The Arizona Court of Appeals recently determined that dyed diesel used in mining equipment was taxable. The taxpayer sold dyed diesel fuel to a mining company for use in powering bulldozers, loaders, haul trucks, and rock crushers.
Arizona exempts machinery or equipment used in mining and processing operations. In determining whether the dyed diesel fuel qualified as "machinery or equipment," the Court looked at the following six factors: (1) whether the item is essential or necessary to the completion of the finished product; (2) the prominence of the item's role in maintaining an integrated system with qualifying exempt items; (3) the connection between the item and the processing or mining operation; (4) whether the item physically touches the raw materials; (5) whether the item manipulates or affects the raw materials; and (6) whether the item adds value to the raw materials.
Applying these factors, the court determined that dyed diesel failed to qualify as machinery or equipment. First, the dyed diesel fuel was not similar to other equipment that clearly qualified for exemption. Second, the dyed diesel fuel never touched or manipulated raw materials. Third, the connection between the dyed diesel fuel and the mining operation did not have a "close nexus" since the fuel never touched raw materials. Finally, the Court noted that Arizona has enacted several exemptions for fuel, but did not provide an exemption for the use claimed. As a result, the Court found that the dyed diesel fuel was taxable.