Does a compressor in a natural gas pipeline compressor station qualify for the Kansas manufacturing machinery and equipment exemption?

Plain-English summary

A natural gas pipeline operator asked whether a compressor in a pipeline compressor station in Kansas qualifies for the manufacturing machinery and equipment (integrated plant) exemption under K.S.A. 79-3606(kk). The compressor boosts the pressure of natural gas in the pipeline; without that pressure boost, a plant in Colorado could not treat the gas or extract liquids from it.

The Department said no — the compressor is taxable. The manufacturing exemption does not extend to "transportation, transmission and distribution equipment ... including the means of conveyance of natural gas ... located outside the plant or facility" (K.S.A. 79-3606(kk)(5)(c)). And the definition of a "manufacturing or processing plant or facility" in K.S.A. 79-3606(kk)(2)(C) expressly excludes "any facility primarily operated for the purpose of conveying or assisting in the conveyance of natural gas." A pipeline compressor station is exactly that kind of conveyance facility, so even if compressing the gas could be characterized as "processing," the equipment is still taxable. The Department also noted that a compressor in Kansas and a refinery in Colorado are not "a single, fixed location ... in a contiguous area," so they cannot be one integrated plant.

Result: the sale or lease of the compressor and all other pipeline equipment located in Kansas is subject to state and local Kansas sales tax. The Department added one separate point in the operator's favor — it has previously ruled that the fuel consumed in an engine that powers a compressor on an interstate pipeline is exempt from sales and use tax.

What this means for you

Natural gas pipeline and gathering operators

Compressors, and pipeline equipment generally, are taxable to buy or lease in Kansas. Boosting line pressure — even where it enables downstream treating or liquids extraction at a distant plant — is conveyance, not exempt manufacturing.

Equipment sellers and lessors

Sales and leases of pipeline compressors and related equipment delivered in Kansas are taxable. Do not treat them as exempt manufacturing machinery.

One exception to remember

The Department reaffirmed that fuel burned in the engine powering a compressor on an interstate pipeline is exempt from sales and use tax — a separate, narrow exemption that does not make the compressor itself exempt.

Common questions

Q: The compression enables gas treating and liquids extraction at another plant — doesn't that make it production equipment?
A: No. The statute excludes equipment that conveys natural gas and any facility "primarily operated" to convey gas, so a pipeline compressor is taxable even if it indirectly supports processing elsewhere.

Q: Could the Kansas compressor and the out-of-state refinery be treated as one integrated plant?
A: No. They are not "a single, fixed location ... in a contiguous area," so they cannot form one manufacturing or processing plant under K.S.A. 79-3606(kk)(2)(C).

Q: Is anything about the compressor operation exempt?
A: Yes — the Department noted the fuel consumed in an engine that powers a compressor on an interstate pipeline is exempt from sales and use tax. The compressor equipment itself remains taxable.

Citations and references

• K.S.A. 79-3606(kk) — the manufacturing machinery and equipment (integrated plant) exemption at issue.
• K.S.A. 79-3606(kk)(2)(C) — defines "manufacturing or processing plant or facility" and excludes any facility "primarily operated for the purpose of conveying or assisting in the conveyance of natural gas, electricity, oil or water."
• K.S.A. 79-3606(kk)(5)(c) — the exemption does not extend to transportation, transmission, and distribution equipment, including the means of conveyance of natural gas, located outside the plant or facility.

Source

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2004-001

Original ruling text

Private Letter Ruling

Body:

January 20, 2004

XXXX
XXXX
XXXX

RE: You e-mail dated January 6, 2004

Dear XXXX:

I have been asked to answer your e-mail sent earlier this month. In it, you ask if a compressor in a pipeline compressor station in XXXX County, Kansas, qualifies for a sales tax exemption as manufacturing machinery and equipment. The compressor is used to boost the pressure of natural gas in a pipeline. Without the increase in line pressure, the plant in Colorado could not treat the gas nor extract liquids from it.

Please be advised that the purchase or lease of the compressor does not qualify for exemption as manufacturing machinery or equipment. The manufacturing machinery or equipment exemption does not extend to:

transportation, transmission and distribution equipment not primarily used in a production, warehousing or materials handling operation at the plant or facility, including the means of conveyance of natural gas, electricity, oil or water, and equipment related thereto, located outside the plant or facility. . . .(K.S.A. 79-3606(kk)(5)(c)).

The exemption statute also provides that:

"manufacturing or processing plant or facility" means a single, fixed location owned or controlled by a manufacturing or processing business that consists of one or more structures or buildings in a contiguous area where integrated production operations are conducted to manufacture or process tangible personal property to be ultimately sold at retail. Such term shall not include any facility primarily operated for the purpose of conveying or assisting in the conveyance of natural gas, electricity, oil or water. A business may operate one or more manufacturing or processing plants or facilities at different locations to manufacture or process a single product of tangible personal property to be ultimately sold at retail. . . . (K.S.A. 79-3606(kk)(2)(C)).

K.S.A. 79-3606(kk) does not extend machinery or equipment used to transport or convey natural gas that is located outside a plant. This includes pipeline compressors or other pipeline equipment. The exemption only applies when the machinery or equipment is located at a plant, which is statutorily defined to mean "a single, fixed location owned or controlled by a manufacturing or processing business that consists of one or more structures or buildings in a contiguous area where integrated production operations are conducted." By definition, a "plant" does not include a "facility primarily operated for the purpose of conveying or assisting in the conveyance of natural gas. . . ." Thus, even if a natural gas compressor station changes the natural gas in a way that can be construed as "processing," it cannot be exempt because pipeline compressors are "primarily operated for the purpose of conveying or assisting in the conveyance of natural gas. . . .". In addition, a pipeline compressor located in Kansas and a refinery located in Colorado are not in "a single, fixed location . . . that consists of one or more structures . . . in a contiguous area."

Accordingly, the sales and lease of the compressor and all other pipeline equipment located in Kansas is subject to state and local Kansas sales tax. Its purchase and lease is not exempt under K.S.A. 79-3606(kk) nor any other sales tax exemption provision. Please note that the department has previously ruled that the fuel consumed in an engine that powers a compressor on an interstate pipeline is exempt from sales and use tax.

This private letter ruling is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 01/21/2004 Date Modified: 01/21/2004

Table 1

Table 2