Does Utah's industrial-use sales tax exemption for gas, electricity, and other fuels cover processing activities like washing, crushing, and sizing minerals at a mine site, not just the extraction itself?

Plain-English summary

A mining industry representative wrote to the Utah State Tax Commission after getting a verbal clarification from the Commission's auditing division suggesting that only the physical extraction and transport of minerals to the surface counted as "mining or extraction of minerals" for the industrial-use fuel exemption — and that storage/processing activities like washing, crushing, and sizing did not count. The taxpayer pushed back, pointing out that the federal Standard Industrial Classification (SIC) Manual's own description of "mining" explicitly includes milling activities like crushing, screening, and washing done at the mine site, and argued it made no sense to treat those processing steps as "commercial" rather than industrial.

The Commission's written response sided with the taxpayer's reading, clarifying the auditors' informal verbal position:

• Utah Code § 59-12-103(1) taxes purchases of gas, electricity, heat, coal, fuel oil, or other fuels for commercial or residential use, but § 59-12-102(10)(a) exempts "industrial use," which by statutory definition includes "mining or extraction of minerals" (see also Admin. Rule R865-19S-35).
• To interpret "mining and mineral extraction," the Commission uses the SIC Manual as a general guide — though it isn't strictly bound by SIC classifications and could adopt its own rule under § 59-1-210/R861-1A-2 (it hadn't done so as of this ruling).
• For oil and gas specifically, the Commission's existing interpretation covers exploration, drilling, completing and equipping wells, and operating separators/emulsion breakers/desilting equipment/field gathering lines — everything up to the point the oil or gas enters the pipeline for shipment from the producing property. Activity after that point is not "mining."
• On the taxpayer's actual question — yes, processing activities like washing, crushing, and sizing of minerals do fall within "mining" for the industrial-use exemption, but with two conditions: they must be done in conjunction with mining/extraction activities, and they must take place at the mining site. The Commission specifically cited SIC Code 1221 (coal mining), which uses "cleaning" and "crushing" language as part of the mining process.
• Finally, the Commission addressed mixed-use sites: if a mining company uses electricity or fuel for a combination of qualifying (mining) and non-qualifying activities at the same location, the entire use qualifies for the exemption as long as the qualifying activities predominate.

What this means for you

Mining companies with on-site processing (washing, crushing, sizing, milling)

Fuel and electricity used to run mine-site processing equipment can qualify for the industrial-use exemption right alongside extraction itself — you don't need to draw a hard line between "extraction" and "processing" as separate commercial/industrial categories, as long as the processing happens at the mine site in connection with the extraction operation.

Oil and gas operators

The Commission's mining/extraction line for oil and gas runs through the point of shipment — exploration, drilling, well completion/equipping, and field-level separation/gathering equipment all qualify, but activities after the oil or gas enters the transportation pipeline do not.

Mining operations with mixed on-site activities

If your site uses electricity or fuel for both qualifying mining activities and other non-qualifying uses, check which predominates. If mining/extraction-related use is the greater share, the exemption can extend to the whole usage at that location rather than requiring you to segregate and meter each activity separately.

Accountants and tax professionals

Note that the Commission here is not strictly bound by SIC classifications and has statutory authority to adopt its own definition of "mining and mineral extraction" (which it hadn't exercised as of this 1996 ruling) — worth checking whether a formal rule has since been adopted that supersedes this SIC-based, case-by-case approach.

Common questions

Q: Does the industrial-use fuel exemption cover only the physical extraction of minerals, or also processing like washing/crushing/sizing?
A: It covers processing activities too, as long as they're performed in conjunction with mining/extraction and take place at the mining site — the Commission grounds this in how the SIC Manual itself describes milling/crushing/washing as part of "mining."

Q: Where does "mining" end for oil and gas operations?
A: At the point the oil or gas enters the pipeline for shipment from the producing property. Activities after that point are not part of the mining process for this exemption.

Q: We use the same electricity meter for mining and some non-mining activities at our site — do we lose the exemption?
A: Not necessarily. If the mining/qualifying activities predominate at that location, the whole usage can qualify for the industrial-use exemption.

Citations and references

Statutes, rules, and classification references:

• Utah Code Ann. § 59-12-103(1) (tax on commercial/residential fuel and electricity purchases)
• Utah Code Ann. § 59-12-102(10)(a) (definition of "industrial use" — includes mining or extraction of minerals)
• Utah Admin. Rule R865-19S-35 (industrial use exemption)
• Utah Code Ann. § 59-1-210; Utah Admin. Code R861-1A-2 (Commission's authority to adopt its own definitions)
• 1987 Standard Industrial Classification Manual, Division B (Mining) and SIC Code 1221 (coal mining, incl. cleaning/crushing)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/96-138.htm

Original ruling text

96-138

Response October 4, 1996

Request

Commissioners

Utah State Tax Commission

210 North 1950 West

Salt Lake City, Utah 84134

Dear Commissioners:

Regarding: Sales tax exemption for industrial
consumption of gas, electricity, heat, coal, fuel oils, or other fuels.

