alleges that some soda remains in the finished catalyst. Document “D”, however, indicates that there is no sodium in the finished catalyst. Tax applies to the sale of tangible personal property to persons who purchase it for use as an aid in manufacturing tangible personal property, but does not apply if the property is purchased for the purpose of incorporating it into the manufactured product. (Regulation 1525). Chemicals purchased primarily for use as manufacturing aids are taxable, even if trace amounts of the chemical will remain in the finished product. (See Annotation 440.0740 (10/10/60).) On the other hand, chemicals purchased primarily for incorporation into the finished product are not taxable, even if a portion of the chemical may be dissipated in the manufacturing process. (See Annotation 440.2380 (9/16/65).)

Downey - Auditing

-2-

September 6, 1977
440.2516

The documents you submitted do not explicitly state the purpose for which the chemicals in question are purchased. It appears, however, that the ammonia and sulfuric acid are purchased primarily for incorporation into the finished catalyst. Although only small percentages of those chemicals are in fact so incorporated, this is apparently a necessary consequence of the manufacturing process. Under these circumstances, the ammonia and sulphuric acid may be considered nontaxable. With respect to the caustic soda, our research indicates that sodium detracts from the stability and activity of cracking catalysts and is usually removed during the manufacturing process. (P. Emmett, Catalysis, Vol. 7, p. 51 (1966).) It appears, therefore, that the caustic soda is purchased primarily for use as a manufacturing aid, and is not intended to be incorporated in the finished catalyst. Unless the taxpayer can establish the contrary, the caustic soda should accordingly be treated as taxable.

JEM:jw