Is diesel fuel used in the various steps of a sandpit operation exempt from Kansas sales tax as consumed in production?

Plain-English summary

A fuel supplier asked whether diesel consumed in a customer's sandpit operation is exempt as "consumed in production." The Department ruled it depends on the step: the extraction and screening stages qualify, but moving and loading the finished sand do not.

The four steps described. The customer operates a sandpit where: (1) sand is pumped from the pit by a diesel-powered pump on a floating barge; (2) the sand is screened and separated; (3) the sand is moved by a diesel front-end loader from the screens to a stockpile; and (4) sold sand is loaded into trucks by a diesel front-end loader.

The consumed-in-production exemption. The Department pointed to K.S.A. 79-3606(n), which exempts sales of tangible personal property (here, diesel fuel) "which is consumed in the production, manufacture, processing, mining, drilling, refining or compounding of tangible personal property . . . for ultimate sale at retail." K.S.A. 79-3602(m) defines "property which is consumed" as property "essential or necessary to and which is used in the actual process of and immediately consumed or dissipated in" that production, "and which is not reusable for such purposes."

The Department's split decision. "The diesel fuel used or consumed in process 1. and 2. is exempt" - that is, pumping the sand from the pit (the mining step) and screening/separating it (processing). But "processes 3. and 4. do not qualify for the exemption as 'consumed in production.' Diesel used in these activities is not exempt from Kansas sales or compensating taxes." Moving the screened sand to a stockpile and loading it onto trucks for shipment fall outside the actual production process.

Bottom line: the diesel that powers the extraction and screening of the sand is exempt as consumed in production/mining, while the diesel that merely moves or loads the finished product is taxable.

What this means for you

Sand, gravel, and quarry operators (and their fuel suppliers)

Diesel used in the actual production steps - pumping/extracting the material and screening or processing it - can be purchased exempt as consumed in production. Diesel used to move the finished product to a stockpile or to load it onto customers' trucks is taxable.

The line is "actual process of production"

The exemption reaches fuel immediately consumed in the mining, processing, or manufacturing itself. Once the product is made, post-production handling - stockpiling and shipping - is no longer part of production, so the fuel for it is taxable.

Track fuel by use

Because the same type of equipment (front-end loaders) can fall on either side of the line, allocate and document diesel usage by function to support the exempt portion.

Common questions

Q: Is diesel used in a sandpit exempt from Kansas sales tax?
A: Only for the production steps. Diesel used to pump sand from the pit and to screen/separate it is exempt as consumed in production; diesel used to move it to a stockpile or load trucks is taxable.

Q: Why are moving and loading treated differently?
A: The consumed-in-production exemption covers fuel used in the actual process of production (mining, processing). Moving finished sand to a stockpile and loading it for shipment are after production, so they do not qualify.

Q: Which statutes apply?
A: K.S.A. 79-3606(n) provides the consumed-in-production exemption, and K.S.A. 79-3602(m) defines property "consumed" as that essential to and immediately consumed in the actual production process and not reusable.

Citations and references

• K.S.A. 79-3606(n) - exempts sales of tangible personal property consumed in the production, manufacture, processing, mining, drilling, refining, or compounding of tangible personal property for ultimate sale at retail. The Department applied it to diesel used to pump and screen sand (exempt), but not to diesel used to stockpile or load the finished sand (taxable).
• K.S.A. 79-3602(m) - defines "property which is consumed" as tangible personal property essential or necessary to, used in the actual process of, and immediately consumed or dissipated in production, and not reusable for such purposes.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2000-055

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 30, 2000

XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX

Dear XXXXXXXXXXXXXXX:

The purpose of this letter is to respond to your letter dated June 23, 2000. In it, you ask if diesel consumed in certain quarry operations are “consumed in production” and therefore exempt from Kansas sales and compensating taxes.

Your customer operates a sandpit. 1.) Sand is pumped from the pit via a diesel-powered pump on a floating barge. 2.) The sand is screened and separated. 3.) The sand is then moved by diesel powered front-end loader from the screens to a stockpile. 4.) Sold sand is loaded into trucks by diesel powered front-end loader. You ask if diesel used in any of these processes are exempt from Kansas sales tax.

The applicable statutes are K.S.A. 79-3606(n), which provides for tax exemption for sales of tangible personal property (in this case diesel fuel) which is consumed in the production, manufacture, processing, mining, drilling, refining or compounding of tangible personal property. . . for ultimate sale at retail within or without the State of Kansas. In addition, K.S.A. 79-3602(m) defines "property which is consumed" as tangible personal property which is essential or necessary to and which is used in the actual process of and immediately consumed or dissipated in the production, manufacture, processing, mining, drilling, refining, or compounding of tangible personal property for sale in the regular course of business and which is not reusable for such purposes.

It is the opinion of the Kansas Department of Revenue:

The diesel fuel used or consumed in process 1. and 2. is exempt.

Processes 3. and 4. do not qualify for the exemption as “consumed in production”. Diesel used in these activities is not exempt from Kansas sales or compensating taxes.

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 at (785) 296-5330 if you need to discuss this matter further.

Sincerely,

Mark D. Ciardullo
Tax Specialist

Date Composed: 10/30/2000 Date Modified: 10/11/2001

Table 1

Table 2