Were payments under mineral-rights agreements taxable when a contractor extracted sand, gravel, or soil from private land?

Plain-English summary

Utah Private Letter Ruling 92-011 addressed a highway contractor that obtained sand, gravel, and soil from privately owned sources.

The contractor described its contracts as acquisitions of mineral rights and paid by several possible methods.

The Commission treated the transaction as a taxable purchase of tangible personal property because the minerals became personal property when extracted and title passed after severance.

When minerals became personal property

Rule R865-19-26S defined tangible personal property to include property severed from real estate.

The Commission said the minerals became personal property at the instant of extraction.

The contractor had not contracted to purchase or own the real estate itself.

Because title to the severed material passed after severance, the contractor acquired tangible personal property.

Contract label and pricing

The contractor's possible payment methods included:

• A job-specific lump sum.
• A fixed monthly amount.
• A lump sum for extraction rights over a stated period.
• A per-ton payment when material left the pit.

The Commission said neither the agreement's wording nor its pricing method changed the existence of a tangible-personal-property sale.

Calling the payment consideration for “mineral rights” did not control the tax result.

Collection responsibility

Because the mineral sale occurred in Utah, the purchaser was ultimately liable for the tax.

The seller was required to collect and remit it.

Holding

Under the stated facts:

• Extracted minerals became tangible personal property at severance.
• Title passed after severance.
• The contractor acquired tangible personal property rather than real estate.
• The mineral-rights label did not change the transaction.
• The method of determining price did not change the transaction.
• The purchaser was ultimately liable for tax.
• The seller had to collect and remit tax.

What this means for you

Contractors and aggregate purchasers

Review exactly when title passes relative to extraction. The timing drove the classification in this ruling.

Landowners and mineral-source operators

A contract described as a mineral-rights agreement can still produce taxable sales of severed material.

Accountants and tax professionals

Separate sales tax on severed property from any other mineral, severance, construction, or real-property tax issues not resolved here.

Common questions

Q: When did the minerals become tangible personal property?

A: At the instant of extraction.

Q: Did calling the agreement a mineral-rights contract prevent sales tax?

A: No.

Q: Did lump-sum instead of per-ton pricing change the result?

A: No.

Q: Who collected the tax?

A: The seller.

Q: Who was ultimately liable?

A: The purchaser.

Key source language

• Severance: “The minerals extracted become personal property at the instant of extraction.”
• Acquisition: “there is an acquisition of tangible personal property.”
• Contract form: “The content of an agreement or the method of determining a price do not change the fact that there is a sale.”
• Collection: “the seller is required to collect and remit the tax.”

Citations and references

• Utah Admin. Rule R865-19-26S

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 92-011
• Scope note: the requester described private mineral sources where the contractor or its agent performed extraction and did not purchase the underlying real estate.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

Response
May 15, 1992

May
15, 1992

XXXXX

Re:
Sales Tax on Mineral Extraction

Dear
XXXXX:

This
letter is in response to your recent request for a Tax Commission ruling on whether sales tax is due on minerals extracted from real estate where XXXXX has a contract with the owner and pays for the extracted minerals (sand, gravel, soil) under a mineral rights agreement.

The
Tax Commission policy is to refer such requests to the division most qualified to analyze the request and make recommendations concerning it. As such, your request was referred to the Tax Commission's Auditing Division for their analysis and recommendations. The division's recommendations are as follows:

1. Sales Tax Rule R865-19-26S defines tangible
   personal property to include property severed from real estate. The minerals extracted become personal property at the instant of extraction. XXXXX has not entered into a contract to purchase or own real estate. Title to the severed property passes after the severance; therefore, there is an acquisition of tangible personal property.

2. The content of an agreement or the method of
   determining a price do not change the fact that there is a sale of tangible personal property even though the contract refers to the transaction as payment for mineral rights.

3. This very issue was decided by the Tax
   Commission in a decision made on XXXXX, and again in a decision made on XXXXX.

4. Since the sale of the minerals takes place
   in Utah, the purchaser is ultimately liable for payment of the tax, but the seller is required to collect and remit the tax.

If
you do not agree with this determination, you may appeal to the Tax Commission for a formal hearing. The results of that hearing would constitute a declaratory judgment and be appealable to the Utah State Supreme Court. A Notice of Appeal Rights and a copy of the Utah Taxpayer Bill of Rights are attached.

For
the Commission,

Joe
B. Pacheco

Commissioner

Utah
State Tax Commission

160
East 300 South

Salt
Lake City, Utah 84134

RE:
Request for an Advisory Opinion on Request

Gentlemen:

XXXXX
(XXXXX), request an advisory opinion regarding their sales tax liability on royalty payments.

The
facts that should be used in determining this liability are outlined as follows:

1.
XXXXX is a Utah Corporation with it's principal place of business located in XXXXX, Utah.

2.
XXXXX is a General Contractor in the State of Utah, which regularly obtains work with the Utah Department of Transportation (UDOT).XXXXX obtains this work through the normal bidding procedures established by UDOT. The work normally obtained is for heavy highway construction ranging from new construction, to reconstruction or any combination of the two.

3. On occasion, when there is not a state or
   bureau of land management (B.L.M.) mineral source, XXXXX contracts with private owners of mineral sources for the acquisition of those mineral rights.

4. When XXXXX contracts with private owners for
   the mineral rights the method of payment varies.

A. Payment for mineral rights may be made in a
lump sum for a specific job, regardless of the quantity of mineral extracted.

B. Payment for mineral rights may be made for a specified amount per month regardless of the quantity of mineral extracted.

C. Payment for mineral rights may be made in a
lump sum for the right to extract mineral for a specified time. The specified time may be longer than one year and not related to any specific job. The payment may not reflect the quantity of mineral extracted.

D. Payment for mineral rights may be made at
the time when the actual mineral is removed from the pit. This usually means that the payment is made based on a per ton of mineral that has left the pit. This method of payment does not reflect the actual mineral extracted.

These
are the typical methods of payment, but in all cases regardless of payment the contract is for the mineral rights.

5. In all cases after obtaining the mineral
   rights, XXXXX or an authorized agent is responsible for extracting the minerals. The seller is never involved in the severance of the mineral from reality.

6. The mineral that is extracted is not
   tangible personal property until after it has been severed according to the Utah administrative code R865-19-26S.

7.
XXXXX has contracted with the owner and obtained the mineral rights prior to any severance of the mineral.

8.
XXXXX takes the severed reality and the converts it back to reality while constructing the road.

9. If for some reason, XXXXX re-sold the
   severed mineral XXXXX would then collect tax and remit the tax to the state.

In
conclusion, for a sales tax to be imposed a sell of tangible personal property must take place. Since, XXXXX was the only owner of the minerals while the minerals were considered tangible personal property; there could have be no sale of tangible personal property. Since no sale of tangible personal property took place, there should be no sales tax liability.

Your
opinion on the above mentioned facts would be greatly appreciated. If further information or clarification is required, please let me know.

Sincerely,

XXXXX

Accountant