A bill before the state house of representatives (HB 2038) would require petroleum refiners to pay use tax on fuels they use that are by-products of the refining process. Bill supporters claim that Washington is unusual in not taxing such fuels. This is not true. These fuels would be untaxed in 8 of the other 12 western states, typically because all fuels used in the manufacturing are not subject to sales or use tax. A 9th western state (New Mexico) is in the process of phasing out sales and use taxes on fuel.

Washington: Under current Washington law, the “use of fuel by the extractor or manufacturer thereof when used directly in the operation of the particular extractive operation or manufacturing plant which produced or manufactured the same” is not subject to the use tax. The joint legislative audit and review committee provides this example: “a timber product manufacturer produces wood scraps in the process of manufacturing plywood. The wood scraps are fed through a machine that converts them to scraps of a certain size, commonly known as ‘hog fuel’. If the hog fuel is used by that manufacturer at the same facility as fuel to make steam to dry the lumber, then the hog fuel is exempt from use tax under this preference.” Wood product manufacturers and petroleum refiners are thought to be the largest beneficiaries of this provision.

HB 2038 would require refiners to pay use tax on the fuel they produce and consume in the refining process. Pulp, paper and wood products manufactures would remain free use tax on by-product fuels.

Other Western States: Of the other 12 states with lands that drain to the Pacific Ocean, three (Alaska, Montana and Oregon) have no sales or use taxes.

Three states have general exemptions for fuel used in manufacturing: Colorado exempts “electricity, coal, gas, fuel oil, steam, coke, or nuclear fuel used in processing, manufacturing, mining, refining, irrigation, construction, telegraph, telephone and radio communication.” Utah exempts “natural gas, electricity, heat, coal, fuel oil, or other fuels for industrial use.” Wyoming exempts power and fuel “consumed by those in the businesses of manufacturing, processing or agriculture.”

Two other states have broader exemptions for goods consumed in the manufacturing process: Idaho exempts “supplies used or consumed primarily and directly in the production process and which are necessary or essential to perform the operation.” New Mexico’s exemption is for “tangible personal property that is consumed in the manufacturing process of a product.” (The New Mexico exemption is new and is being phased over 5 years. For 2013, 20 percent of the value of property consumed in the production process is exempt.)

California‘s treatment is most like Washington’s and is in two parts. First, still gas and petroleum coke produced during the process of refining purchased crude oil falls under the state’s use tax exemption for fuel from organic products and waste by-products. Second, a refiner does not owe tax on its use of oil it itself has extracted.