Does a battery system a wind farm installs to store generated electricity for grid-reliability service qualify for Texas's manufacturing sales tax exemption?

Plain-English summary

A commercial wind farm operator wanted to participate in ERCOT's Fast-Responding Regulation Service (FRRS), which pays operators to commit to supplying a set amount of electricity within 60 cycles of a dispatch instruction. To meet that response time, the operator had to install a battery system (battery, inverter, and HVAC unit) that stores electricity — about 90% of it generated by the wind farm itself — and releases it on demand. The operator asked whether buying this battery system qualified for Texas's manufacturing sales tax exemption.

The Comptroller ruled it does not qualify. The manufacturing exemption covers equipment that directly causes a chemical or physical change essential to producing tangible personal property (electricity) for sale — but it specifically excludes equipment used to "maintain or store" that property. Even though the battery does convert the electricity to chemical energy and back (arguably a "chemical change"), the Comptroller found that conversion happens only for storage purposes, not to manufacture new electricity — the electricity going into the battery was already manufactured and, in the FRRS context, already effectively committed for sale. Storage equipment is excluded from the exemption regardless of what physical or chemical process it uses internally to store the product.

What this means for you

Wind, solar, and other power generators exploring battery storage

Don't assume a battery's internal energy-conversion process (chemical, thermal, etc.) automatically qualifies it as "manufacturing equipment." The Comptroller looks at the battery's purpose — storing and releasing electricity on demand — not its internal mechanics. If the equipment's job is holding onto a product you already made until you're ready to sell or deliver it, it's storage, and storage equipment is carved out of the manufacturing exemption by statute.

Grid-services participants (FRRS, demand response, ancillary services)

Equipment installed specifically to meet a grid operator's response-time requirement (batteries, buffer capacity) is being bought to enable timely delivery, which the Comptroller treats as a storage function even when it's essential to your business model and required by contract with ERCOT or a similar grid operator.

Accountants and tax professionals

The ruling leans on the well-established storage carve-out in Section 151.318(c)(4) and a consistent line of Comptroller Decisions (112,918 (2017); 106,088 and 107,112/107,113 (2014); 103,035 (2014)) applying it to refrigeration and other storage equipment — this ruling extends the same reasoning to battery storage of electricity, treating "produces a chemical change" arguments as insufficient when the change serves a storage function rather than production of a new product.

Common questions

Q: Does converting electricity to chemical energy and back count as "manufacturing" for exemption purposes?
A: Not here. The Comptroller found the chemical/physical change in the battery served only to store already-manufactured electricity, not to produce a new or different product — so it didn't meet the manufacturing exemption's "chemical or physical change to the product being manufactured" test.

Q: Would other equipment at the wind farm (turbines, generators) qualify for the manufacturing exemption?
A: This ruling only addresses the battery system; equipment that actually generates electricity from wind is a separate question not answered here.

Q: Can other wind or solar operators rely on this ruling for their own battery-storage projects?
A: No. It's a private letter ruling binding on the Comptroller only for the taxpayer and facts submitted, and it cannot be relied on by any other taxpayer.

Citations and references

Statutes, rules, and decisions:

• Tex. Tax Code § 151.009 ("Tangible Personal Property"); 34 Tex. Admin. Code Rule 3.295(b) (Natural Gas and Electricity)
• Tex. Tax Code § 151.318(a)(2), (c)(4), (d) (Property Used in Manufacturing — exemption and storage-equipment exclusion)
• Comptroller's Decision No. 112,918 (2017) (refrigeration/storage equipment not exempt)
• Comptroller's Decision Nos. 106,088 (2014); 107,112 & 107,113 (2014)
• Comptroller's Decision No. 103,035 (2014); 34 Tex. Admin. Code Rule 3.300(c)(6)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201808009L

Original ruling text

August 14, 2018

RE: Private Letter Ruling No. 20180110143018

* Taxpayer No. *

Dear **:

We issue this private letter ruling in accordance with Rule 3.1 Private Letter Rulings and General Information Letters.[ENDNOTE: 1]We are responding to your request dated Dec. 29, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of a battery system used by a commercial windfarm.

Facts Presented

Taxpayer operates a windfarm in CITY A and CITY B Counties. Taxpayer began commercial operation of its windfarm business in 2009.

In 2017, Taxpayer began a project that would allow it to participate in the Electric Reliability Council of Texas’ (ERCOT’s) Fast-Responding Regulation Service (FRRS). Participants of the FRRS commit to make available a certain capacity of electricity within 60 cycles of a dispatch instruction or a triggering event.

