How’s this for an April Fools’ joke: “In a rash of hastily drafted legislation that is shocking the tax community today, several cash-strapped states have determined that the only way to make up their budget shortfalls is to expand the use tax base to the air we breathe.” States, the joke goes, would charge an annual per-person use tax based on the amount of air each person “inhales, exhales, or otherwise uses.” Of course, this would never actually happen…
All kidding aside, states do impose sales and use tax on various gases. In fact, some states impose tax on oxygen, including medical oxygen, as well as other gases that are isolated and sold.
Indeed, in Alabama sales of medical oxygen are only exempt from sales tax if the oxygen is prescribed to a Medicare or Medicaid recipient. Everyone else has to pay sales and use tax on it (except for livestock, for whom all medicines are exempt in Alabama). Some states, like Arkansas, exempt oxygen only if it is purchased with a prescription. Other states, such as Arizona, exempt medical oxygen entirely, regardless of whether it has actually been prescribed for a patient.
Oxygen also has its uses in the agricultural and manufacturing fields and many states impose tax on its sales. In fact, Colorado taxes the sale of gases, including oxygen and other inert gases that are used in the welding process. Alternatively, other states exempt some gases sold for manufacturing and agricultural uses. One such example is Alabama, which exempts sales of oxygen to be used in steel manufacturing. Additionally, California exempts from sales tax all oxygen administered to food animals to prevent or control disease, including oxygen injected into ponds or tanks that house fish.
It’s not just oxygen that’s subject to sales tax. In fact, sales of hydrogen, argon and other gases are also subject to the sales and use tax in most states. Indeed, North Carolina and Alabama explicitly impose sales tax on hydrogen. Other states have specific exemptions for some gases, but not others. For example, sales of argon for use in manufacturing in Iowa are exempt from sales tax, but sales of oxygen, hydrogen and methane are taxable. In Illinois, sales of hydrogen are taxable, unless the hydrogen is used as a catalyst in manufacturing.
As it’s evident that some states are not hesitant to tax gases, including oxygen, maybe taxing the air we breathe really isn’t that far-fetched!
Continue the discussion on LinkedIn: Should states impose sales and use taxes on gases?
For more information about state tax issues, sign up for a free trial on Bloomberg BNA’s Premier State Tax Library.
By Emilie Burnette
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