For the purpose of this sales tax exemption, use in
mining or extraction of minerals is included in the legal definition of
"industrial (formerly noncommercial) consumption." Since the definition does not specify which
activities are considered mining or extraction of minerals, we have sought a
verbal clarification from your auditing division.

Our understanding of their position is as follows:

1.
Extracting minerals from the ground and transporting them to the surface
and across company-owned property to a storage or processing facility are
considered mining or extraction of minerals.

2. Storage
   or processing activities, such as washing, crushing, and sizing, are not
   considered part of the mining process.

We have also been advised that processing activities
relative to a mining operation do not

qualify as manufacturing if they are specifically
included in descriptions of mining activities in the Standard Industrial
Classification Manual.

It seems reasonable, however, that processing
activities that are included under the mining category in the SIC Manual should
be considered mining for the purpose of this exemption. The manual under Division B, Mining, The
Division as a Whole, reads, in part:

The term mining is used in the broad sense to
include the extraction of minerals occurring naturally: solids, such as coal
and ores; liquids, such as crude petroleum; and gases such as natural gas. The term mining is also used in the broad
sense to include quarrying, well operations, milling (e.g., crushing,
screening, washing, flotation), and other preparation customarily done at the
mine site, or as part of mining activity.

Descriptions of specific industry classifications in
the SIC Manual also include processing activities.

Processing activities seem aptly described as either
mining or manufacturing, which are both industrial or noncommercial
activities. Excluding processing
activities from the exemption implies that they are commercial activities,
which are associated with trade or commerce.
We doubt that was the intent.

We would appreciate your clarifying the position of
the tax commission on this question.

Thank you.

Sincerely,

XXXXX

XXXXX

RE:
Advisory Opinion - Sales Tax Exemptions in Mining and Mineral Extraction

Dear XXXXX

We
received your letter regarding the sales tax exemption for industrial
consumption of gas, electricity and other fuels. In your letter, you described your main concerns as: 1) what
activities are considered �mining and mineral extraction� that qualify for the
exemption, and 2) whether �processing activities� such as �washing, crushing,
and sizing� of minerals constitute �mining and mineral extraction.� We offer the following guidance:

Utah
Code � 59-12-103(1) imposes sales tax liability on the purchaser for purchases
of �gas, electricity, heat, coal, fuel oil, or other fuels� for �commercial� or
�residential� use. However, Utah law
allows a sales tax exemption for such purchases if they are for �industrial�
use. Furthermore, the Code provides
specific language as to what constitutes �industrial use.� Section 59-12-102 of the Code states, in
pertinent part:

. .
.

(10)
�Industrial use� means the use of natural gas, electricity, heat, coal, fuel
oil, or other fuels in:

(a) mining or extraction of minerals;

. .
.

Thus, the industrial use exemption extends to �mining
and mineral extraction� activities (See also Utah Admin. Code R865-19S-35).

To
interpret the meaning of �mining and mineral extraction,� the Tax Commission
relies on the Standard Industrial Classification Manual (SIC) as a general
guide. However, SIC classifications
tend to be rather broad and the Commission is not strictly bound by them. Furthermore, the Tax Commission may adopt
its own rules defining �mining and mineral extraction� (see Utah Code � 59-1-210
and Utah Admin. Code R861-1A-2), though it has not done so yet. Therefore, the SIC manual provides
reasonable guidelines.

Based
on the SIC manual�s definition of �oil and gas extraction,� the Commission has
interpreted �mining and mineral extraction� for oil and gas mining to include
exploration, drilling, completing and equipping wells; operation of separators,
emulsion breakers, desilting equipment and field gathering lines for crude
petroleum; and all other activities in preparation of oil and gas up to the
point of shipment from the producing property.
On that basis, the �mining� activity ends when the oil or gas enters the
pipeline for transportation from the producing property. Any activities, in connection with the oil
or gas, performed thereafter do not constitute part of the �mining� process.

Regarding
your other inquiry, we agree that �processing� activities, such as washing,
crushing and sizing of minerals, are within the definition of �mining� for
purposes of the industrial use exemption if they are in conjunction with
mining and extraction activities and if they take place at the mining
site. As you pointed out in your
letter, the SIC manual specifically refers to these �processing� activities as
part of the �mining� process. Furthermore,
SIC Code 1221 uses specific language such as �cleaning� and �crushing� of
minerals as part of the �mining� process with respect to coal mining.

Some
mining companies use electricity and other fuels in a multitude of different
activities at the same location, some of which qualify for the industrial use
exemption and some of which do not. In
those situations, if companies use the electricity and other fuels
predominantly in those activities that do qualify for the exemption, then all
the activities together qualify for the exemption.

We appreciate
you bringing this issue to our attention.
We hope the information we have provided will help resolve any concerns
you may have. Please let us know if we
can be of further assistance.

For
the Commission,

Alice
Shearer,

Commissioner