Does Texas's manufacturing sales tax exemption cover a steel manufacturer's dedicated quality-control lab equipment — lathes, presses, ovens, and materials-testing machines — used to test finished plates before sale?

Plain-English summary

A Texas manufacturer of carbon steel plates runs quality-control testing on every plate before sale, to confirm it meets industry standards (API, ASME, ASTM, ISO) and generate the Mill Test Report customers require. It uses a dedicated set of equipment — a lathe (cuts samples to size), a mechanical press (flattens samples), ovens (heat-treat samples), and testing machines (Charpy impact tester and pendulum, tensile tester, hardness tester, optical emission spectrometer). It asked whether this equipment qualifies for Texas's manufacturing sales tax exemption.

The Comptroller ruled yes, all of it qualifies. Tex. Tax Code § 151.318(a)(8) exempts property that's necessary and essential to a quality-control process testing a product before ultimate sale — testing after production but before packaging/shipping is the textbook example in the Comptroller's own rule. The only trap to avoid is § 151.318's general hand-tools exclusion: equipment powered and controlled entirely by hand doesn't qualify. Here, every piece of equipment ran on electricity or other fuel, so none of it fell into that exclusion, and the whole quality-control equipment set — both sample-preparation machines and testing machines — qualified as exempt.

What this means for you

Manufacturers running quality-control/testing operations

If you operate a dedicated internal lab (or lab equipment) used to test your own product's compliance with industry or customer specifications after production but before sale, that equipment is a strong candidate for the manufacturing exemption under § 151.318(a)(8) — covering both sample-prep machines (cutting, flattening, heat treatment) and the actual testing instruments. The main thing to check: none of the equipment can be manually hand-powered, or it falls into the hand-tools exclusion instead.

Manufacturers generally evaluating the manufacturing exemption

Remember the "divergent use" rule (§ 151.3181): if exempt quality-control equipment gets used for something other than quality control, that divergent use can trigger tax liability on the portion of use outside the exemption — track how consistently the equipment is used only for QC.

Accountants and tax professionals

The exemption hinges on Rule 3.300(d)(9)'s "necessary and essential to a quality control process" standard and its own example (testing after production, before packaging). Watch Rule 3.300(a)(6) and STAR Accession No. 9912967L (1999) for the hand-tools trap, and Rule 3.300(c) for the "merely useful or incidental" exclusion that can defeat marginal equipment claims.

Common questions

Q: Does all quality-control equipment automatically qualify for the manufacturing exemption?
A: Not automatically — it must be necessary and essential to testing the product before ultimate sale, and it can't be a manually hand-powered tool. Equipment that's merely useful or incidental to manufacturing (rather than necessary/essential to QC testing specifically) can also fail to qualify under Rule 3.300(c).

Q: What if I later use my QC equipment for something else, like general production?
A: That could trigger "divergent use" tax liability under § 151.3181 on the portion of use outside quality control — track how the equipment is actually used.

Q: Can another manufacturer rely on this ruling?
A: No. It binds the Comptroller only for the taxpayer and facts in the request. Equipment that's hand-powered, or not necessary/essential to a genuine QC testing process, could be treated differently.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed); § 151.010 (Taxable Item)
• Tex. Tax Code § 151.318(a)(8) (quality control equipment exemption); § 151.3181 (divergent use)
• 34 Tex. Admin. Code § 3.300(a)(6) (hand tools exclusion); (c) (incidental equipment exclusion); (d)(9) (quality control example); (k) (divergent use calculation)

Cited prior guidance:

• STAR Accession No. 9912967L (Dec. 7, 1999) — hand-tools exclusion

Source

• Landing page (STAR search): https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202501016L

Original ruling text

January 24, 2025

RE: Private Letter Ruling No. 20230627143417

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 June 28, 2023, and supplemental submissions received on Sept. 27, 2023 and Oct. 12, 2023. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance, for purposes of a sales tax exemption, on equipment used for quality control equipment in the manufacturing of carbon steel plates.

Facts Presented

** (Taxpayer), is a manufacturer of carbon steel plates in Texas. As a part of the manufacturing process, Taxpayer conducts quality control testing which ensures the manufactured steel plates meet customer requirements and industry standards.

