Is electricity used to manufacture signs exempt from Texas sales tax when the company also installs most of the signs it makes?

Subject

Electricity Used To Manufacture Signs — Exempt Only If The Sign Is Sold As Tangible Personal Property, Not As An Improvement To Realty

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1269D12

Plain-English Summary

A sign-manufacturing company asked the Comptroller to confirm a refund of sales tax it had paid on electricity used to manufacture signs, based on a utility study. The company was responsible for installing almost 90% of the signs it manufactured and billed customers for the total job (manufacturing plus installation).

The Comptroller explained the governing distinction: electricity used directly in manufacturing tangible personal property qualifies for the sales tax exemption only if the finished product is sold as tangible personal property. Electricity used to manufacture tangible personal property that is sold together with installation that turns the item into an improvement to real property is not exempt.

Applying that rule to signs specifically, the letter states that signs sold over the counter and signs sold free-standing without any installation are sold as tangible personal property (and so the manufacturing electricity for those signs is exempt). Signs sold along with installation that causes the sign to become an improvement to realty are not sold as tangible personal property — so the electricity used to manufacture those installed signs does not qualify for the exemption.

Because the company installed almost 90% of its signs and billed for the total job, the Comptroller stated it could not advise the company to keep the refund, and expressed doubt that the utility study supporting the refund was accurate, since only electricity used to manufacture signs sold without installation qualifies.

What This Means For You

If your business manufactures and installs signs (or similar items): Track separately, if possible, which of your products are sold "as-is" (over the counter or free-standing, no installation) versus which are sold as part of an installation job that makes the item part of the real property. Only the electricity used to manufacture the former category supports a sales-tax exemption claim.

If you are relying on a utility study to support a refund claim: This letter shows the Comptroller will scrutinize whether the study accounted for the split between exempt manufacturing (signs sold as TPP) and non-exempt manufacturing (signs sold with installation as a realty improvement). A study that doesn't make that distinction — especially where the company bills for the "total job" and installs the large majority of what it makes — is likely to be questioned.

If most of what you make gets installed by your own company: Installing nearly all of your output as part of a single billed job is a fact the Comptroller weighed against the taxpayer here. Expect the same scrutiny if your business model similarly bundles manufacturing and installation.

Q&A

Q: Is electricity used to manufacture signs always exempt from Texas sales tax?
A: No. Per the letter, electricity used directly in manufacturing tangible personal property is exempt only if that property (here, the sign) is sold as tangible personal property — not if it's sold along with installation that makes it an improvement to realty.

Q: What kind of sign sale counts as a sale of tangible personal property?
A: The letter states that signs sold over the counter and signs sold free-standing without any installation are sold as tangible personal property.

Q: What kind of sign sale does NOT count as a sale of tangible personal property?
A: A sign sold along with the installation that causes the sign to become an improvement to realty is not sold as tangible personal property, per the letter.

Q: The company installs almost 90% of the signs it makes and had a utility study supporting a refund claim — did the Comptroller approve the refund?
A: No. The Comptroller stated it could not advise the company to keep the refund, doubting the study's accuracy because only electricity used to manufacture signs sold without installation qualifies for the exemption, and the company bills for the total job.

Q: Does this letter apply to facts other than those described?
A: The letter states this opinion is based upon the facts presented, and that if there are additional or different facts, the opinion may change.

Original ruling text

October 4, 1993

Dear *:

I am responding to our telephone conversation and your letter
questioning the validity of your company claiming a refund of tax paid
on electricity used to manufacture signs. In our telephone
conversation, you stated that your company is responsible for the
installation of almost 90% of the signs you manufacture.

Electricity used directly in the manufacturing of tangible personal
property to be sold as tangible personal property qualifies for
exemption from sales tax. Electricity used in manufacturing tangible
personal property that will be sold along with the installation that
causes the item to become an improvement to realty is not exempt.

Signs sold over the counter and signs sold free-standing without any
installation are sold as tangible personal property. Signs sold along
with the installation that causes the sign to become an improvement to
realty is not sold as tangible personal property. I have enclosed a
hearing that addresses these issues.

Although I do not know the considerations made in performing the
utility study, I cannot advise you to keep the refund. Only the
electricity used in manufacturing signs sold without installation
qualifies for the exemption. Based upon my discussion with you, with
the engineer, and your statement that your company bills for the total
job, I doubt that the study is accurate.

This opinion is based upon the facts presented. If there are
additional or different facts, this opinion may change. You may also
write to Tax Administration Division, Comptroller of Public Accounts.

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 9311044L.2 and/or 9311044L