Section 25128-1 - Extractive Business Activity(a) Subdivision (c) of section 25128 of the Revenue and Taxation Code provides that "extractive business activity" is a "qualified business activity." This regulation defines an "extractive business activity" and what constitutes gross business receipts from such activity.(b) Subdivision (d)(3) of section 25128 of the Revenue and Taxation Code defines extractive business activity as "activities relating to the production, refining, or processing of oil, natural gas, or mineral ore." In order to qualify as an extractive business, the apportioning trade or business need not conduct all of these activities.(c) Production. For purposes of subdivision (d)(3) of section 25128 of the Revenue and Taxation Code, "production" means the location, extraction, and initial processing of oil, natural gas, or mineral ore ("crude substance"). "Extraction" means to remove a crude substance from the place where it naturally occurs (e.g., a surface mine, an underground mine, a well, oil shale or oil sand). Extraction of naturally occurring minerals is "mining." (1) Production of "metallic" and "nonmetallic" minerals, as defined in subsection (f) of this regulation, includes exploration, extraction, and all other activities customarily performed at the mine site or as part of the mining activity. Examples of mineral production include: development of mineral properties; preparation of the site; quarrying; well operations; milling (e.g., crushing, screening, washing, and flotation); leaching; precipitation; sintering; ore dressing (e.g., crushing, grinding, gravity concentration, and froth flotation); amalgamation; cyanidation; production of bullion; production of metallic mercury by furnacing or retorting; production of dimension stone, or crushed or broken stone (including boulder, ganister, grits and riprap); production of slabs or rough cuts of stone; and grinding and pulverizing of crude borax.(2) Production of "coal," as defined in subsection (f)(3) of this regulation, includes exploration, extraction, and all other activities customarily performed at the mine site or as part of the mining activity. Examples of coal production include: development of surface mines; auger mining, strip mining, culm bank mining, and other surface mining; development of underground mines; production from underground mines; cleaning, crushing, screening or sizing; and production of hydrocarbon liquids and the gasification, liquefaction, and pyrolysis of coal.(3) Production of oil or natural gas includes exploration, extraction, and all other activities customarily performed at the site of extraction or as part of the extraction activity. Examples of oil and natural gas production include: drilling and equipping wells; secondary and tertiary recovery; oil and gas well operation and maintenance; purification and dewatering of the oil, natural gas, or hydrocarbon liquids; operation of field gathering lines for crude oil and natural gas; and production of hydrocarbon liquids (e.g., butane, propane, and natural gasoline).(d) Refining. For purposes of subdivision (d)(3) of section 25128 of the Revenue and Taxation Code, "refining" is the separation, purification, or conversion of a crude substance into valuable products by an apportioning trade or business in a refinery.(1) Petroleum Refining. (A) Examples of refined products produced in a petroleum refinery include gasoline, diesel fuels, jet fuels, kerosene, distillate fuel oils, residual fuel oils, lubricants, alkylates, aromatic chemicals, olefins, asphalt, mineral jelly, natural mineral oils, natural mineral waxes, naphtha, naphthenic acids, partly refined oils sold for rerunning, lubricating and illuminating oils and fuels, paraffin wax, petrolatums, bitumen, road oils, solvents, and tar or residuum.(B) Examples of petroleum refining include dewatering and desulferization, fractionation or straight distillation, redistillation of unfinished petroleum derivatives, cracking and blending.(2) Other Refining.(A) Examples of refined products produced in refineries other than petroleum refineries include, but are not limited to, coke, hot metal, pig iron, silvery pig iron, primary smelting copper, primary refining copper, blister copper, copper blocks, copper ingots and refinery bars, copper pigs, copper slabs, aluminum, aluminum ingots and primary production shapes, extrusion ingot, aluminum pigs and aluminum slabs.