In order to participate in the FRRS, Taxpayer is required to install a “battery system” in their operation. The “battery system” consists of a battery, an inverter, and a heating, ventilation, and air conditioning (HVAC) system. Taxpayer cannot participate in FRRS without the battery system for two reasons. First, the battery system allows Taxpayer to commit to a certain capacity of power. Second, the battery system allows Taxpayer to supply energy demand in a timely manner.

The electricity generated by Taxpayer’s windfarm is of a low voltage. Upon entering the battery, the direct current (“DC”) power flow is converted in the battery from electrical energy to chemical energy plus energy dissipation (thermal energy) which is removed through the battery enclosure HVAC. When the battery subsequently discharges, the energy is converted from chemical energy to electrical energy plus dissipation (thermal energy) which is removed through the battery enclosure HVAC. The battery is interconnected to the low voltage of the windfarm substation transformer. Thus, the voltage of the electricity will be increased before it enters the transmission lines.

A majority of the energy in the battery system will be generated by the windfarm. There may be rare occasions where the battery system will receive energy from the grid. In taxpayer’s estimation, 90% of the energy in the battery system will be generated by the windfarm.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Will Taxpayer’s purchase of a battery system qualify for an exemption from sales and use tax under Tax Code Section 151.318 (Property Used in Manufacturing)?

Ruling: No. Taxpayer’s purchase of the battery system will not qualify for the manufacturing exemption because Taxpayer will use the battery system to store electricity.

Analysis: Tangible personal property is defined as “personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner. . .” Section 151.009 (“Tangible Personal Property”). Further, “[t]he furnishing of natural gas or electricity is a sale of tangible personal property and presumed to be taxable.” Rule 3.295(b) (Natural Gas and Electricity).

Manufacturing is defined as “each operation beginning with the first stage in the production of tangible personal property and ending with the completion of tangible personal property having the physical properties (including packaging, if any) that it has when transferred by the manufacturer to another.” Section 151.318(d).

Section 151.318(a)(2) provides an exemption from sales and use tax for the purchase of tangible personal property directly used or consumed in or during the actual manufacturing of tangible personal property for ultimate sale if the use or consumption of the property is necessary or essential to the manufacturing operation and directly makes or causes a chemical or physical change to the product being manufactured or any intermediate or preliminary product that will become an ingredient or component part of the product being manufactured for ultimate sale.

Section 151.318(c)(4) excludes from the exemption machinery and equipment not otherwise exempted if “used to maintain or store tangible personal property.”

Taxpayer does not use the battery system directly to manufacture electricity. Taxpayer uses the battery system to store electricity it has generated or received from the grid. Taxpayer provides they will make available a certain capacity of electricity and bid into the day-ahead market of FRRS, which requires a response within 60-cycles of a dispatch instruction or a triggering event. This is only possible through the use of the battery system. The process requires Taxpayer to store and maintain electricity so the energy is available and ready for distribution upon instruction or triggering event.

Additionally, Taxpayer’s claim that the energy undergoes a chemical change does not fall within the scope of Section 151.318(a)(2). Under this provision of the Texas Tax Code, an exemption will be provided for items directly used or consumed during the manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary or essential. . . and makes or causes a chemical or physical change to the product being manufactured. Taxpayer explains the DC power flow generated by the windfarm is converted in the battery from electrical energy to chemical energy. Later, during discharging, the energy is converted from chemical energy to electrical DC energy. This change is done only for storing manufactured electricity. The battery is capable of storing electricity that another manufacturer generated, and that electricity clearly has already been manufactured and sold.

Several Comptroller’s Decisions have held that equipment used to maintain or store tangible personal property is not exempt. In Comptroller’s Decision No. 112,918 (2017), the ALJ ruled, “Equipment used to maintain or store tangible personal property, including items that cool or freeze food, are specifically excluded and are not exempt.” See Tex. Tax Code § 151.318(c)(4); see also, e.g., Comptroller’s Decision Nos. 106,088 (2014) and 107,112 & 107,113 (2014) (citing State Tax Automated Research (STAR) Document No. 200612897L).” Additionally, Comptroller’s Decision No. 103,035 (2014) stated, “[R]efrigeration equipment that is used to maintain or store tangible personal property is not exempt. See Tex. Tax Code Ann. Section 151.318(c)(4); and 34 Tex. Admin. Code Section 3.300(c)(6).”

Comptroller’s Decisions and STAR documents cited are available on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20180110143018.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTES:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.