Gas Gathering System Parts Exempt in Colorado

Monday, August 25th, 2014

Natural gas pipelines.

The Colorado Court of Appeals recently ruled that a taxpayer's purchases of pipelines and fittings used to gather and deliver natural gas were exempt.

Colorado exempts sales of machinery or machine tools in excess of $500 if the machinery or tools are used solely and exclusively in a manufacturing process in an enterprise zone. For this exemption, "manufacturing" includes quarrying, processing and beneficiation, or otherwise extracting from the earth any natural resource.

The taxpayer operated wells and compressor sites in an enterprise zone. The taxpayer used a gathering system with pipelines and fittings to maintain pressure, extract natural gas from each well, and move the gas to compressor or processing stations for final processing. Essentially, this system transported the gas from the extraction site to the processing site. The state argued this gathering process was not part of the "manufacturing" process and that the taxpayer could not purchase pipelines and fittings exempt.

The Court ruled that these items were used in a manufacturing process and were therefore exempt. The gathering process was part of a larger extraction and processing system. These items were used to move the product (gas) from one step of the manufacturing process to another. The pipelines and fittings were therefore directly used in manufacturing.

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