Is a pipeline company's purchase of a friction-reducing additive it injects into oil moving in its pipeline exempt from Kansas sales tax?

Plain-English summary

A pipeline company buys an additive that it injects into crude oil or refined products to reduce friction and improve product flow. The additive is a hydrocarbon that mixes into and becomes part of the product being moved and is never removed. Importantly, the pipeline company buys the additive but does not own the crude or refined product flowing through its pipeline. The company asked whether its purchases of the additive are exempt from Kansas sales tax. The Department's answer split on whether the pipeline movement is interstate or intrastate.

Interstate use — exempt. If the additive is used in an interstate pipeline for movement directly and immediately in interstate commerce, the purchase is exempt from sales tax as property consumed in interstate commerce under K.S.A. 2000 Supp. 79-3606(f).

Intrastate use — taxable. If the additive is used in intrastate pipelines, it does not qualify for exemption. The reason is that the exemption for property consumed in producing or moving a product runs to the owner or producer of that product, and here the pipeline company that buys the additive is not the owner or producer of the oil being transported (K.S.A. 2000 Supp. 79-3602(m)). The Department pointed to its earlier ruling P-1998-108 on the same point.

Bottom line: the same additive can be exempt or taxable depending on how it is used — exempt when consumed in interstate pipeline movement, but taxable when used in an intrastate pipeline, because the pipeline company does not own the product it is moving.

What this means for you

Pipeline operators

Whether your friction-reducing (or similar) additive purchases are taxable turns on interstate vs. intrastate movement. Additives consumed in moving product directly and immediately in interstate commerce are exempt (79-3606(f)); additives used in intrastate pipeline movement are taxable. Track which pipelines and movements each additive purchase supports.

Ownership of the product matters

The "consumed in production" style exemption generally runs to the owner or producer of the product. Because a common-carrier or transporter pipeline company typically does not own the oil it moves, it cannot claim that exemption for intrastate movement — a key distinction from a refiner or producer moving its own product.

Keep documentation tied to use

Because the exemption depends on the specific use, keep records connecting each additive purchase to interstate movement if you intend to claim exemption. Mixed or purely intrastate use will be treated as taxable.

Common questions

Q: Is a pipeline friction-reducing additive exempt from Kansas sales tax?
A: Only when used in an interstate pipeline for movement directly and immediately in interstate commerce — then it is exempt as consumed in interstate commerce (79-3606(f)). Used in an intrastate pipeline, it is taxable.

Q: Why is the additive taxable for intrastate pipelines?
A: Because the pipeline company buying the additive is not the owner or producer of the product being transported (79-3602(m)), so it cannot claim the exemption for property consumed in moving the product.

Q: Does it matter that the additive becomes part of the product?
A: The additive mixing into and becoming part of the crude or refined product did not change the result; the outcome turned on interstate vs. intrastate use and on the buyer not owning the transported product.

Citations and references

• K.S.A. 2000 Supp. 79-3606(f) — exempts, as consumed in interstate commerce, additives used in an interstate pipeline for movement directly and immediately in interstate commerce.
• K.S.A. 2000 Supp. 79-3602(m) — the definition under which additives used in intrastate pipelines fail the exemption because the additive's purchaser is not the owner/producer of the product transported.
• P-1998-108 — earlier Kansas ruling the Department cited on the same intrastate-pipeline point.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-086

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

August 8, 2001

XXXXXXXXX
XXXXXXXXX
XXXXXXXXX

Re: Private Letter Ruling Request

Dear XXXXX:

Please accept my apology for the delay in responding to your private letter ruling request. You indicated that your pipeline company uses an additive in its pipelines that improves the product flow by reducing friction. Your pipeline company injects this additive into either crude oil or refined products being transported by pipeline. It is a hydrocarbon and readily mixes with either product. It becomes part of the makeup of the crude or refined product and no effort is used to remove it. Your pipeline company is the buyer of the additive but does not own the crude or refined product being moved in its pipeline.

You requested a ruling as to whether the purchases of this additive would be exempt from sales tax. Please be advised that if such purchases are of additives used in an interstate pipeline for movement directly and immediately in interstate commerce, then such purchases would be considered exempt from sales tax as consumed in interstate commerce. K.S.A. 2000 Supp. 79-3606(f). However, if such additives are used in intrastate pipelines, they would not qualify for exemption, because the purchaser of the additive is not the owner/producer of the product being transported by pipeline. See K.S.A. 2000 Supp. 79-3602(m); P-1998-108 (available on our website, www.ink.org/public/kdor).

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.

Very truly yours,

Richard L. Cram

Date Composed: 08/16/2001 Date Modified: 10/11/2001

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