New York Advisory Opinion TSB-A-96(6)S: Is electricity used to power pipeline pumping stations that transport partially refined petroleum products between a refinery and terminals -- where the products get further blended before final retail sale -- exempt production electricity under Tax Law Section 1115(c)?

Plain-English summary

Atlantic Pipeline Corporation, a subsidiary of Sun Company, Inc., operates an interstate network of FERC-regulated pipelines, part of which runs through New York State, transporting petroleum fuel products (mostly gasoline, plus kerosene and fuel oil/diesel) refined from crude oil. Sun Company's refining arm, Sun R&M, produces roughly 75-85% of the products moving through the New York section of the network from crude oil Sun R&M purchased from third-party extractors. About 58% of the network's product is owned by Sun R&M itself, with the rest carried for others on a common-carrier basis subject to FERC regulation. The network's two major New York branches terminate at Sun R&M-owned terminals in Rochester and Buffalo, where Sun R&M product is temporarily held before being loaded into tanker trucks for retail delivery. Critically, about 49% of the total network product (all of Sun R&M's gasoline) arrives at these terminals still in "pre-retail" form -- at least one more processing stage (blending in detergent additives to create name-brand retail grades) happens at the point of loading onto delivery trucks, and further blending sometimes happens even at the retail pump to create intermediate octane grades. Four remote, unmanned New York pumping stations, drawing 100% of their electricity for moving product, power this transport.

The Department ruled the electricity isn't exempt. Tax Law § 1115(c) exempts electricity used directly and exclusively in production (manufacturing, processing, refining) of tangible personal property for sale, and 20 NYCRR § 528.22(c) requires the electricity to operate exempt machinery, create conditions necessary for production, or perform an actual part of the production process -- explicitly excluding activities merely "collateral" to production. The Department found Petitioner's pipeline transport is ancillary to, not a continuation of, the production process: it relied on its own prior ruling that pipeline transmission of natural gas is ancillary to production (Tenneco), and on case law holding that trucking ore from a mine to a mill over public roads isn't itself production (St. Joe Resources) and that pipeline gas transmission is similarly ancillary (Envirogas). The Department also considered -- and rejected -- the separate pipeline exemption in the last sentence of § 1115(a)(12), which covers pipe and associated equipment used in oil/gas production "to the point of sale to the first commercial purchaser": that exemption doesn't apply here because Sun R&M already bought its crude oil from third-party extractors before this pipeline network's transport even starts, meaning the "first sale" already happened upstream of the network. Since the pumping stations that power the network aren't used directly in production, per 20 NYCRR § 528.13(c)(2), the electricity that runs them falls outside the § 1115(c) exemption entirely -- so Petitioner's New York electricity purchases for its four pumping stations are subject to sales and use tax, notwithstanding that roughly half the transported product will undergo further processing after it arrives at its destination.

What this means for you

Pipeline operators transporting partially processed products

Moving your own already-refined or partially-processed product between refining sites, terminals, or further-processing locations is generally treated as transportation ANCILLARY to production -- not itself a production step -- even when meaningful additional processing (like additive blending) happens downstream at the destination. Electricity powering that transport typically won't qualify for the production-electricity exemption.

Oil, gas, and mining companies relying on the pipeline production exemption

The § 1115(a)(12) pipeline carve-out only reaches transport up to the FIRST sale to a commercial purchaser -- if your raw material (crude oil, ore, etc.) was already purchased from a third party before your pipeline/transport network's involvement begins, that "first sale" has already occurred, and your downstream transport won't qualify under this specific provision.

Businesses with multi-site, multi-stage production processes

Don't assume electricity is exempt just because more processing will eventually happen to the product -- what matters is whether the SPECIFIC equipment being powered (here, the pumping stations) is itself performing an actual production step, versus simply moving material between production stages.

Common questions

Q: Would the result differ if the pipeline itself performed some processing step (e.g., inline blending) rather than pure transport?
A: Potentially -- the ruling's reasoning turns specifically on the pumping stations' function being pure transportation of product, not an active production step; equipment that genuinely performs part of the production process (rather than merely moving material to where production continues) would be analyzed differently under 20 NYCRR § 528.22(c)(1)(iii).

Q: Does it matter that a large share (49%) of the transported product will undergo further processing?
A: No -- the ruling explicitly acknowledges this fact but still finds the transport ancillary, because the relevant question is whether the pumping stations THEMSELVES perform a production function, not whether processing happens somewhere else in the overall supply chain.

Q: Why doesn't the pipeline exemption in Section 1115(a)(12) apply here?
A: Because that exemption is expressly limited to pipe and equipment used in oil/gas activities "to the point of sale to the first commercial purchaser" -- and Sun R&M already purchased its crude oil from third-party extractors before the refined product ever entered this particular pipeline network, so the network's transport happens entirely after that "first sale" checkpoint.

