Is the first Connecticut sale of No. 2 heating oil exempt from the petroleum products gross earnings tax when the buyer burns the oil to make steam that it pipes to customers to heat their buildings?

Plain-English summary

Connecticut imposes a petroleum products gross earnings tax on companies that refine or distribute petroleum products: under Conn. Gen. Stat. § 12-587(b)(1), such a company pays a quarterly tax on its gross earnings from the first sale of petroleum products in the state. But not every first sale is taxed. The statute exempts the first sale of No. 2 heating oil (the product the ASTM designates "specification for heating oil D396-69") when it is "used exclusively for heating purposes" — § 12-587(b)(2)(B).

Here, a distributor made the first Connecticut sale of No. 2 heating oil to a business that generates and sells steam. That business burns the oil to heat water into steam, then delivers the steam through pipes to its customers, who use it to heat their buildings. The question was whether, in that chain, the oil is "used exclusively for heating purposes."

DRS said yes — the sale is exempt. It applied the same reasoning as its earlier Ruling No. 92-6. Read according to common usage (§ 1-1(a)), "heat" means to make warm or hot, to raise the temperature. Every use the steam producer makes of the oil raises the temperature of space or tangible personal property: it heats water (tangible personal property) to make steam, and that steam is delivered to heat the interior space of customers' buildings. Importantly, DRS held it does not matter that the steam producer doesn't own the buildings being heated — the oil is still being used exclusively for heating. The ruling amplifies and clarifies Ruling No. 92-6 (named here in prose, not linked).

Two technical footnotes round it out. First, the companion tax in § 12-587(c)(1) (on companies importing petroleum products above a consideration threshold) carries a parallel exemption in § 12-587(c)(2) for products exempt under (b)(2), and (c)(1) doesn't apply to a company already paying the (b) tax on the first in-state sale. Second, after 1998 Conn. Pub. Acts 244, § 25, § 12-587(b)(2) now operates as a true tax exemption (the definition of "petroleum products" no longer carves out heating oil for heating), so the analogy Ruling No. 92-6 drew to Plasticrete Block & Supply Corp. v. Commissioner is "no longer appropriate" — but the conclusion stands.

What this means for you

Petroleum distributors making the first in-state sale

Your gross earnings from the first Connecticut sale of No. 2 heating oil are exempt when the oil will be used exclusively for heating purposes — and "heating" is read broadly, by common usage, as raising the temperature of space or property. Selling heating oil to a customer who will burn it to produce heat (including making steam that heats buildings) fits the exemption. Document the buyer's use so you can support the exemption for the gross-earnings return.

District-energy and steam providers

Buying No. 2 heating oil to fire boilers that make steam for space heating is a heating use, even though what you sell downstream is steam rather than the oil, and even though you don't own the buildings your steam ultimately warms. That downstream chain doesn't defeat the "used exclusively for heating purposes" character of the fuel at the first-sale level.

Accountants and tax professionals

The exemption lives in § 12-587(b)(2)(B) and turns on the phrase "used exclusively for heating purposes," construed by commonly approved usage under § 1-1(a). Note the drafting change: after 1998 Conn. Pub. Acts 244, § 25, § 12-587(b)(2) is now a genuine exemption statute, which is why DRS abandoned Ruling No. 92-6's Plasticrete analogy while keeping its result. Watch the companion § 12-587(c) import tax, which has its own parallel exemption in (c)(2).

Common questions

Q: What is the petroleum products gross earnings tax?
A: A quarterly tax under § 12-587(b)(1) on a refiner/distributor's gross earnings from the first sale of petroleum products in Connecticut.

Q: Why is this heating-oil sale exempt?
A: Because § 12-587(b)(2)(B) exempts the first sale of No. 2 heating oil that is "used exclusively for heating purposes," and burning the oil to make steam that heats buildings is a heating use — every step raises the temperature of space or tangible personal property.

Q: Does it matter that the buyer sells steam rather than using the oil to heat its own building?
A: No. DRS held it is not necessary that the person burning the oil own the interior space being heated. The oil is still used exclusively for heating purposes.

Q: Is this a new position?
A: No — it amplifies and clarifies Ruling No. 92-6. After 1998 Conn. Pub. Acts 244, § 25 made § 12-587(b)(2) a true exemption, DRS dropped that ruling's analogy to Plasticrete Block & Supply Corp. v. Commissioner but confirmed the same conclusion.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-587(b)(1) (quarterly petroleum products gross earnings tax on the first sale of petroleum products in Connecticut)
• Conn. Gen. Stat. § 12-587(b)(2) / (b)(2)(B) (exemption for No. 2 heating oil — ASTM "specification for heating oil D396-69" — used exclusively for heating purposes)
• Conn. Gen. Stat. § 12-587(c)(1)–(c)(2) (companion import/consideration tax and its parallel exemption; (c)(1) inapplicable to a company paying the (b) tax)
• Conn. Gen. Stat. § 1-1(a) (statutory words construed according to commonly approved usage)
• 1998 Conn. Pub. Acts 244, § 25 (recast § 12-587(b)(2) as an exemption; definition of "petroleum products" no longer excludes heating oil used for heating)

Related rulings and authority:

• Ruling No. 92-6 (No. 2 heating oil used to heat building space, dry manufacturing materials, and heat storage containers is used exclusively for heating purposes) — amplified and clarified here
• Plasticrete Block & Supply Corp. v. Commissioner, 216 Conn. 17, 579 A.2d 20 (1990) (analogy relied on in Ruling No. 92-6, now no longer appropriate after the 1998 recast)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 99-2

Original ruling text

Ruling 99-2, Petroleum Products Gross Earnings Tax / Fuel Used Exclusively for Heating Purposes

FACTS:

A company which is engaged in the refining or distribution, or both, of petroleum products and which distributes such products in this state makes the first sale of the petroleum product commonly known as number 2 heating oil within this state to a person which is engaged in the business of generating and then selling steam and delivering it to its customers through pipes. The person heats the water that generates the steam by the combustion of the number 2 heating oil. The person’s customers use the steam to heat their own buildings.

