Was electricity used by one subsidiary to process seismic data gathered by another subsidiary exempt as exploration?

Plain-English summary

One affiliate gathered raw seismic data in the field while another affiliate used computers to process it at a shared site. Texas distinguished that structure from an earlier hearing where the same taxpayer both gathered and processed geophysical data as part of exploration.

Because the processing subsidiary did not gather the data, the Comptroller said it was not engaged in exploration for material extracted from the earth. Electricity used to run its computers was taxable.

Electricity supplied to other subsidiaries occupying the site was also taxable commercial use to the parent company. The letter allowed the taxpayer to request a redetermination hearing if it disagreed with the audit assessment.

Common questions

Was the processing electricity exempt? No.

What fact distinguished the earlier hearing? There, the same taxpayer gathered and processed the data; here, separate affiliates performed those functions.

Was electricity supplied to other affiliates exempt? No. It was treated as commercial use.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8811L0918B05

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller November 8, 1988

Dear **:

Thank you for your letter asking whether the electricity used in
connection with the processing of seismic data at the **
site, for the years involved, qualifies as an exempt use.

As I understand from the facts presented, you are currently under
audit and tax is being assessed on the electricity used at the
** site because the predominant use is not for exempt
purposes. You explained that the corporation (within the
affiliated group of corporations headed by the Taxpayer) that
performed the electronic processing of the seismic data was
different from the one that collected the raw data (field work).

You also stated that the * site was used to house the
computers which processed the seismic data gathered by geophysical
service subsidiaries of the Taxpayer. The site has only one meter
to record electricity usage. The amount due for electricity usage
was paid by the Taxpayer through Division 14, a digital systems
division of the Taxpayer. As the host division of the site it had
the additional responsibility of allocating the cost of
electricity usage to the other divisions and entities housed at
this major site. Allocations for the seismic data processing
activities at the site were charged to Division 06, a geophysical
division of the Taxpayer.

You explained that this procedure was effective through December
1986. As of January 1987, the procedure changed due to a reorgan-
ization plan that eventually split **'s geophysical
business from its electronics business. The new procedure used
the same allocation scheme described above, except the electricity
used in seismic processing was charged to ** Service,
Inc., a wholly-owned subsidiary of the Taxpayer and a member of
the consolidated group of ** companies, instead of
Division O6.

This cross-entity (between a parent corporation and its wholly-
owned subsidiary) charge occurred during the first half of the
year until ****** Service Inc. physically moved its
operations to another location.

The facts in Comptroller's Decision Hearing No. 12,507 were that
the taxpayer gathered the geophysical data and then processed the
data at their own location. The decision was that the geophysical
work, the gathering and processing of the data, constituted
"exploration for ... a material extracted from the earth."

In your fact situation, one subsidiary gathers the data and
another subsidiary processes the data. The subsidiary processing
the data is not engaged in "exploration for ... a material extracted
from the earth." The electricity to operate the computers is
taxable.

Your fact situation further indicates that electricity was
provided to other subsidiaries occupying space at the * site.
The electricity provided to the subsidiaries is commercial use and
taxable to **.

If you disagree with assessment of tax in the audit, you may
request a redetermination hearing. I am enclosing a brochure
explaining the procedure for your information.

This opinion is based on the facts presented. If there are
additional or different facts, the opinion may change.

Please feel free to contact me if you have additional questions or
need more information. You may call me toll free at 1-800-252-
5555, ext. 3-4666 or write me at Tax Correspondence.

Sincerely,
Jo Ann Dieck
Tax Correspondence