Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO:
KRS
139.010,
139.200,
139.260,
139.270,
139.280,
139.290,
139.310,
139.330,
139.470,
139.480
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
131.130(1) authorizes the
Department of Revenue to promulgate administrative regulations necessary for
the administration and enforcement of Kentucky tax laws. This administrative
regulation establishes the sales and use tax requirements for transactions
relating to the oil and gas extraction industry.
Section 1.
(1) Definitions. "Contract driller" means a
person performing a drilling service for the owner or operator of an oil or gas
well under a contractual relationship for consideration.
(2) "Repair, replacement, or spare parts" is
defined by
KRS
139.010(34).
Section 2. Eligible Property for Exemption.
The storage, use, or other consumption of tangible personal property for use in
the extraction or production process for oil or natural gas which will be for
sale shall be exempt from the sales and use tax according to the provisions of
KRS
139.010,
139.470(9),
and
103 KAR
30:120.
(1) The
extraction or production process for oil shall be considered as beginning with
the erection of the drilling rig at the drilling location and shall be
considered as terminating at the settling tank immediately prior to
transportation. Oil tanks used for storage alone shall be subject to
tax.
(2) The extraction or
production process for natural gas shall be considered as beginning with the
erection of the drilling rig at the location of the well and shall be
considered as continuing until the gas leaves the outlet on the discharge side
of the final gathering compressor station. The pipeline from the outlet to the
transmission line shall be subject to tax.
(3) The list in this subsection shall serve
as examples of machinery used in the extraction or production process:
(a) Drilling rigs;
(b) Casings;
(c) Tubing;
(d) Well head equipment;
(e) Pumps;
(f) Compressors;
(g) Production and gathering pipe;
(h) Cleaning equipment; and
(i) Oil settling tanks.
(4) The list in this subsection shall serve
as examples of other tangible personal property used in the extraction or
production process:
(a) Drilling
bits;
(b) Explosives;
(c) Drilling muds;
(d) Chemicals; and
(e) Fracking fluids, including water and
sand.
(5) Tangible
personal property shall not be exempt from sales and use tax if it is used as
"repair, replacement, or spare parts".
Section 3. The extraction or production
process shall include the following operations:
(1) Drilling and equipping wells, to include:
(a) Drilling of the hole by the drilling rig
to the producing formation;
(b)
Installing casing and tubing in the hole;
(c) Stimulating production by explosives or
other means;
(d) Hydraulic
fracturing or fracking; and
(e)
Completion of the well by the installation of machinery and equipment; and
(2) Pumping, gathering,
and cleaning.
(a) Pumping shall include the
use of separate pumps on individual wells, group well pumps, and auxiliary
pumps at other points on the gathering system. The machinery and appurtenant
equipment used in secondary methods of recovery including gas repressuring or
water-flooding shall be considered part of the extraction or production
process.
(b) The gathering system
shall consist of a series of pipelines connecting several different wells with
settling tanks grouped together for production purposes. Compressors used to
stimulate production and to continue in effect the processing production
operation shall be considered part of the gathering system.
(c) Cleaning operations shall occur in the
final settling tank where impurities are removed from oil by chemical heating
and settling processes. If a well produces both oil and gas, separator
equipment shall be necessary at appropriate points in the gathering lines to
separate the oil and gas. In addition, various types of machinery may be used
at different points in the gathering system to clean oil or
gas.
Section 4.
Nonproduction Process. Preliminary work, transportation, and marketing shall
not be considered part of the oil or gas extraction or production process.
(1) Preliminary work shall include:
(a) Geological and geophysical
work;
(b) Leasing or purchasing
operations;
(c) Determination of
drilling sites; and
(d) Surface
work preparatory to drilling.
(2) The transportation of oil shall be
considered as commencing when the oil is pumped from the settling tank into
transportation facilities, which may be truck, rail, or pipeline, or a
combination thereof.
(3) The
transportation of natural gas shall be considered as commencing at the point
where the production or gathering system ceases, and it is delivered into
pipelines for transportation to the retail distribution system.
(4) The marketing of natural gas shall be
considered as commencing when the pressure in the transportation line is
reduced and the gas is delivered into a low-pressure system for distribution to
the ultimate retail consumer.
Section
5. Contract Drillers.
(1) The
exemptions provided in
KRS
139.470(9) and
139.480(10)
shall not apply to purchases made by a contract driller since a contract
driller is providing a service and is the consumer of the machinery and
materials used to provide the service.
(2) A contract driller may jointly execute a
"Certificate of Exemption Machinery for New and Expanded Industry," Form
51A111, with an oil or gas well owner or operator to purchase machinery used to
provide drilling services to the oil or gas well owner or operator only if the
oil or gas well owner or operator is the actual title owner of the machinery
used to provide the drilling services after the contract between the contract
driller and the oil or gas well owner or operator has been
completed.
Section 6.
(1) This administrative regulation shall
replace Revenue Circular 51C013.
(2) Revenue Circular 51C013 is rescinded and
shall be void.
Section 7.
Forms. The form listed within this administrative regulation may be inspected,
copied, or obtained, subject to applicable copyright law, at:
(1) The Kentucky Department of Revenue, 501
High Street, Frankfort, Kentucky 40601;
(2) A Kentucky Taxpayer Service Center;
or
(3) The department Web site at
http://revenue.ky.gov.
STATUTORY AUTHORITY:
KRS
131.130(1)