Does vibration monitoring equipment used by petroleum manufacturers and electric utilities qualify for the Texas manufacturing exemption?

Plain-English summary

A taxpayer asked the Comptroller whether vibration monitoring equipment — used by manufacturers of petroleum products and by electric utilities that use fossil fuel turbines to generate electricity — qualifies for the sales tax manufacturing exemption. The taxpayer argued the equipment should be exempt under Rule 3.300(d)(3)(A), the manufacturing exemption rule.

The Comptroller disagreed. The manufacturing exemption in Rule 3.300(d)(3)(A) did not apply because the vibration monitoring equipment is not a "material." The letter also pointed to Rule 3.300(a)(4), which defines "equipment" for exemption purposes as any apparatus, device, or simple machine "used directly in production." The vibration monitoring equipment did not meet that standard because it does not itself produce a chemical or physical change in the product being manufactured — it only monitors, rather than participates in, the manufacturing process.

Based on this reasoning, the Comptroller instructed that exemption certificates should not be accepted from manufacturing customers for this equipment, meaning sellers should charge tax on sales of vibration monitoring equipment to these customers.

What this means for you

Businesses selling monitoring or instrumentation equipment

If you sell vibration monitoring equipment (or similar monitoring/instrumentation devices) to manufacturers, including petroleum product manufacturers or electric utilities running fossil fuel turbines, this letter indicates you should not accept a manufacturing exemption certificate for that equipment. The Comptroller's position is that monitoring equipment does not qualify as exempt manufacturing equipment because it does not directly cause a chemical or physical change in the product being manufactured.

Petroleum product manufacturers and electric utilities

If your facility uses vibration monitoring equipment on production or generation equipment, this letter indicates that equipment is taxable and cannot be purchased tax-free under the manufacturing exemption, even though it is used in connection with your manufacturing or generation operations.

Accountants and tax professionals

This letter is useful as an example of how the Comptroller applies the "used directly in production" standard from Rule 3.300(a)(4): equipment that monitors a process, rather than causing a chemical or physical change in the product itself, falls outside the manufacturing exemption. Note that the letter cites only Comptroller rules (34 Tex. Admin. Code Rule 3.300), not a specific statute, and states it is based on the facts presented — different facts could yield a different result.

Common questions

Q: Does vibration monitoring equipment qualify for the Texas manufacturing exemption?
A: No. The Comptroller held that vibration monitoring equipment used by petroleum product manufacturers and electric utilities using fossil fuel turbines does not qualify for exemption under Rule 3.300(d)(3)(A) because the equipment is not a material.

Q: Why doesn't the equipment count as exempt manufacturing "equipment" either?
A: Rule 3.300(a)(4) defines equipment, for exemption purposes, as an apparatus, device, or simple machine used directly in production. The letter explains the vibration monitoring equipment does not produce a chemical or physical change in the product being manufactured, so it does not meet that definition.

Q: Should a seller accept an exemption certificate from a manufacturing customer buying this type of equipment?
A: No. The letter specifically states that exemption certificates should not be accepted from manufacturing customers for this equipment.

Q: Does this ruling apply beyond vibration monitoring equipment specifically?
A: The letter addresses vibration monitoring equipment used by petroleum manufacturers and electric utilities with fossil fuel turbines. The Comptroller notes the opinion is based on the facts presented and that different or additional facts could change the outcome, so it should not automatically be extended to other types of equipment without confirming similarity to these facts.

Citations and references

The letter does not cite a Texas statute by number. It refers to Comptroller Rule 3.300(d)(3)(A) (the manufacturing exemption) and Rule 3.300(a)(4) (defining "equipment" for exemption purposes).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9404L1296E12

Original ruling text

April 6, 1994

Dear **:

Thank you for your letter of March 9, 1994, concerning the
taxability of sales of vibration monitoring equipment.

The vibration monitoring equipment is used by manufacturers
of petroleum products and by electric utilities using fossil
fuel turbines to generate electricity. You contend the
vibration monitoring equipment qualifies for exemption under
Rule 3.300(d)(3)(A) concerning manufacturing. The exemption
found in Rule 3.300(d)(3)(A) does not apply because the
equipment is not a material.

Rule 3.300(a)(4) defines "equipment" as "any apparatus ...
device, or simple machines used directly in production."
(Emphasis added.) The vibration monitoring equipment is not
manufacturing equipment because it does not produce either a
chemical or physical change in the product being
manufactured.

Exemption certificates should not be accepted from
manufacturing customers.

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

You may call toll free 1-800-531-5441, extension 3-4683 if
you have any questions or need more information. You may
write to Tax Administration Division, Comptroller of Public
Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division

NOTE: Previous Accession Number 9404270L