November 23, 2011
TAX TREATMENT OF PROPANE
By: Kevin McCarthy, Principal Analyst
You asked for a description of the tax treatment of propane, particularly with regard to its use as a fuel for commercial electric generators.
The taxability of propane, also known as liquefied petroleum gas or LPG, under the sales and petroleum products gross earnings taxes depends on how it is used and delivered. Residential use of propane is exempt from the sales tax under CGS § 12-412. The sales tax exemption also applies to retail sales of propane that is used directly in (1) agricultural production, (2) fabrication of a finished product to be sold, and (3) an industrial manufacturing plant. The non-residential exemption only applies to sales to a metered building, location, or premise where at least 75% of the propane is used for agricultural production, fabrication, or manufacturing. It appears that the use of propane as a fuel for electric generation is not covered by these exemptions and is thus subject to the sales tax.
The gross earnings tax applies to the initial sale of petroleum products in the state, which typically occurs at the wholesale level. Under CGS § 12-587, the use of propane exclusively for heating purposes by any customer is exempt from the tax. In addition, under CGS § 12-458, the motor fuels tax does not apply to propane or other fuels sold exclusively to furnish electricity, “if delivered to consumers through mains, lines or pipes.” It appears that if the propane is delivered to the generator by other means, it is subject to the tax.