OUR THOUGHTS ON:

Fine Line Between Taxable and Exempt Mining Activities

State and Local Tax|Energy & Resources

By Cathleen Condrac

The Pennsylvania Department of Revenue has issued a sales and use tax bulletin to provide clarification of the existing mining regulation as it applies to modified or enhanced mining processes such as hydraulic fracturing used in unconventional oil and gas well development.

Generally, property used directly and predominantly in mining operations is exempt from tax under Pennsylvania sales tax law. However, certain property that may be considered essential to the mining operation because its use is required by law or practical necessity may not be considered directly used in mining operations for sales and use tax purposes. For instance, equipment used to remove timber, clear land of dirt and rocks, build access roads or even transport mining equipment to the mining site is considered taxable under premining activities even though mining cannot take place until this work is performed. Equipment and materials used in the construction of ponds for storage of fresh water is also considered taxable if storage occurs prior to its use in drilling or hydraulic fracturing.

Materials such as liners, sand, and gravel utilized in the construction of ponds which control or abate pollution generated in the mining operation; or foundation constructed directly beneath the drilling rig are not taxable under Pennsylvania law since the property is deemed directly used in mining operations. However, the equipment used to construct the respective ponds and foundations is taxable.

Of interest, the law has always exempted from tax equipment used to illuminate production activities as well as equipment (dozers, graders, etc.) and materials (fill, seedlings, grass seed, shrubs, etc.) used in reclamation of mining facilities when such reclamation is required by law. Water trucks purchased for dust control and property utilized for accident and fire prevention are typically taxable.

Sales and Use Tax Bulletin 2012-01

Please contact the State and Local Tax (SALT) professionals at Schneider Downs with mining questions specific to your business. Our SALT team has over 100 years of combined state and local tax experience and we welcome the opportunity to serve you.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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