(B) Other refining also includes: (1) Calcining, polishing, pulverizing, and blending;(2) Smelting ferrous and nonferrous metals such as lead-based antifriction bearing metals, antimony, babbitt metal, beryllium metal, bismuth, zinc blocks, cadmium, chromium, cobalt, columbium, germanium, gold, nonferrous metal ingots, iridium, primary lead pigs, primary lead blocks, primary lead ingots, primary lead refinery shapes, lead, magnesium, nickel, platinum group metals, precious metal, rhenium, selenium, silicon, silver, slabs (nonferrous metals), speltzer (zinc), tantalum, tellurium, tin base alloys, tin, titanium metal sponge and granules, zinc dust, and zirconium metal sponge and granules; and(3) Applying thermal action or other treatment affecting chemical change to natural, raw, or crude minerals. Examples of these processes include burning of carbonate rock to produce lime; heating gypsum to produce calcined gypsum or plaster of paris; heating clays to reduce water or crystallization; sawing to finish rough cut blocks of stone; sand finishing, buffing, or otherwise smoothing blocks of stone; burning bricks; expansion or popping of perlite; exfoliation of vermiculite; heat treatment of garnet; and heating shale, clay or slate to produce lightweight aggregates.(e) Processing. For purposes of subdivision (d)(3) of Revenue and Taxation Code section 25128, "processing" means activities intended to create valuable products from a crude substance which has not already been refined within the meaning of this regulation. Examples of processing include grading and sorting.(f) Mineral Ore. Naturally occurring minerals include:(1) Metallic minerals, consisting of: (A) Iron ores and manganiferous ores valued chiefly for their iron contents. Examples of these minerals include brown ore, hematite, iron agglomerate and pellet, blocked iron, limonite, magnetite, siderite, and taconite.(B) Copper ores. Examples of these minerals include chalococite, chalcopyrite, and cuprite.(C) Lead ores, zinc ores, or lead-zinc ores. Examples of these minerals include blende, calamine, cerrusite, galena, smithsonite, sphalerite, willemite, zinc-blende (sphalerite), and zincite.(F) Ferroalloy ores, except vanadium. Examples of these minerals include chromite, chromium ore, cobalt ore, columbite, ferberite, huebnerite, manganese ore, maganite, molybdenite, molybdenum ore, molybdite, nickel ore, ipsilomelane, pyrolusite, rhodochrosite, scheelite, tantalite, tantalum ore, tungsten ore wolframite, and wulfenite.(G) Uranium-radium-vanadium ores. Examples of these minerals include carnotite, pitchblende, radium ore, roscoelite (vanadium hydromica), tyuyamunite, and uraninite (pitchblende).(H) Miscellaneous metal ores, not elsewhere classified. Examples of these minerals include aluminum ore, antimony ore, bastnasite ore, bauxite, beryl, beryllium ore, cerium ore, cinnabar, ilmenite, iridium ore, mercury ore, microlite, monazite, osmium ore, palladium ore, platinum group ore, quicksilver (mercury) ore, rare-earth's ore, rhodium ore, ruthenium ore, rutile, thorium ore, tin ore, titaniferous-magnetite, titanium ore, and zirconium ore.(2) Nonmetallic minerals, consisting of:(A) Argillite, basalt, bluestone, calcareous tufa, diabase, diorite, dolomite, dolomitic marble, flagstone mining, gabbro, gneiss, granite, greenstone, limestone, marble, mica schist, onyx marble, quartzite, rubble mining, sandstone, serpentine, slate, syenite (except nepheline), trap rock, travertine, verdé antique, and volcanic rock.(B) Sand and gravel including common sand, construction sand, pebble, abrasive sand, blast sand, enamel sand, filtration sand, foundry sand, glass sand, grinding sand, industrial sand, and molding sand.(C) Clays, ceramic and refractory minerals. Examples of these minerals include clays, nepheline syenite, shale, ball clay, china clay, kaolin, paper clay, rubber clay, slip clay, alusite, aplite, bentonite, brucite, burley, cornwall stone, cyanite, diaspore, dumortierite, feldspar; fire clay; flint clay, fuller's earth, kyanite, magnesite, olivine (nongem), pegmatite (feldspar), pinite; plastic fire clay, sillimanite, stoneware clay, and topaz (nongem).(D) Natural potassium, sodium, or boron compounds, alum, borate compounds, borax, boron mineral, colemanite, glauber's salt, kernite, potash, potassium compounds, probertite, saltines (except common salt), soda ash, sodium compounds (except common salt), trona, and ulexite.(E) Phosphate rock, including apatite.