September 21, 2014

Colorado Court of Appeals: Natural Gas Pipelines and Fittings Exempt from Sales Tax

The Colorado Court of Appeals issued its opinion in Pioneer Natural Resources USA, Inc. v. Colorado Department of Revenue on Thursday, August 14, 2014.

Sales Tax—Pipelines—Fittings—Enterprise Zone—Natural Gas.

In this sales tax case, the district court concluded that the pipelines and fittings at issue, which are located in one of Colorado’s enterprise zones and are used to gather and deliver natural gas from plaintiff’s wells to its processing facilities, qualify for Colorado’s sales tax exemption because they “are in direct use in the manufacturing of natural gas,” as defined in CRS §§ 39-26-709 and 39-30-106. The Colorado Department of Revenue (DOR) appealed, contending that the district court erred in finding that plaintiff’s purchases qualify for this tax exemption.

The parties agreed that plaintiff’s wells and gas-gathering system are located within an enterprise zone. Under the enterprise zone sales and use tax exemption statute, purchases of “machinery or machine tools” in excess of $500 are exempt from sales tax if they are “used solely and exclusively in an enterprise zone in manufacturing tangible personal property, for sale or profit. . . .” Here, the pipelines are used to “move material from one direct production step to another in a continuous flow,” and the enterprise zone exemption statute considers both “extracting” and “processing” as manufacturing. Thus, plaintiff’s pipelines and fittings that move natural gas from the wells—a direct production step of extracting natural gas—to the processing facilities in a continuous flow qualify for Colorado’s sales tax exemption because they “are in direct use in the manufacturing of natural gas.” Therefore, the district court did not err in finding that plaintiff’s purchases qualified for Colorado’s sales tax exemption. The judgment was affirmed.

Summary and full case available here, courtesy of The Colorado Lawyer.

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