Is natural gas and electricity used to perform failure-analysis testing on metals, plastics, coatings, and other materials exempt as utilities used in manufacturing or processing?

Plain-English summary

A business that performs failure analysis — determining why products fail or how they react under certain conditions, testing on metals, plastics, coatings, and other materials — asked whether the natural gas and electricity it uses to perform that testing is exempt from Texas sales tax.

The Comptroller explained that Texas sales tax law exempts utilities (like gas and electricity) used in manufacturing or processing tangible personal property FOR SALE as tangible personal property, where "processing" means an activity that produces a physical or chemical change in the property. That sounds like it could fit failure-analysis testing, since the testing does cause a physical change in the material being tested. But the exemption still doesn't apply here, because the company isn't processing property for sale — it's providing a testing/analysis service to determine why products fail or how they react under conditions. Even though a physical change results, that doesn't make it "processing" as that term is used in Tex. Tax Code §§ 151.317(a)(2) and 151.318(a)(2) and (4). The gas and electricity used for this testing service remain taxable.

What this means for you

Materials testing labs and failure-analysis service providers

Don't assume the manufacturing/processing utilities exemption covers your testing operations just because your testing physically or chemically alters the sample. The exemption is tied to processing property FOR SALE — a testing service performed on a customer's materials (rather than producing something you'll sell) doesn't qualify, even if the test itself changes the material.

Manufacturers evaluating their own utilities exemption claims

This letter is a useful contrast case: the "physical or chemical change" language in the processing definition is necessary but not sufficient — the change has to occur as part of manufacturing/processing property that will be SOLD, not as a byproduct of a testing or analytical service.

Accountants and tax professionals

Cite this letter when a client's utilities exemption claim rests on an activity that causes a physical/chemical change but isn't actually producing a product for sale — testing, inspection, and analytical services performed on someone else's materials generally fall on the taxable side of this line.

Common questions

Q: If my testing process physically changes the material being tested, does that qualify for the manufacturing utilities exemption?
A: Not necessarily. This letter confirms that a physical change alone doesn't satisfy the statutory definition of "processing" — the activity must be processing tangible personal property FOR SALE, which a testing/analysis service is not.

Q: What counts as "processing" for the utilities exemption?
A: An activity that produces a physical or chemical change in tangible personal property being manufactured or processed for sale as tangible personal property — not a service performed to analyze or test material.

Q: Are utilities used to test my own manufactured products exempt?
A: This letter doesn't address that scenario directly — it addresses a failure-analysis SERVICE performed (implicitly) on materials being tested, not property the tester itself manufactures and sells.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.317(a)(2) (utilities exemption — manufacturing/processing property for sale)
• Tex. Tax Code § 151.318(a)(2), (4) (definition of "processing" for the manufacturing exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200005314L

Original ruling text

May 17, 2000

Subject: ***

Dear **:

Thank you for your recent email concerning the taxability of natural gas and
electricity (utilities) used to perform failure analysis on metals, plastic,
coatings, etc. (materials).

The sales tax law exempts utilities used in manufacturing or processing
tangible personal property for sale as tangible personal property. Processing
is an activity that produces a physical or chemical change in tangible personal
property.

Your client is not processing tangible personal property for sale. Your client
is providing a service to determine why products fail or how a product reacts
under certain situations or conditions. Although the failure analysis results
in a physical change in the product being tested, this activity does not
constitute processing as that term is used in Texas Tax Code Sections
151.317(a)(2) and 151.318(a)(2) and (4).

You may view or down load the sales tax law at and
then click on the following:

1. Texas Taxes
2. Tax Code under Texas Laws and Rules
3. Tax Code
4. Scroll down to referenced statutory cite

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free 1-800-531-5441, extension 3-4683, if you have any
questions or need more information. My email address is
.You may write to Tax Policy Division,
Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3825.

Sincerely,

Eddie C. Washington
Tax Policy Division