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Arizona Appellate Court Issues Decision in Chevron U.S.A. Inc. v. Department of Revenue

Tax Development Dec 11, 2015

On December 3, 2015, the Arizona Court of Appeals issued its decision in Chevron U.S.A. Inc. v. Department of Revenue, Arizona Court of Appeals, No. 1 CA-TX 14-0013, holding that proceeds from the sale of Chevron’s industrial oils and greases to Freeport-McMoRan, Inc. (“Freeport”), for use in Freeport’s mining and metallurgical operations, are exempt from transaction privilege tax under Ariz. Rev. Stat. § 42-5061(B)(1),(2), (18).

Chevron filed a refund claim related to taxes paid between July 2002 and March 2006 for various transactions with Freeport, asserting that the sales of oils and greases were exempt from transaction privilege tax as 1) machinery or equipment used directly in the manufacturing of metallurgical operations under Ariz. Rev. Stat. § 42-5061(B)(1), 2) mining machinery or equipment under Ariz. Rev. Stat. § 42-5061(B)(2), and 3) machinery or equipment used directly to meet or exceed pollution control regulations under Ariz. Rev. Stat. § 42-5061(B)(18). The Arizona Department of Revenue (“Department”) issued a refund for taxes paid on sales of hydraulic oils and transmission fluids but denied portions related to engine oil, gear oil, grease, and open gear lube. Chevron filed an appeal with the tax court. The tax court ruled in favor of the Department, agreeing with the Department’s reasoning that such greases and oils for exempt machinery and equipment were taxable “expendable materials” with a short useful life. The Appellate Court rejected the Department’s argument, as the useful life analysis does not apply if items are exempt under Ariz. Rev. Stat. § 42-5061(B).

In its reasoning, the Appellate Court relied on the Arizona Supreme Court’s analysis in Arizona Department of Revenue v. Capital Castings, Inc., 207Ariz. 445 (2004) (“Capital Castings”) that if the items in question are essential or necessary to the completion of the finished product, and such items are part of a “harmonious integrated synchronized system” with exempt equipment, then such items will be exempt from tax. The Appellate Court reasoned that such oils and greases were an essential part of the integrated process; without the use of the oils and greases the exempt machinery and equipment would not be able to function.

On December 3, 2015, the Appellate Court issued its decision, reversed the tax court’s determination, and held that industrial oils and greases used for mining and metallurgical operations were not subject to Arizona’s transaction privilege tax. At this time, court records do not indicate whether the Department has appealed the Appellate Court’s decision.


Mark W. Eidman

Evan Schneider