Citations and references

Statutes and regulations:

• Tax Law § 1115(a)(12) (production machinery/equipment exemption; oil/gas pipeline carve-out to point of first sale)
• Tax Law § 1115(c) (production fuel/electricity/steam exemption)
• 20 NYCRR 528.13(c) (directly and predominantly; collateral activities not direct production)
• 20 NYCRR 528.22(c) (directly and exclusively for fuel/electricity/steam exemption)

Prior rulings and cases referenced:

• Matter of St. Joe Resources Co. v. New York State Tax Comm., 72 N.Y.2d 943, revg on the dissenting opn below 132 A.D.2d 98
• Envirogas, Inc. v. Chu, 114 A.D.2d 38, affd 69 N.Y.2d 632
• Matter of Tenneco Inc., State Tax Commission, January 17, 1986, TSB-H-86(86)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_6s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (6)S
Sales Tax
February 5, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S950522A

On May 22, 1995, a Petition for Advisory Opinion was received from Atlantic Pipeline
Corporation, 10 Penn Center, 1801 Market Street, Philadelphia, PA 19103-1699.
The issue raised by Petitioner, Atlantic Pipeline Corporation, is whether electricity consumed
by Petitioner in the transport of intermediate petroleum products between refining sites and locations
at which additional stages of processing are accomplished is consumed directly in the production of
tangible personal property for purposes of the exemption provided by Section 1115(c) of the Tax
Law.
Petitioner presents the following facts. Petitioner, a subsidiary of the Sun Company, Inc.
("Sun"), operates an interstate network of pipelines, regulated by the Federal Energy Regulatory
Commission (FERC), located partially within the State of New York. The network transports
petroleum fuel products which have been refined from crude oil.
The products carried in the section of the network located in New York (the "NY network")
over the course of a year include:
(a) Gasoline (85%)
(b) Kerosene (11%)
(c) Fuel Oil/Diesel Fuel (4%)
The NY network originates in Pennsylvania. Approximately 75% to 85% of the products
transported in the NY network have been produced from crude oil by Sun Company, Inc. (R&M)
("Sun R&M") in its local refining operation. Sun R&M purchases the crude oil used in its refining
operation from third parties who have extracted the crude oil.
Approximately 58% of the products in the NY network are owned by Sun R&M. These
products as well as the remaining 42% of the products carried in the network are transported on a
common carrier basis subject to FERC regulation.
The two major branches of the NY network terminate in Rochester and Buffalo. The
majority of the Sun R&M owned products are delivered in these cities to two terminals owned and
operated by Sun R&M.

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The Sun R&M owned products are temporarily held at the terminals and then loaded into
tanker trucks primarily for delivery to retail sites (gasoline stations etc.). With the exception of a
negligible portion of the products which might be trucked into Canada, the products are then
delivered by the tankers to retail sites located within New York.
All of the Sun R&M owned and manufactured gasoline products (or approximately 49% of
the total products handled in the network over the course of a year) are in pre-retail form when they
are delivered from the NY network to the terminals. The products will be subject to at least one
additional stage of processing at the point of delivery to the tanker trucks with the blending of
detergent additives to produce "name brand" grades of retail gasoline. This same process of addition
and blending is accomplished at the point of delivery to an additional indeterminate portion, equal
to at least one or two percent of the total products in the NY network, of the gasoline products.
In addition, a significant, though indeterminate, portion of the gasoline products are also
subject to an additional stage of processing (in this case inter-mixture) at the point of retail sale in
order to produce additional intermediate retail grades of gasoline. There are four grades of gasoline
products in the NY Network (86, 87, 93 and 94 octane). The Sun R&M owned products have been
refined to 86 and 94 octane grades and will be sold at retail in 86, 87, 89, 92, 93 and 94 grades. The
intermediate grades are produced by blending the 86 and 94 octane products at the pump.
Some portion of the remaining products (diesel fuel and kerosene) are subject to similar
intermixture at the point of delivery to the tanker trucks in order to produce retail winter grades of
diesel fuel. Some portion of the kerosene in the NY network is blended with a portion of the product
intended for use as diesel fuel at the point of delivery to lower the freezing point in order to produce
winter grade. Traditional fuel oil and diesel fuel are chemically identical fractional products of crude
oil. Red dye is added to that portion of the product intended for use as fuel oil prior to its leaving
the refinery.
The NY network is serviced by four pumping stations located in New York (at Corfu,
Caledonia, Cohocton and Corning) which, in concert with stations located on the Pennsylvania
portion of the network, power the movement of the products from the refining sites to the terminals
where approximately forty-nine percent (49%) of the contents are subject to one or more additional
stages of processing prior to transfer or sale to another.
These pumping stations are all remote, unmanned facilities, and one hundred percent of the
electricity consumed in their operation is devoted to movement of the products.
Approximately forty-nine percent of the network's operations are devoted to the transport of
manufactured gasoline products creating conditions necessary to the production of "name-brand",
retail grades of gasoline. The network transports the products after the initial stage of production
has begun but prior to the completion of the final preparation of the products for sale.