Taxpayer follows industry standards including those published by the American Petroleum Institute (API), American Society of Mechanical Engineers (ASME), American Society for Testing and Materials (ASTM) - Physical Measurement Standards, and International Organizations for Standardization (ISO). Those standards dictate requirements for steel plates such as design, thickness, strength, grain, and chemical properties.

Quality control testing begins upon completion of a manufactured steel plate. A sample of a metal plate is sheared off and sent to a metallurgical lab (COMPANY A) for testing. Taxpayer owns all COMPANY A equipment and conducts testing on materials. COMPANY A equipment includes equipment to prepare samples for testing and testing equipment. Taxpayer’s customer requirements and industry standards for the steel plates dictate the appropriate size of the sample and type of tests within COMPANY A that must be conducted.

As part of the quality control process, Taxpayer uses certain equipment exclusively to prepare samples for testing. Equipment can include:

Lathe machine that cuts metal to specific sizes to be tested.

Mechanical press that flattens material samples to prepare for additional testing.

Ovens to heat material to change the mechanical properties of the material for testing.

Once a metal sample is prepared for testing, it is put through the appropriate testing equipment which can include:

Charpy impact tester that measures toughness and ductility of material. This includes the charpy pendulum machine which generates the impact on the material which the charpy impact tester measures.

Tensile test machine that measures the properties of steel including yield strength, tensile strength, elongation, and modulus of elasticity.

Mechanical hardness tester which determines the hardness of that material.

Optical emission spectrometer which determines the chemical composition of the material.

Once testing is complete, a Mill Test Report (MTR) is generated which ensures the physical and chemical properties of the steel. The MTR is required by industry and customers to confirm the steel plates meet customers specifications. If a plate does not pass quality control testing, an MTR is not generated, and the plate is not sold as a prime plate but as a secondary plate.

The steel plates are then bundled, and a bulletin is added to the plate. A bulletin is a list of the plates included in the bundle. Taxpayer’s customers require both the bulletin and the MTR for each of the plates sold.

Question, Ruling, and Analysis

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

Question: Is Taxpayer’s COMPANY A equipment used to test carbon steel plates exempt quality control equipment?

Ruling: Yes, COMPANY A equipment used for quality control testing of carbon steel plates is exempt quality control equipment.

Analysis: Sales tax is imposed on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). Section 151.010 (Taxable Item) defines “taxable item” as tangible personal property and taxable services. Section 151.318 (Property Used in Manufacturing) provides certain exemptions for tangible personal property used by a manufacturer.

Section 151.318(a)(8) exempts “tangible personal property used or consumed during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary and essential to a quality control process that tests the tangible personal property that is being manufactured, processed, or fabricated for ultimate sale….” For example, equipment used to test a product after the item is produced but prior to wrapping and packaging qualifies for the exemption. See Rule 3.300(d)(9) (Manufacturing; Custom Manufacturing; Fabricating; Processing).

Equipment used, managed, and powered by hand are not qualified for the manufacturing exemption as they are considered hand tools. Rule 3.300(a)(6) and STAR Accession No. 9912967L (Dec. 7, 1999). Further, tools and other accessories that are merely useful or incidental to the manufacturing process do not qualify for the manufacturing exemption under Section 151.318. See also Rule 3.300(c).

Taxpayer conducts quality control testing on samples of steel plates once they are produced. Taxpayer’s equipment tests metal samples for physical and chemical characteristics to meet within industry and governmental standards. This process includes equipment such as a lathe machine, mechanical press, ovens, charpy impact tester, charpy pendulum machine, tensile test machine, mechanical hardness tester, and optical emission spectrometer.

Taxpayer’s COMPANY A equipment is necessary and essential to the quality control process to test metal plates to meet customer requirements and industry standards. The equipment identified in this request were all powered by electricity or other fuel and therefore were not considered hand tools. Therefore, Taxpayer’s COMPANY A equipment qualifies as exempt under Section 151.318(a)(8).

Use of the quality control equipment for any purpose other than for quality control is considered divergent use. Section 151.3181(a)(1) (Divergent Use of Property Used in Manufacturing). For additional information and calculation of divergent use refer to Section 151.3181 and Rule 3.300(k).

Comptroller’s Decisions and STAR documents cited can be found 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. 20230627143417.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

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.