Is electricity used to cool natural gas, run compressors, and pump water (including salt water) at an underground natural gas storage facility exempt from Texas sales tax?

Plain-English summary

A natural gas company asked the Comptroller's office how sales tax applies to the electricity it buys, on two separate meters, at a facility that stores natural gas in underground caverns.

The first meter powers electric fans that cool natural gas from 210 degrees so compressors can move it into underground caverns, and it also powers electric controls that monitor those compressors. The company argued this electricity should be exempt either as "processing" (changing the gas's temperature to make it marketable) or as transportation of a material extracted from the earth. The Comptroller disagreed on the processing point: compressors used to increase or decrease gas pressure so the gas can be transported are transportation equipment, not processing equipment, so electricity used for that purpose is taxable. However, electricity used to transport natural gas to or from an underground storage facility is exempt, as long as the gas is not being processed or altered (for example, deodorized) along the way. Because this single meter covers both a taxable use (compression for transport, to the extent it's not exempt transportation) and an exempt use (transportation without processing), the company must determine the predominant use of the meter under Rule 3.295(d) and (e) to know how the electricity should be taxed.

The second meter powers pumps that move water from a well to a holding tank and then to cooling jackets on the compressors, and during "leaching" (enlarging the underground caverns by circulating water through them) the same meter pumps salt water to a disposal well three miles away. The Comptroller ruled that electricity used to transport unprocessed water to holding tanks is exempt as transportation of a material extracted from the earth. Electricity used to pump salt water is exempt on the same theory only if the salt water occurs naturally — man-made or artificially mixed salt water or brine does not qualify, and electricity used to pump it is taxable. Again, if this meter has both exempt and taxable uses, the predominant use must be worked out under Rule 3.295(d) and (e). The Comptroller also confirmed that using salt water to enlarge the storage caverns during leaching is not "manufacturing" under Rule 3.300, so that activity does not independently create a manufacturing exemption.

What this means for you

Natural gas companies and other extraction/storage operators

Electricity used purely to transport a material extracted from the earth (including natural gas or naturally occurring water) — without processing or altering it — is exempt. But electricity used to run compressors or other equipment for the purpose of pressurizing gas for transport is taxable as transportation equipment, not exempt as "processing," even if the compression process also changes the gas's temperature or pressure.

Businesses pumping water or salt water

Electricity used to pump naturally occurring water, including naturally occurring salt water, to move it from where it's extracted can be exempt as transportation of a material extracted from the earth. If you pump artificially created salt water or brine (i.e., water you've mixed yourself), that electricity is taxable — the exemption only covers naturally occurring materials.

Accountants and tax professionals handling mixed-use meters

Whenever a single electric meter serves both exempt and taxable purposes, Comptroller Rule 3.295(d) and (e) requires a predominant use determination (often via a predominant use study performed by a qualified engineer) to establish how the electricity on that meter should be taxed.

Common questions

Q: Is electricity used to run compressors that move natural gas into underground storage exempt as "processing"?
A: No. Compressors used to increase or decrease gas pressure to transport the gas are transportation equipment, not processing equipment, so electricity used for that purpose is not exempt as processing.

Q: Is electricity used to transport natural gas to or from underground storage exempt?
A: Yes, as long as the gas has not been processed or altered (such as deodorized) in the process. If a single meter also powers taxable equipment, the predominant use of the meter must be determined.

Q: Is electricity used to pump water from a well exempt from sales tax?
A: Yes, a charge for electricity used to transport unprocessed water to holding tanks is exempt as transportation of a material extracted from the earth.

Q: Is electricity used to pump salt water always exempt?
A: No. It is exempt only if the salt water is naturally occurring. Electricity used to pump man-made (artificially mixed) salt water or brine is taxable.

Q: Does circulating salt water to enlarge underground storage caverns count as "manufacturing"?
A: No. The Comptroller ruled that using salt water to enlarge caverns for storage through leaching does not qualify as manufacturing under Rule 3.300.

Citations and references

No specific Texas statutes are cited in the text of this letter; the letter instead references Comptroller Rules 3.295 (Natural Gas and Electricity) and 3.300 (Manufacturing; Custom Manufacturing; Fabricating; Processing).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9409L1321A08

Original ruling text

September 26, 1994

Dear **:

Thank you for your letter requesting information on the taxability of
electricity used by ** ("GAS COMPANY") to cool down natural gas.

FACTS: GAS COMPANY purchases electricity form POWER AND LIGHT COMPANY on one
meter. This electricity is used to cool natural gas down by electric fans from
210 degrees so that the compressors can transport the natural gas into
underground caverns at this location. This electricity is used to power
electric controls that monitor the compressors that move the natural gas also.
The gas is being moved 1000 feet above ground and then at least 1000 feet below
the surface of the ground. Natural gas consists of millions of molecules
rapidly moving in all directions. These molecules collide with each other and
with everything else that attempts to contain or hold them, such as the walls
of a vessel. The cooling of the natural gas causes its molecules to move more
slowly and the pressure to decrease. Some (very little) of the electricity is
used for an office building and lighting within the plant area.

