Did a refiner's self-produced commercial-grade butane and propane qualify as exempt waste by-products, still gas, or gas delivered through pipes?

Plain-English summary

A petroleum refinery produced commercial-grade butane and propane. It sold some for blending and heating and burned excess amounts in place of purchased natural gas when economically favorable.

The products were ordinary, marketable outputs of refining rather than low-value manufacturing waste. They also were not "still gas" because the described butane and propane were separate products, not the refinery-gas mixture in the submitted definition.

The pipeline exemption did not apply either. Purchased crude oil was liquid and was not furnished by the seller through a pipe, while movement of the refiner's own gases through its internal pipes was not delivery to consumers. Counsel recommended denying the petition.

What this means for you

Petroleum refiners, industrial fuel users, and tax advisers

Analyze marketability, product form, and who owns and operates the delivery system. Burning a valuable self-produced product as substitute fuel does not automatically make it waste or still gas.

Common questions

Q: Were the butane and propane waste by-products?

A: No.

Q: Did they qualify as still gas?

A: No. They were not the mixture described by that term.

Q: Did internal pipeline movement qualify under section 6353?

A: No.

Citations and references

• California Revenue and Taxation Code §§ 6353 and 6358.1
• Union Oil Co. v. State Board of Equalization, 224 Cal. App. 3d 665 (1990)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 596.0140
• Original supporting opinion: 596.0140 PDF

Original ruling text

596.0140
STATE OF CALIFORNIA
BOARD OF EQUALIZATION
BUSINESS TAXES APPEALS REVIEW SECTION
In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
ABC, INC.
Petitioner

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DECISION AND RECOMMENDATION
No. SR REDACTED TEXT

The Appeals conference in the above-referenced matter was held by Senior Staff Counsel H. L. Cohen on March 11, 1993 in Houston, Texas. Appearing for Petitioner:

Mr. A
Assistant Vice President
ABC, Inc.
Mr. B
Assistant Manager
Tax Audit & Litigation
ABC, Inc.
Mr. C
Senior Tax Attorney
ABC, Inc.
Mr. D

Appearing for the
Sales and Use Tax Department:

Mr. S. Zigelman
Area Administrator
Houston Area Office
Mr. J. Clayton
Supervising Tax Auditor
Houston Area Office
Mr. W. Hopkins
Supervising Tax Auditor
Out-of-State District
Ms. A. Paras
Senior Tax Auditor
Houston Area Office

ABC, INC.
SR OHC REDACTED TEXT

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May 6, 1993
596.0140

Protested Item
by:

The protested tax liability for the period April 1, 1987 through June 30, 1990 is measured

Item
C.

State, Local
and County

Deduction claimed for consumption of
waste by-products disallowed

$3,814,166

Contentions
Petitioner contends that the self-produced butane and propane which it consumes constitute waste by-products or still gas that are exempt from tax. Petitioner also contends that these gases are exempt because they are delivered through pipelines. Summary Petitioner is a corporation which operates a petroleum refinery in Hercules, California. The name was formerly DEF. The last prior audit was for the period through September 30, 1985. Petitioner purchases crude oil which is transported by ship to a wharf near Hercules. The crude oil is pumped from the wharf to the refinery through a 24-inch pipeline which is owned by petitioner. During the refining process, petitioner produces butane and propane. Some butane is used in gasoline blending. Both butane and propane are sold for heating purposes. The amount of butane and propane produced exceeds the demand for blending and heating purposes. Petitioner purchases natural gas from Pacific Gas & Electric Company (PG&E) for petitioner's heating needs in the refinery. The excess butane and propane which petitioner produces is used as a substitute for the natural gas purchased from PG&E when the economics of such use are advantageous to petitioner. The auditor regarded petitioner's use of butane and propane for heating purposes in the refining process as a taxable use and applied tax to the cost to petitioner of these components of the crude oil. Petitioner does not contest the method of allocating costs to the gases. The auditor based this application of tax on the position taken by the Board in the prior audit of petitioner. The notice of redetermination in the prior audit dated December 26, 1990 states: "The Board concluded that the 'on-spec' propane and butane produced in your refining process are commercial grade products of the type ordinarily produced in the refining process, are commercially marketable, and therefore cannot be classified as 'waste by-products'. Accordingly, the Board ordered the tax redetermined without adjustment." Petitioner had requested a rehearing before the Board on this decision, but the Board denied the request on January 9, 1992 stating:

ABC, INC.
SR OHC REDACTED TEXT

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May 6, 1993
596.0140

"The Board has denied the request for rehearing because (1) the Board's redetermination was not based on the butane and propane in question being nonmarketable; (2) the market grade butane and propane in question is not 'still gas' within Section 6358.1(b), and (3) the Board fully considered and adopted the test from the Union Oil case in deciding that the butane and propane in question were moderate-to-high value by-products, rather than low value by-products, and thus were not a 'waste by-product' within the meaning of Section 6358.1." Petitioner contends that since the crude oil is brought into the refinery through a pipeline and the butane and propane are transported inside the refinery by pipeline, the use of the butane and propane is exempt under Section 6353 of the Revenue and Taxation Code. That section applies to gas delivered through pipes. Petitioner also contends that the consumption of the butane and propane is exempt under Section 6358.1 which exempts still gas and waste by-products from manufacturing from tax. Petitioner contends that the butane and propane qualify as both manufacturing waste by-products and still gas. Petitioner submitted a copy of the American Petroleum Institute (API) definition of still gas. It reads as follows: "Any form or mixture of gas produced in refineries by distillation, cracking, reforming and other processes, the principal constituents of which are methane, ethane, ethylene, propane, propylene, butanes, butylene, etc. Statistically, still gas is reported in two categories as follows: "a.

Petrochemical Feedstock Use--Includes all refinery gas streams which are sold to or directed to chemical or rubber manufacturing operations for further processing, less the amount of such streams returned to the source refinery.

"b.

Other Use--All other still gas including that used as refinery fuel." Analysis and Conclusions

Section 6353 provides in pertinent part:
"There are exempted from the taxes imposed by this part the gross receipts from the sales, furnishing, or service of and the storage, use, or other consumption in this state of gas, electricity, and water, including steam and geothermal steam, brines, and heat, when delivered to consumers through mains, lines, or pipes...." The crude oil which petitioner purchases is not a gas, it is a liquid. Further, it is not furnished by the seller to petitioner through a pipe. The pipe belongs to petitioner. The fact that petitioner transports the butane and propane inside the refinery through pipes does not qualify the gases for exemption. Petitioner is not delivering gas to consumers. It is transporting its own property from one location to another location. Section 6358.1 provides:

ABC, INC.
SR OHC REDACTED TEXT

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May 6, 1993
596.0140

"(a) There are exempted from taxes imposed by this part the gross receipts from the sale of and the storage, use, or other consumption in this state of either of the following: "(1) Organic products grown expressly for fuel purposes. "(2) Waste byproducts from agricultural or forest products operations, municipal refuse, or manufacturing, which are used in an industrial facility as a fuel source in lieu of the use of either oil, natural gas or coal. "(b) In addition to subdivision (a), the exemption under this section shall include the use of still gas produced in the refining process from purchased crude oil." In the appeal of the prior audit, the Board concluded that butane and propane which are produced in the refinery process and which meet commercial specifications are products of the type ordinarily produced in the refinery process and commercially marketed. They cannot, therefore, be classified as manufacturing waste by-products. The Board concluded that the holding in the case of Union Oil Company of California v. State Board of Equalization, 224 Cal.3d 665, distinguishes between low value by-products and high value by-products and justifies the denial of the exemption for butane and propane. The API defines still gas as a mixture including "methane, ethane, ethylene, propane, propylene, butanes, butylene" and so forth. Petitioner's propane and butane are not mixtures. They do not meet the definition of still gas. Recommendation Deny the petition. H. L. Cohen, Senior Staff Counsel

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