Which chemicals added to natural gas — odorants, dehydrating glycol, anticorrosion chemicals — are exempt from Kansas tax?

Plain-English summary

A taxpayer asked about the taxability of odorants and anticorrosion chemicals added to natural gas. The Department first explained a key distinction: "[w]hile natural gas producers can claim exemption when chemicals are consumed in production, pipelines cannot make the same claim," because "pipelines do not produce a taxable product or provide a taxable service." As a result, "the same chemical [can] be taxed when sold to a pipeline company that is exempted when sold to a gas producer."

Odorants are exempt for everyone. Odorants (capstan or thiophane) are added to natural gas for safety under state and federal law. "Odorants are an integral part of natural gas and are exempt from Kansas sales and use tax. It makes no difference what company buys and furnishes this component part of natural gas."

Dehydrating glycol — exempt for producers, taxable for pipelines. "Triethylene glycol, and chemicals with similar uses for dehydrating [natural] gas, that are used by a natural gas producer are exempt from sales and use tax as consumed in production," citing In re Derby Refining Co., 17 Kan. App. 2d 377 (1992). "However, the same chemical is not exempt if sold to a pipeline company." Pipelines "are considered to be providing a transportation service and cannot claim that they consume their purchases in their production of a taxable product," so "triethylene glycol sold to a pipeline company is taxable."

Anticorrosion chemicals are taxable. Chemicals like isopropanol alcohol used to inhibit pipeline corrosion "are not exempt." They "are not component parts of [natural] gas because they are not essential or necessary to the production of natural gas" (citing K.A.R. 92-19-54(a)(1)); they "serve to protect the pipeline." Even the fact that "trace amounts of these chemicals may be detected in [natural] gas provided to end users does not change [the] tax treatment."

Bottom line: whether a chemical added to natural gas is exempt depends on what it does and who buys it — odorants are always exempt as a required component; dehydrating glycol is exempt only for producers (consumed in production), not pipelines; and anticorrosion chemicals that merely protect the pipeline are taxable.

What this means for you

The buyer's role matters, not just the chemical

A producer can claim the consumed-in-production exemption; a pipeline generally cannot, because it provides a transportation service rather than producing a taxable product. The same chemical can therefore be exempt for one buyer and taxable for another.

Odorants are a required component of the gas

Because odorants are legally required and become an integral part of the natural gas, they are exempt regardless of which company buys and adds them.

Dehydrating chemicals track the consumed-in-production rule

Triethylene glycol and similar dehydrating chemicals are exempt when a producer uses them (consumed in production, per Derby Refining), but taxable when a pipeline buys them.

Anticorrosion chemicals protect equipment, so they are taxable

Chemicals that inhibit pipeline corrosion protect the equipment rather than forming a necessary part of the gas, so they are taxable — even if trace amounts end up in the delivered gas.

Common questions

Are natural gas odorants taxable in Kansas?
No. Odorants (capstan or thiophane) are an integral, legally required component of natural gas and are exempt from Kansas sales and use tax, regardless of who buys them.

Is triethylene glycol exempt?
It depends on the buyer. Used by a natural gas producer, it is exempt as consumed in production; sold to a pipeline company, it is taxable.

Why can't a pipeline claim the exemption?
Because a pipeline provides a transportation service and does not produce a taxable product, so it cannot claim that its chemicals are consumed in production.

Are pipeline anticorrosion chemicals taxable?
Yes. Anticorrosion chemicals such as isopropanol alcohol protect the pipeline and are not a necessary component of natural gas, so they are taxable even if trace amounts appear in the delivered gas.

Citations and references

• In re Derby Refining Co., 17 Kan. App. 2d 377, 838 P.2d 354 (1992) — supports exemption of dehydrating chemicals (triethylene glycol) as consumed in production when used by a natural gas producer.
• K.A.R. 92-19-54(a)(1) — cited for the conclusion that anticorrosion chemicals are not component parts of natural gas because they are not essential or necessary to its production, and are therefore taxable.
• The ruling treats odorants as an exempt integral component of natural gas and distinguishes producers (who can claim consumed-in-production) from pipelines (who cannot, as transportation-service providers); it does not cite a numbered exemption statute.
• K.A.R. 92-19-59 — authorizes Kansas private letter rulings; this ruling binds the Department only as to the requesting taxpayer and the facts presented.
• Issued September 1, 1998 by Thomas E. Hatten, Attorney, Policy & Research, Kansas Department of Revenue.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1998-108

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 1, 1998

XXXXX
XXXXX
XXXXX

RE: Your letter of
December 30, 1997

Dear XXXXX:

I have been asked to respond to your letter of December 30, 1997 addressed to Mr. Robert Sweat. In it, you ask about the taxability of odorants and anticorrosion chemicals that are added to natural gas. While natural gas producers can claim exemption when chemicals are consumed in production, pipelines cannot make the same claim. This is because pipelines do not produce a taxable product or provide a taxable service. This disparity can result in the same chemical being taxed when sold to a pipeline company that is exempted when sold to a gas producer.

Odorants (capstan or thiophane) are chemicals used to odorize natural gas. Various state and federal laws require odorants to be placed in natural gas for reasons of safety. Odorants are an integral part of natural gas and are exempt from Kansas sales and use tax. It makes no difference what company buys and furnishes this component part of natural gas.

Triethylene glycol, and chemicals with similar uses for dehydrating nature gas, that are used by a natural gas producer are exempt from sales and use tax as consumed in production. See In re Derby Refining Co., 17 Kan.App. 2d 377, 838 P.2d 354 (1992). However, the same chemical is not exempt if sold to a pipeline company. This rule applies event though both pipelines and producers use underground storage to store natural gas. As discussed, pipelines are considered to be providing a transportation service and cannot claim that they consume their purchases in their production of a taxable product. Thus, triethylene glycol sold to a pipeline company is taxable.

Chemicals, such as isopropanol alcohol, that are used to inhibit pipeline corrosion are not exempt from sales and use tax. Anticorrosion chemicals are not component parts of nature gas because they are not essential or necessary to the production of natural gas. See K.A.R. 92-19-54(a)(1). Anticorrosion chemicals serve to protect the pipeline. Pipeline and other equipment used in the transportation of natural gas are not exempt from sales tax. These chemicals are taxable since they are used to protect the pipeline and are not a necessary or integral part of natural gas and are merely incidental to natural gas production rather than a necessary or essential part of it. Please note that the fact that trace amounts of these chemicals may be detected in nature gas provided to end users does not change tax treatment of these chemicals.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination. Please call me if you have any additional questions.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 09/02/1998 Date Modified: 10/10/2001

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