Comptroller Rule 3.295(5)(A) states that "Other noncommercial uses include:
transportation of material extracted from the earth." Rule 3.295(8)(c) states
that noncommercial use is exempt from sales tax.

Comptroller Rule 3.295(7) states that electricity used in processing is exempt.

QUESTION: If GAS COMPANY has a predominant use study done by an engineer at
this location, will the electricity be exempt from sales tax as processing
(changing the chemical temperature of the natural gas in order to make it
marketable) and/or transportation of a product extracted from the earth?

Response: Compressors used to increase or decrease gas stream pressure in order
to transport the gas to a storage facility are considered transportation
equipment. Electricity used for this purpose is not considered processing and
would therefore not be exempt.

Sales or use tax is not due on natural gas or electricity used to transport a
material or its components extracted from the earth. Therefore, electricity
used to move the natural gas from or to an underground storage facility would
be an exempt use of electricity, if the gas has not been processed or altered
(i.e., deodorized, etc.). If there are both exempt and nonexempt uses of
electricity on a single meter, the predominant use must be determined as
outlined in Sections (d) and (e) of Rule 3.295, Natural Gas and Electricity.

FACTS: Another meter at this same location is for transporting water from the
well to a holding tank and then to the cooling jackets on the compressors that
are moving natural gas at this site. This same meter during leaching pumps salt
water to a disposal well 3 miles away. During leaching, water is circulated
throughout caverns in order to enlarge (manufacture) the caverns.

QUESTION: Because the electricity at this meter is transporting water which is
a material extracted from the earth, is the electricity exempt from sales tax
under Rule 3.295(5)(A)?

Response: A charge for electricity used to transport unprocessed water to
holding tanks is exempt. The electricity to transport salt water is exempt only
if the salt water qualifies as a "material extracted from the earth." The salt
water must be naturally occurring to qualify as a "material extracted from the
earth." The electricity to pump man-made (i.e., artificially mixed) salt water
or brine is taxable. If there are both exempt and nonexempt uses of electricity
on a single meter, the predominant use must be determined as outlined in
Sections (d) and (e) of Rule 3.295, Natural Gas and Electricity.

Using the salt water to enlarge the caverns for storage does not qualify as
"manufacturing" as that term is defined in Rule 3.300 - Manufacturing; Custom
Manufacturing; Fabricating; Processing.

This opinion is based on the facts presented. Other facts though similar may
provide a different result. You may call me toll-free at 1-800-531-5441,
extension 3-4502. The direct line is 512/463-4502. You may also write to Tax
Administration, Comptroller of Public Accounts.

Sincerely,

Gilbert Zamora
Tax Administration Division

September 14, 1994

Gilbert Zamora
Tax Policy
Comptroller of Public Accounts
Austin, Texas 78774-0100

Dear Mr. Zamora:

GAS COMPANY purchases electricity from POWER AND LIGHT COMPANY on one meter.
This electricity is used to cool natural gas down by electric fans from 210
degrees so that the compressors can transport the natural gas into underground
caverns at this location. This electricity is used to power electric controls
that monitor the compressors that move the natural gas also. The gas is being
moved 1,000 feet above ground and then at least 1,000 feet below the surface of
the ground. Natural gas consists of millions of molecules rapidly moving in all
directions. These molecules collide with each other and with everything else
that attempts to contain or hold them, such as the walls of a vessel. The
cooling of the natural gas causes its molecules to move more slowly and the
pressure to decrease. Some (very little) of the electricity is used for an
office building and lighting within the plant area.

Comptroller Rule 3.295(5)(A) states that "Other noncommercial uses include:
transportation of material extracted from the earth." Rule 3.295(8)(c) states
that noncommercial use is exempt from sales tax.

Comptroller Rule 3.295(7) states that electricity used in processing is exempt.

QUESTION: If GAS COMPANY has a predominant use study done by an engineer at
this location, will the electricity be exempt from sales tax as processing
(changing the chemical temperature of the natural gas in order to make it
marketable) and/or transportation of a product extracted from the earth?

Another meter at this same location is for transporting water from the well to
a holding tank and then to the cooling jackets on the compressors that are
moving natural gas at this site. This same meter during leaching pumps salt
water to a disposal well 3 miles away. During leaching, water is circulated
throughout caverns in order to enlarge (manufacture) the caverns.

QUESTION: Because the electricity at this meter is transporting water which is
a material extracted from the earth, is the electricity exempt from sales tax
under Rule 3.295(5)(A)?

Please call me if you have any questions at **.

Sincerely,

Senior Tax Analyst

cc: **