Does Utah sales/use tax apply to natural gas sold and delivered through a pipeline with title passing in Utah, when the gas goes to a reseller, an out-of-state end user, or a utility company?

Plain-English summary

A tax attorney representing a natural gas seller asked the Tax Commission how Utah sales/use tax applies to gas moving through a pipeline, where title and possession pass to the buyer at a specific meter point inside Utah ("Meter X"), regardless of where the buyer is located or where the gas ultimately ends up. The request laid out four scenarios and asked whether each is taxable, plus whether Utah honors an out-of-state buyer's resale exemption certificate.

The Commission's answers:

1. Sold to a broker for resale (1a): Exempt, as long as the seller obtains a resale exemption certificate from the broker.
2. Sold to an out-of-state end user, with title/possession passing in Utah (1b): Taxable. Even though the buyer isn't a Utah resident and intends to move the gas out of state, Sales Tax Rule R865-19-44S provides that delivery to the buyer in Utah is not interstate commerce -- the sale is complete in Utah and subject to tax.
3. Sold to a local distribution company / utility company (1c): Exempt as a resale transaction, even though title and possession pass while the gas is still physically in a Utah pipeline -- the utility's resale status controls, unlike the end-user scenario in 1b.
4. Out-of-state resale certificates (1d): Utah accepts a resale exemption certificate issued by a purchaser registered in another state.
5. Gas originating out of state: None of the above answers change merely because the gas entered the Utah pipeline system from another state (question 2).

What this means for you

Natural gas marketers, brokers, and pipeline sellers

The taxability turns on who the buyer is and what they do with the gas, not on where the gas came from. Selling to a reseller (broker or utility) with a proper resale certificate keeps the sale exempt even when title changes hands inside Utah. Selling directly to an end user -- including an out-of-state one -- while title/possession passes in Utah makes the sale taxable, because Utah treats delivery-in-state as controlling over the buyer's ultimate destination.

Utility and local distribution companies

This ruling directly supports treating a utility's purchase of gas at an in-state meter point as an exempt resale transaction, so long as the utility is buying for resale/distribution rather than as the final consumer.

Accountants and tax professionals advising energy clients

This is a useful early (1992) statement of Utah's position that "delivery in Utah" -- not the buyer's location or plans to transport goods elsewhere -- is what triggers Utah sales tax under Rule R865-19-44S, and that the resale exemption (not an interstate-commerce exemption) is the mechanism that keeps most pipeline gas sales to brokers/utilities exempt.

Common questions

Q: If I sell gas to an out-of-state buyer but title passes in Utah, is the sale exempt as interstate commerce?
A: No, per this ruling. Rule R865-19-44S treats delivery to the buyer in Utah as completing the sale in Utah regardless of the buyer's residency or plans to move the property out of state, so the sale is taxable unless another exemption (like resale) applies.

Q: Is a sale of gas to a utility company automatically exempt?
A: Per this ruling, yes -- if the utility/local distribution company is buying for resale, the transaction is exempt even though title and possession pass while the gas is in a Utah pipeline.

Q: Does Utah accept a resale certificate from a buyer registered in another state?
A: Yes, per this ruling.

Q: Does it matter if the gas was produced outside Utah before entering the pipeline?
A: No -- this ruling states that the origin of the gas doesn't change any of the taxability answers.

Q: Can I rely on this ruling for my own gas sales?
A: Not automatically -- it binds the Commission only for the taxpayer and the specific pipeline-delivery scenarios described. Different facts (contract terms, where title actually passes, buyer classification) would need their own analysis.

Citations and references

Rules:

• Utah Sales Tax Rule R865-19-44S (a commodity delivered to the buyer in Utah is not interstate commerce and is subject to tax, even if the buyer is a nonresident who intends to transport the property out of state)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/92-005.pdf

Original ruling text

Response May 8, 1992

May, 8, 1992

XXXXX, Tax Attorney

Re: Sales Tax on Natural Gas

Dear XXXXX:

This letter is in response to your recent request for a Tax Commission ruling
on whether sales or use tax is due on the sale of natural gas delivered via a
pipeline with title passing in Utah.

1a.
The gas is sold to a broker for resale. The sale is exempt and the seller should
have an exemption certificate from the resale customer.

1b.
The gas is sold to an end user who is located in another state. Possession
takes place in Utah where title passes to the end user who then transports the
gas to his out-of-state location. Sales Tax Rule R865-19-44S states "When
a commodity is delivered to the buyer in this state, even though the buyer is
not a resident of this state and intends to transport the property to a point
outside the state, the sale is not in interstate commerce and is subject to
tax."

1c.
Gas sold to a local distribution company (utility company) is exempt as a
resale transaction even though title and possession passes while in a pipeline
in Utah.

1d.
Utah does accept a resale exemption certificate from a purchaser in another
state.

2.
The fact that gas is delivered into the transportation pipeline from another
state does not change any of the answers to 1, above.

For
the Commission,

Joe
B. Pacheco

Commissioner

Commissioner
Hal Hansen

Utah
State Tax Commission

160
East 300 South, Fifth Floor

Salt
Lake City, Utah 84134

Re:
Request for Advisory Opinion/Ruling

Dear
Commissioner Hansen:

In
the past year, changes in the marketing of natural gas have occurred. Resellers
and end-users are now allowed to buy gas directly from a marketing company and
to have transportation rights on gas transmission pipelines. Title and
possession will transfer based on the point in the pipeline at which the
purchaser's transportation rights begin.

We
are requesting guidance on the application of your Sales and Use tax (Sales
tax) in the following situations. The sales may be in the spot market or based
on long-term contracts. The pipelines are assumed to be common carriers, and
Meter X is the point in the common carrier pipeline where the purchaser's
transportation rights begin. It is also assumed that the purchaser is not
registered for Sales tax purposes in your state.

1) Gas is produced in your state.

a) The gas is sold to a broker for resale.
Title and possession passes while in the pipeline to the broker at Meter X in
your state for ultimate delivery outside your state.

b) The gas is sold to an end-user who is
located in another state. The title and possession passes while in the pipeline
to the end-user at Meter X in your state. The gas is purchased for use by the
end-user in another state.

c) The gas is sold to a local distribution
company (XXXXX) located in another state which is classified as a utility or
reseller. The title and possession passes while in the pipeline to the XXXXX at
Meter X in your state but the gas will be sold in another state.

d) Is either a), b) or c) subject to your Sales
tax? Does an exemption or deduction from the tax apply, and, if so, what are
the rules for obtaining it? Will your Department accept an exemption
certificate issued by the purchaser registered in another state?

2) The same facts and questions as in 1) above,
except that the gas is produced and delivered into the transportation pipeline
from another state.

Your
prompt attention to this matter will be greatly appreciated. Please do not
hesitate to call or write to me if you have any questions regarding this
request.

Yours
truly,

XXXXX

Tax
Attorney