Arizona: Dyed diesel does not qualify for mining/processing exemption

Listen to a brief overview of state tax developments this week, including Arizona, or read full Arizona development below.

Detailed Arizona Development

The Arizona Court of Appeals recently ruled that dyed diesel fuel sold to a gravel mining company was not exempt from the Transaction Privilege Tax (TPT).  Under Arizona law, a TPT exemption applies to “mining machinery, or equipment, used directly in the process” of extraction or processing. Another exemption applies to “machinery and equipment” used directly in processing or metallurgical operations.  The taxpayer at issue made sales of dyed diesel to a customer that used the fuel to power heavy equipment used in its gravel mining and processing operations.  The taxpayer filed a TPT refund claim, arguing that the fuel qualified for the mining machinery exemption.  The Department of Revenue denied the refund claim, and the taxpayer sought review in the tax court.  After the tax court ruled in the taxpayer’s favor, the Department appealed.

On appeal, the court reviewed earlier case law that had set forth certain tests that at times allowed items that would not ordinarily be considered “machinery” or “equipment” to qualify for the exemptions based on the nature of the item and its role in the operations. The court pointed to six factors that have been used when examining the role an item plays in an operation, including whether an item physically touches raw materials, and whether the item adds value to the raw materials.  Applying factors, the court acknowledged that although the diesel was vital to the mining operations, it was not equivalent to the machinery and equipment that it powered and did not function like items traditionally thought to be machinery or equipment.  Further, the court observed that if the Arizona legislature had wished to exempt dyed diesel fuel from the TPT, it would have done so plainly.  As a result, the court reversed the tax court’s decision and ruled in favor of the Department.  Please contact John Schneider at 213-955-8534 for more information on Carter Oil v. Arizona Department of Revenue.

This Week's Developments

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Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US