When a distributor's propane is a mix of natural-gas propane and petroleum-gas propane, how much of its Connecticut gross earnings is subject to the petroleum products gross earnings tax?

Plain-English summary

Connecticut's petroleum products gross earnings tax (Conn. Gen. Stat. § 12-587) taxes companies on their earnings from distributing "petroleum products" in the state. A propane distributor asked a practical question: its propane is actually a blend. It buys from a supplier of natural-gas propane, but that product gets intermingled in the pipeline with petroleum-gas propane from other producers before it reaches Connecticut — roughly 70% natural-gas propane and 30% petroleum-gas propane. How much of its earnings is taxable?

The key is that the two kinds of propane have different tax status:

• Petroleum-gas propane is a "petroleum product" — it's on the list (drawn from SIC Major Group 29, Industry No. 2911) in Regs. § 12-602-1a(b) — so it is taxable.
• Natural-gas propane is not a petroleum product — it isn't made from petroleum or a petroleum derivative, and it sits under a completely different SIC major group (Group 13) — so it is not taxable.

When they're commingled, you can no longer physically tell the molecules apart. But the tax reaches only earnings from distributing "petroleum products." So DRS held that only the portion of the company's gross earnings attributable to the petroleum-gas propane is taxable. The natural-gas propane portion is excludable.

The condition: the company can exclude the natural-gas percentage of its gross earnings only if it can establish that percentage to the Commissioner's satisfaction by keeping written documentation of the extent to which its propane's source is natural gas — even though, after commingling, the two are physically inseparable.

What this means for you

Propane and blended-fuel distributors

If your product is a mix of taxable and non-taxable components, you don't owe the petroleum products gross earnings tax on the whole thing. Only the petroleum-gas propane share of your earnings is taxable; the natural-gas propane share can be excluded.

Documentation is the price of the exclusion

The exclusion isn't automatic — you must prove the split. Keep written records of the source composition (here, the ~70% natural-gas / ~30% petroleum-gas breakdown) sufficient to satisfy the Commissioner. Without documentation, you can't carve out the non-taxable portion.

Commingling doesn't change the tax character

Even though blended propane is physically inseparable once mixed, the tax still follows the source composition. The mixing doesn't convert non-taxable natural-gas propane into a taxable petroleum product — but you have to substantiate the proportions.

Watch the import-based tax threshold

The ruling notes that the natural-vs-petroleum distinction can also matter under § 12-587(c) for a company buying $100,000 or more of petroleum products in a quarter. If you're near that threshold, the composition of your purchases affects your import-tax exposure too.

Common questions

Q: Is propane subject to Connecticut's petroleum products gross earnings tax?
A: Only the petroleum-gas propane portion. Petroleum-gas propane is a taxable "petroleum product"; natural-gas propane is not. In a blend, only the petroleum-gas share of gross earnings is taxable.

Q: My propane is commingled — how do I handle the tax?
A: You may exclude the natural-gas propane percentage of your gross earnings, but you must keep written documentation establishing that percentage to the Commissioner's satisfaction.

Q: Why is natural-gas propane treated differently?
A: Because it isn't made from petroleum or a petroleum derivative and falls under a different SIC classification (Group 13, not the Group 29 list of petroleum products). It simply isn't a "petroleum product" under § 12-587.

Q: What if I can't document the split?
A: Then you can't exclude the natural-gas portion. The exclusion depends on proving the source composition; absent records, the earnings aren't carved out.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-587 (petroleum products gross earnings tax; definition of "petroleum products" as products containing or made from petroleum or a petroleum derivative)
• Conn. Agencies Regs. § 12-602-1a(b) (elaborates the definition; list drawn from SIC Major Group 29, Industry No. 2911)
• Conn. Gen. Stat. § 12-587(c) (import-based tax; $100,000-per-quarter threshold)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 94-16

Original ruling text

Ruling 94-16, Petroleum Products Gross Earnings Tax

FACTS:

A company (the "Company") is engaged in the sale and distribution of propane to locations in Connecticut. It purchases the propane from a distributor (the "Distributor") that sells only natural gas propane. The Distributor distributes its product through a system in which the natural gas propane is mingled with petroleum gas propane from other producers and distributors before the propane gas reaches Connecticut. Approximately 70 percent of the gas delivered through the system to the Company is natural gas propane, with the remainder being petroleum gas propane.

ISSUE:

Whether any part of the gross earnings of the Company from its distribution in Connecticut of propane gas which contains intermingled petroleum gas propane and natural gas propane must be included in the measure of Petroleum Products Gross Earnings Tax under Conn. Gen. Stat. §12-587.

DISCUSSION:

Conn. Gen. Stat. §12-587 defines "petroleum products" as those products which contain or are made from petroleum or a petroleum derivative. Conn. Agencies Regs. §12-602-1a(b) elaborates on that definition by stating that the term means "refined products made from crude petroleum and its fractionation products, through straight distillation of crude oil or through redistillation of unfinished petroleum derivatives," and provides a list of petroleum products that is drawn from Major Group 29, Industry No. 2911 of the Standard Industrial Classification Manual of 1972. Thus, because petroleum gas propane is included in this list as a "petroleum product," it is taxable as such.

Natural gas propane, on the other hand, is not included in the definition of "petroleum product." It is not made from either petroleum or a petroleum derivative (in fact, it is found under a completely different major group in the Standard Industrial Classification Manual (Major Group 13)). Thus, natural gas propane is not taxable under the Petroleum Products Gross Earnings Tax.

A problem arises where, as here, petroleum gas propane and natural gas propane are intermingled, whether during their transportation or during storage. In such cases, the components may no longer be distinguished from each other, nor is the distinction generally of importance to the person using the propane gas (except under Conn. Gen. Stat. § 12-587(c) for a company purchasing $100,000 or more of petroleum products during a quarterly period).

However, because the Petroleum Products Gross Earnings Tax is imposed only on gross earnings from the distribution in this state of "petroleum products" as defined in Conn. Stat. §12-587 and Conn. Agencies Regs. §12-602-1a(b), only the portion of the gross earnings of the Company from its sale and distribution of propane gas which is derived from petroleum gas is taxable.

RULING:

To the extent that the Company can establish to the satisfaction of the Commissioner the percentage of propane gas distributed by it that is natural gas propane, by maintaining written documentation of the extent to which the source of the propane is natural gas, the Company may exclude that percentage of its gross earnings from the distribution of the propane gas from the Petroleum Products Gross Earnings Tax, even though the natural gas propane may have become mingled with petroleum gas propane in the distribution system.

LEGAL DIVISION

Issued: August 3, 1994