Was diesel fuel used after rock crushing to move aggregate to a stockpile and load customer trucks exempt as consumed in production?

Plain-English summary

Diesel used after the rock was crushed to finished size—to move it to a stockpile and load it into customer trucks—was taxable.

K.S.A. 79-3606(n) exempted tangible personal property consumed in production, manufacturing, processing, mining, and similar activities. K.S.A. 79-3602(dd) required the property to be essential or necessary to the actual process and consumed, depleted, or dissipated within one year.

The Kansas Board of Tax Appeals had already determined that two post-crushing steps were outside integrated rock production:

1. transferring finished-size rock to a stockpile using conveyors, trucks, loaders, a scraper, and diesel power; and
2. loading material from the stockpile into customer trucks with a front-end loader.

Because those steps occurred after production of the finished rock, the diesel was not exempt. The business had to continue adding the stockpile-transport fuel cost to its sales-tax returns and paying tax on the fuel used to load customer trucks.

What this means for you

Aggregate and quarry operators

Draw the production boundary carefully. Fuel used before or during actual crushing may require a different analysis from fuel used to store or deliver finished product.

Equipment and fuel accounting

Track fuel by activity and machine. Post-production stockpiling and customer loading were taxable uses in this ruling.

Common questions

Q: Was diesel used to move crushed rock to the stockpile exempt?
A: No.

Q: Was loader fuel used to fill customer trucks exempt?
A: No.

Q: Why did the consumed-in-production exemption fail?
A: The Board had found those steps were not essential or necessary to integrated rock production.

Citations and references

• K.S.A. 79-3606(n) — property consumed in production and mining
• K.S.A. 79-3602(dd) — definition of property consumed
• Kansas Board of Tax Appeals Docket No. 91-44-DT — post-crushing stockpile and loading processes

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2004-036

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

June 30, 2004

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Dear XXXXXXXXXX,

This is a formal response to your inquiries regarding the application of the Kansas retailer’s sales tax to your business. Specifically, you stated:

About 10-15 years ago, XXXXXXXXXX had a sales tax audit. At that time we were told that any diesel fuel used to transport an aggregate (rock) product from the crushing plant to the stockpile is “not” exempt from sales tax. At that time, I paid the penalties charged to us. From that day forward, I have added the cost of the diesel fuel used to transport the product to the stockpile on my monthly sales tax returns. Is this fuel taxable or non-taxable?

Also, I have been paying sales tax (per auditor) on the fuel used by our front-end loader that puts the aggregate into the customer’s trucks. Is this fuel taxable or non-taxable?

Kansas sales tax law imposes tax on the sale of tangible personal property and enumerated services. However, K.S.A. 79-3606(n) provides a tax exemption for all sales of tangible personal property which is consumed in the production, manufacture, processing, mining, drilling, refining or compounding of tangible personal property for ultimate sale at retail within or without the state of Kansas. "Property which is consumed" includes tangible personal property which is essential or necessary to and which is used in the actual process of and consumed, depleted or dissipated within one year in the production, manufacture, processing, mining, drilling, refining or compounding of tangible personal property, which is not reusable for such purpose. K.S.A. 79-3602(dd).

In Docket No. 91-44-DT, the Board of Tax Appeals examined the exemption in K.S.A. 79-3606(n) and decided that the following two processes are not essential or necessary to an integrated rock production:

8. After the rock is crushed to the finished size, it is transferred to a stockpile. Conveyors, stockpile trucks, front-end loaders and a scraper are used for this job. Once again, a diesel-powered electric generator is necessary to operate conveyors, and diesel fuel is used in the trucks, front-end loaders, and scraper.

9. Material is loaded from the stockpile onto customer's trucks. Diesel fuel is consumed by a front-end loader.

Thus, the diesel fuel used in these processes is not exempt from Kansas retailer’s sales tax. You should continue to add the cost of the diesel fuel used to transport the product to the stockpile to your monthly sales tax returns. You should also continue to pay sales tax on the fuel used by your front-end loader that loads the aggregate onto customers’ trucks.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this private letter ruling.

I sincerely apologize for the delay in answering your letter. If I may be of further assistance to you, please contact me at your earliest convenience at (785) 296-5330.

Sincerely,

Mark Ciardullo

Date Composed: 07/06/2004 Date Modified: 07/09/2004

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