SALT Report 2246 – The Missouri Department of Revenue issued a letter ruling regarding the taxability of rental charges for compression services, natural gas compressors, and compressor operators. The Taxpayer rents natural gas compressors and operators to natural gas producers in Missouri. The compressors are used directly in the production of natural gas.
When natural gas is first extracted from the earth it is an unusable product. Because of this, natural gas producers will rent a compressor and hire an operator from the Taxpayer to compress the natural gas. This process eliminates impurities such as water and other distillates and turns the raw product into a marketable natural gas product.
The Taxpayer requested guidance regarding the taxability of rental and service fees for the compressors and operators, as well as repair parts and service. The Department determined the taxability as follows.
Section 144.020.1(8), RSMo, imposes sales tax on the rental or lease of tangible personal property if sales tax was not paid at the time the property was originally purchased. However, if the items are used to provide a service to a customer and the use of the property is a necessary part of the service, then a temporary transfer of the property to the customer as part of the service transaction is not considered a lease or rental of the property.
The Department stated that although the Taxpayer labels the charges for its service a “rental charge”, the charges are in fact for the compression services of which, the compressors are an integral part. Therefore, charges for the temporary transfer of a compressor to the natural gas producer as a part of the service is not a lease or rental of property and is not subject to sales tax.
The Taxpayer’s natural gas compression services are not subject to sales tax. The Department stated that the Taxpayer is providing the service of removing impurities and compressing the well gas so that it can be discharged through gas lines which makes it suitable for commercial and residential use. Because this process changes raw, unusable natural gas into a marketable natural gas product with a use, identity and value different from the original, the Taxpayer’s natural gas compression qualifies as manufacturing under §§144.030.2(5) and (6), RSMo.
The Taxpayer’s purchase of natural gas compressors, parts, and oil filters are exempt from sales and use tax. Likewise, the Taxpayer’s purchases of oils, lubricants, and coolants used to maintain its compressors are exempt from state sales tax and state and local use tax under §144.054.2, RSMo. However they may be subject to local sales tax.
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