ISSUE:

When a company which is engaged in the refining or distribution, or both, of petroleum products and which distributes such products in this state makes the first sale of number 2 heating oil within this state to a person that will combust the number 2 heating oil to heat water that will generate steam, which steam will be delivered by the person to the person’s customers through pipes and will be used by the customers to heat their buildings, is the number 2 heating oil used exclusively for heating purposes?

DISCUSSION:

Conn. Gen. Stat. §12-587(b)(1) provides that, except as otherwise provided in Conn. Gen. Stat. §12-587(b)(2), "any company which is engaged in the refining or distribution, or both, of petroleum products and which distributes such products in this state shall pay a quarterly tax on its gross earnings derived from the first sale of petroleum products within this state." Not all gross earnings derived from the first sale of petroleum products within this state are subject to the petroleum products gross earnings tax. For example, "[g]ross earnings derived from the first sale of the following petroleum products within this state shall be exempt from tax: ... (B) the product designated by the American Society for Testing and Materials as ‘specification for heating oil D396-69’, commonly known as number 2 heating oil, to be used exclusively for heating purposes ..." Conn. Gen. Stat. §12-587(b)(2). (endnote 1)

The issue of whether, for petroleum products gross earnings tax purposes, number 2 heating oil was used exclusively for heating purposes was previously addressed in Ruling No. 92-6 . There, the number 2 heating oil was combusted to heat the interior space of the purchaser’s buildings (which were used for commercial and manufacturing purposes); to heat manufacturing materials in order to remove moisture from those materials before the purchaser’s manufacturing production process began; and to heat the interior of a container in which those manufactured products were stored prior to their sale (which heated storage was necessary to prevent the products from becoming unusable).

If the phrase ‘to be used exclusively for heating purposes’ is construed according to the commonly approved usage of the language; Conn. Gen. Stat. §1-1(a); the verb ‘heat’ means ‘to make warm or hot; raise the temperature of [heat the oven to 350 degrees] [water heated by the sun] ...’ Webster, Third New International Dictionary. The uses that the [purchaser] makes of the heating oil all involve the raising of the temperature, and the making warm or hot, of space or tangible personal property: heating interior building space, heating manufactured materials to remove moisture, and heating the interior of a container in which the manufactured product is stored.

Ruling No. 92-6 , at 2-3. The Ruling concluded that the number 2 heating oil was used exclusively for heating purposes.

Here, too, the uses that the person that is engaged in the business of selling steam and delivering it to its customers through pipes makes of the heating oil all involve the raising of the temperature, and the making warm or hot of space or tangible personal property. The person heats tangible personal property (water) that generates steam and delivers that steam to its customers through pipes in order to heat the interior space of its customers’ buildings. It is not necessary that the person own the interior building space that is being heated.

RULING:

When a company which is engaged in the refining or distribution, or both, of petroleum products and which distributes such products in this state makes the first sale of number 2 heating oil within this state to a person that will combust the number 2 heating oil to heat water that will generate steam, which steam will be delivered by the person to the person’s customers through pipes and will be used by the customers to heat their buildings, the number 2 heating oil is used exclusively for heating purposes. Ruling No. 92-6 is amplified and clarified. (endnote 2)

Endnotes:

1. In some circumstances, Conn. Gen. Stat. §12-587(c)(1) imposes a tax on any company which imports or cause to be imported into this state petroleum products, where the consideration given or contracted to be given for all such deliveries to such company during the quarterly period for which such tax is to be paid exceeds $100,000. However, "[consideration given or contracted to be given for petroleum products, gross earnings from the first sale of which are exempt from tax under [Conn. Gen. Stat. §12-587(b)(2)], [are] exempt from tax." Conn. Gen. Stat. §12-587(c)(2). Conn. Gen. Stat. §12-587(c)(1) does not apply to a company subject to and paying the tax imposed under Conn. Gen. Stat. §12-587(b) (because the company made the first sale of the petroleum products within this state).

2. The conclusion reached in Ruling No. 92-6 is confirmed notwithstanding that, after the passage of 1998 Conn. Pub. Acts 244, §25, Conn. Gen. Stat. §12-587(b)(2) is, in fact, a statute that confers a tax exemption. Because the definition of "petroleum products" no longer excludes number 2 heating oil to be used exclusively for heating purposes, the analogy in Ruling No. 92-6 to Plasticrete Block & Supply Corporation v. Commissioner , 216 Conn. 17, 25, 579 A.2d 20 (1990) is no longer appropriate.

LEGAL DIVISION

Issued May 27, 1999