(F) Chemical or fertilizer mineral raw materials, including alunite, amblygonite, arsenic mineral, barite, barium ore, brimstone, celestite, fluorite, fluorspar, guano, lepidolite, lithium mineral, marcasite, mineral pigment, ocher, pyrites, pyrrhotite, rock salt, common salt, sienna, spodumene, strontianite, strontium mineral, sulfur (native), and umber.(G) Miscellaneous nonmetallic minerals including agate, alabaster, amethyst, asbestos, asphalt (native), asphalt rock, bitumens (native), calcite, catlinitie, corundum, cryolite, diamond, diatomaceous earth, diatomite, emery, garnet gem stone, gilsonite grahamite, graphite, greensand, gypsite, gypsum, Iceland spar optical grade calcite), jade, meerschaum, mica, muscovite, natural abrasives, ozokerite, peat humus, peat, perlite, phlogopite, pipestone, pozzolana, precious stones, pumice, pumicite, pyrophyllite quartz crystal, reed peat, ruby, sapphire, scoria, sedge peat, selenite, semiprecious stones, shell, steatite, talc, tripoli, turquoise, vermiculite, volcanic ash, wurtzlite, bituminous limestone, bituminous sandstone, burrstone fill dirt pits, grindstone, millstone, oilstone, pulpstone, rubbing stone, scythestone, sharpening stone, and soapstone.(3) Coal, consisting of bituminous coal, lignite and anthracite.(g) Extractive business activity also includes the addition of non-extractive material to a product whose production, refining, or processing is otherwise defined as an extractive business activity in this regulation, if the non-extractive material is incidental to, and does not affect the basic character of, the product to which it is added. For purposes of this subsection, the non-extractive material shall be considered to be incidental to and as not affecting the basic character of the product to which it is added if it consists of 10 percent or less of that product. In any case, the non-extractive material shall be considered to be incidental to and as not affecting the basic character of the product to which it is added if it is added in order to meet the requirements of a governmental mandate and consists of 30 percent or less of that product. Example 1: Company X refines oil into gasoline, adds several additives amounting to 10 percent of the gasoline, and sells the enhanced gasoline. The gross receipts from the sale of the enhanced gasoline are from an extractive business activity because the additives are incidental to, and do not affect the basic character of, the gasoline.
Example 2: Company Y mines raw iron ore, smelts the ore, and adds 2.25 percent of carbon to make steel. Company Y's gross receipts from the sale of this steel constitute receipts from a qualified extractive business activity, because the additive (carbon) consists of 10 percent or less of the steel, and the refining of iron ore is defined as an extractive business activity. It makes no difference whether the carbon is self produced or purchased.
(h) Gross business receipts from extractive business activity. (1) Except as provided in paragraphs (3) and (4) of this subsection, only gross receipts derived by an apportioning trade or business from the sale of products created through its performance of one or more of the activities described in subsections (c)-(g), inclusive, of this regulation shall be considered to be gross business receipts from a qualified extractive business activity for purposes of Revenue and Taxation Code section 25128. If an apportioning trade or business performs any services, including any activities described in this regulation, for others on a contract or fee basis, the gross receipts from those service activities are not gross business receipts from qualified extractive business activity for purposes of section 25128. Example 1: Company B purchases gasoline from an unrelated petroleum refiner. The gross receipts from Company B's sale of such gasoline to a third party do not constitute gross business receipts from an extractive business activity, because the gasoline was not created by Company B's own performance of a qualified extractive business activity as defined in subsections (c)-(g), inclusive, of this regulation.
Example 2: The business of an apportioning trade or business is drilling oil and gas wells for others on a contract or fee basis. The gross receipts from the sale of such drilling services are not gross receipts from the conduct of an extractive business activity for purposes of Revenue and Taxation Code section 25128.
