Did recycled lubricant oil sold as substitute industrial fuel qualify for the waste-by-product exemption?

Plain-English summary

A taxpayer proposed acquiring oil previously used as lubricant in vehicles and machinery from service stations, railroads, and public utilities, then reselling it as industrial fuel in place of natural gas.

California analogized the drain oil to scrap tires that had entered the municipal waste stream before a market emerged for alternative-fuel use.

The proposed sales could qualify under section 6358.1(b), but only if evidence showed the recycled drain oil was part of the municipal waste stream. Legal staff told the auditor to compile that evidence before issuing an opinion.

What this means for you

Used-oil collectors, industrial fuel buyers, and tax advisers

Trace the oil's prior use and disposal path. Alternative-fuel use alone was not enough; the seller needed proof that the material came from the municipal waste stream.

Common questions

Q: What was drain oil in this memorandum?

A: Oil previously used as lubricant in vehicles or machinery.

Q: Could its sale qualify?

A: Yes, conditionally.

Q: What evidence mattered?

A: Proof that the oil was part of the municipal waste stream and used as qualifying industrial fuel.

Citations and references

• California Revenue and Taxation Code § 6358.1(b), as cited in the source

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 596.0300
• Original supporting opinion: 596.0300 PDF

Original ruling text

596.0300
State of California

Board of Equalization

Memorandum
To:

Principal Tax Auditor

From:

Legal (JEM)

Subject:

REDACTED TEXT

Date:

August 20, 1985

Your memo to Mr. Donald Hennessy dated August 13, 1985, has been referred to the undersigned for reply. You ask whether this taxpayer’s proposed sale of recycled drain oil will qualify under Section 6358.1, subdivision (b), which authorizes a temporary exemption for sales of “[w]aste 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.” We understand that drain oil is oil which has previously been used as a lubricant in vehicles or other types of machinery. Taxpayer apparently intends to acquire recycled drain oil from service stations, railroads and public utility companies, and then resell it to a customer. Taxpayer implies, and we assume, that the customer will use the recycled drain oil as an industrial fuel in lieu of natural gas. The legal staff has previously determined that scrap tires acquired from bus and trucking companies could qualify as “waste byproducts from …municipal refuse….” This determination was based on evidence that the scrap tires were “part of the municipal waste stream.” (That is, until their value as an alternative fuel source was discovered, the scrap tires had been dumped in landfills.) Accordingly, the staff concluded that the scrap tires would be exempt under Section 6358.1, subdivision (b), when sold for the use specified in the statute. By analogy, taxpayer’s proposed sales will also qualify for the exemption, provided that the recycled drain oil is part of the municipal waste stream. You should compile evidence on this point before issuing your opinion to the taxpayer.

JEM:ba