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Sales Tax
February 5, 1996
Section 1115 of the Tax Law provides, in part, as follows:
Section 1115. Exemptions from sales and use taxes--(a) Receipts from the
following shall be exempt from the tax on retail sales imposed under subdivision (a)
of section eleven hundred five and the compensating use tax imposed under section
eleven hundred ten:
*

*

*

(12) Machinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property,...by manufacturing,
processing,...refining, mining or extracting,... . This exemption shall include all pipe,
pipeline, drilling rigs, service rigs, vehicles and associated equipment used in the
drilling, production and operation of oil, gas, and solution mining activities to the
point of sale to the first commercial purchaser.
*

*

*

(c) Fuel, gas, electricity, refrigeration and steam, and gas, electric,
refrigeration and steam service of whatever nature for use or consumption directly
and exclusively in the production of tangible personal property,...for sale, by
manufacturing, processing,...refining, mining, extracting,...shall be exempt from the
taxes imposed under subdivisions (a) and (b) of section eleven hundred five and the
compensating use tax imposed under section eleven hundred ten.
Section 528.13(c) of the Sales and Use Tax Regulations which pertains to exempt machinery
and equipment provides, in part, as follows:
(c) Directly and predominantly. (1) “Directly” means the machinery or
equipment must, during the production phase of a process:
(i) act upon or effect a change in material to form the product to be sold, or
(ii) have an active causal relationship in the production of the product to be
sold, or
(iii) be used in the handling, storage, or conveyance of materials or the
product to be sold, or
(iv) be used to place the product to be sold in the package in which it will
enter the stream of commerce.
(2) Usage in activities collateral to the actual production process is not
deemed to be used directly in production.
Section 528.22(c) of the Sales and Use Tax Regulations which pertains to exempt fuel, gas,
electricity, refrigeration and steam provides, in part, as follows:

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(c) Directly and exclusively. (1) Directly means the fuel, gas, electricity,
refrigeration and steam and like services, must during the production phase of a
process, either:
(i) operate exempt machinery or equipment; or
(ii) create conditions necessary for production; or
(iii) perform an actual part of the production process.
(2) Usage in activities collateral to the actual production process is not
deemed to be use directly in production.
In this case, Petitioner is a Federal Energy Regulatory Commission (FERC) regulated
interstate network of pipelines which, as noted in the statement of facts, transports product on a
common carrier basis subject to FERC regulation. Approximately 58% of the product transported
is owned by Petitioner's parent (Sun R & M) and the remaining portion by others. The primary
function of Petitioner's pipeline and pumping stations is to transport product. The transportation of
Sun R & M owned product to Sun R & M terminals by Petitioner's pipeline is ancillary to and not
a continuation of the production process. This conclusion is supported by the decision in Matter of
St. Joe Resources Co. v. New York State Tax Comm. 72 NY2d 943, revg on the dissenting opn
below 132 AD2d 98, where the court upheld the taxability of trucks used to transport ore from a
mine to a mill over public roads, on the grounds that the transportation was not part of production.
See also Envirogas, Inc. v. Chu, 114 AD2d 38, affd 69 NY2d 632 and Matter of Tenneco Inc., State
Tax Commission, January 17, 1986, (TSB-H-86(86)S), which hold that pipeline transmission of
natural gas is ancillary to production.
The last sentence of section 1115(a)(12) of the Tax Law exempts pipeline and other
associated equipment “used in the drilling, production and operation of oil, gas, and solution mining
activities to the point of sale to the first commercial purchaser.” (Emphasis added) This provision
does not apply to the NY network. Sun R&M purchases the crude oil used in its refining operation
from third parties who have extracted the crude oil. The extracted crude oil, therefore, has been sold
before Sun R&M's refined petroleum fuel products enter the NY network. Accordingly, for purposes
of the last sentence of section 1115(a)(12), the NY network is not used directly and predominantly
in production.
Since the transportation of fuel products in Petitioner's pipeline is ancillary to the production
process, the pumping stations which power the movement of the products through the pipeline are
not used directly in production. See 20 NYCRR 528.13(c)(2). Thus, the electricity used to power
the pumping stations is not used directly and exclusively in the production of tangible personal
property for sale and, therefore, does not fall within the scope of the exemption under section

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Sales Tax
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1115(c) of the Tax Law. Accordingly, Petitioner's purchases of electricity to operate the four
pumping stations located within New York State are subject to sales and use taxes.

DATED: February 5, 1996

/s/
DORIS S. BAUMAN
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.