Example 3: A combined apportioning trade or business is engaged in a business which involves exploration for and extraction of crude oil, purchase of crude oil from third parties, and refining the crude oil, both self produced and purchased, into gasoline, which the business sells to third parties. In its records, the business classifies revenue into three categories: production, refining, and marketing. The marketing category includes receipts from the products the business sells to third parties, including the gasoline it has refined. The receipts from the sales of gasoline, which are included in marketing revenues, are receipts from qualified extractive business activity because the refining of crude oil into gasoline is a qualified business activity conducted by the apportioning trade or business regardless of whether the crude oil was self produced or purchased from third parties.
(2) If an apportioning trade or business sells products purchased from third parties as well as products created in the course of conducting its qualifying extractive business activity, tracing will generally be required to determine which portion of the receipts is from its qualified extractive business activity and which portion is not. In some cases, tracing may be difficult because records are not available and cannot reasonably be obtained. In such cases, reasonable estimates will be acceptable. Direct tracing is not required if 5 percent or less of the purchases included in the cost of goods sold of the apportioning trade or business is refined products purchased from unrelated third parties. Gross receipts from the sale of these purchased products will be considered extractive business receipts.(3) Exchanges. Exchanges are an exception to the requirement that the product sold must be derived from the apportioning trade or business's qualified extractive business activity as set forth in subsection (h)(1) of this regulation. If products from an extractive business activity are exchanged for similar products owned by parties outside of the apportioning trade or business, the subsequent sale of the products received in the exchange shall be treated as arising from the apportioning trade or business's qualified extractive business activity to the extent the exchange itself has not previously been reflected in the calculation of the business's qualified extractive business activity. Example: Company S refines oil and markets gasoline in California and Washington. Company B, an unrelated party, refines oil in Washington and markets gasoline in Oregon and Washington. S needs more gasoline for its Washington customers than it has available at its Washington storage facilities. B needs more gasoline to sell in its Oregon market. B exchanges some of its gasoline in Washington for some of S's gasoline in California, which B then sells in its Oregon market. Title to B's Washington gasoline transfers to S at the time of the exchange and title to S's California gasoline transfers to B at the same time. The exchange is of substantially identical gasoline. Although S has not refined the gasoline obtained from B, S's subsequent sale of such gasoline to parties outside of its apportioning trade or business is considered to be a sale of product from S's extractive business activity because it was exchanged for gasoline which was refined by S. This is also true of B's subsequent sales of the gasoline obtained from S to parties outside of its apportioning trade or business.
(4) Temporary interruptions in supply. If an apportioning trade or business experiences a temporary interruption in its normal supply of crude substances or in its ability to supply the established requirements of its customers for crude substances or refined products normally sold by the apportioning trade or business, the gross receipts from the resale to its customers of crude substances or refined products purchased from others solely because of the interruption will be treated as receipts from qualified extractive business activity. For purposes of this paragraph, an interruption in supply will not be treated as "temporary" after the last day of the first full income year following the occurrence of the event which caused the interruption. Example: Company F operates oil refineries in both California and Washington. It sells gasoline and other refined products produced by these refineries to customers throughout the U.S., and it files its California franchise tax returns on the basis of an income year ending on December 31. On March 3, 1995, a fire disabled the company's Washington refinery, forcing Company F to purchase refined products from other refiners in order to continue supplying the established requirements of its customers. The gross receipts from Company F's resale to its customers of the products purchased from the other refiners will be treated as gross receipts from a qualified extractive business activity during the period March 3, 1995, through December 31, 1996.
Cal. Code Regs. Tit. 18, §§ 25128-1
1. New section filed 7-7-99; operative 8-6-99 (Register 99, No. 28).
2. Change without regulatory effect amending subsections (c)(1)-(2), redesignating former subsections (d)-(d)(3) as new subsections (f)-(f)(3), relettering subsections and amending subsection (h)(4) filed 2-29-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 9). Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25128, Revenue and Taxation Code.
1. New section filed 7-7-99; operative 8-6-99 (Register 99, No. 28).
2. Change without regulatory effect amending subsections (c)(1)-(2), redesignating former subsections (d)-(d)(3) as new subsections (f)-(f)(3), relettering subsections and amending subsection (h)(4) filed 2-29-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 9).