Energy Law

Taxation of Fuel Provided to Compression Service Operators at No Cost

In Bridges v. Production Operators, Inc., 2007-0648 (La. App. 4th Cir. 12/12/07),974 So.2d 54, at issue was whether the provision of fuel by customers to a compression services operator at no cost for use in powering the operator’s compressors was subject to Louisiana sales or use tax. 

 Production Operators, Inc. (“POI”) operated a gas compression company and used customer-supplied fuel to power its compressors. For its services, POI received a flat monthly fee, regardless of whether its compressors were used, and customers were required to provide compressor fuel at no cost to POI. The Louisiana Department of Revenue contended that the provision of compressor fuel to POI by its customers was a taxable sale in the form of a barter. POI defended against the collection of tax by arguing that there was no transfer of title to the fuel, and to the extent there was a transfer of title, POI did not owe tax because the “sales price” and “cost” of the fuel was zero. The Fourth Circuit agreed with the Department on the first issue, concluding that the transfer of compressor fuel from the customers to the operator constituted a taxable sale in the form of a barter for consideration, but the court did not agree that Henry Hub spot price was the appropriate value of the consideration and instead remanded the matter to the trial court to determine the amount of the consideration for tax purposes.

            The Fourth Circuit’s decision in Production Operators, Inc. creates a split among Louisiana courts, for in 2003, the Third Circuit, considering similar facts, held that, though the provision of compressor fuel constituted a taxable transaction, because there was neither a sales price nor value for the compressor fuel, the Department could not recover any tax. Hanover Compressor Company v. Department of Revenue, 02-0925 (La. App. 3d Cir. 2/5/03), 838 So.2d 876. Production Operators, Inc. also leaves open the question of how consideration is to be determined when fuel is supplied to power gas compression operations at no cost tothe operator.

Full post as published by The Energy Law Blog on April 17, 2008 (boomark / email).