Texas Letter Ruling 9406L1306D01: Foundations — Real Property — Cannot Qualify For Manufacturing Exemption

Plain-English summary

A manufacturer had operated a manufacturing line inside a larger existing structure from 1986 until 1988, when the line was shut down and completely removed because the production process had become uneconomical. In 1994, the taxpayer decided to build two new manufacturing lines for two new products, located in essentially the same footprint as the old line. The project involved demolishing the old foundations down to the dirt, pouring roughly 20,886 square feet of new foundations and floor slabs (about a third of the total 64,234 square-foot project area), erecting new walls, and adding new electrical, plumbing, computer cabling/telephone, and fire sprinkler work.

The taxpayer asked the Comptroller to treat all of this work as tax-favored in two ways: first, as exempt "new construction" under Rule 3.357 (rather than taxable real property repair/remodeling), and second, as part of the manufacturing equipment itself, eligible for the partial manufacturing sales tax exemption. The Comptroller disagreed on every point. Because the new lines were being built as a "structure within a structure" rather than a standalone new building next to the old one, the foundation, wall, electrical, and plumbing work did not qualify as new construction; the same was true of the telephone/cabling work and the fire sprinkler modifications. Demolition of the old foundations was taxable because it was not a demolition of an entire structure with the service separately stated, and hauling away the demolished material was a taxable real property service under Rule 3.356.

On the manufacturing exemption side, the Comptroller held that foundations are real property, not machinery or equipment, so they can never qualify for the partial manufacturing exemption or refund — regardless of how essential they are to supporting the equipment. Process piping, valves, and pressure regulators that move product between processing steps were classified as taxable "intraplant transportation equipment," not exempt production equipment. And structural steel catwalks providing access to otherwise-qualifying packaging equipment did not qualify either, unless physically attached as an integral part of the machinery itself — merely being necessary for worker access was not enough.

What this means for you

Manufacturers planning plant construction or line replacement

If you're building or rebuilding a manufacturing line inside an existing building, don't assume foundations, wall work, utilities, or access structures will ride along with your equipment's manufacturing exemption. This ruling draws a hard line: foundations are always real property, never exempt equipment, no matter how essential they are to supporting exempt machinery. The same applies to catwalks and stairs unless they are physically built into the equipment itself, and to piping/valves that simply move product from one step to the next (classified as taxable transportation equipment, not production equipment).

Contractors and construction accountants

Whether foundation, wall, electrical, and plumbing work qualifies as tax-favored "new construction" versus taxable remodeling/repair turns on whether you are building an entirely new, freestanding structure or working within/attached to an existing structure. Here, because the new lines were installed inside the shell of the prior structure rather than as a separate building, none of the construction elements qualified as new construction. Also flag that demolition is only nontaxable when an entire structure is torn down and that service is separately identified on the invoice — partial demolition (like removing old foundations within a larger structure) and the related hauling/disposal are taxable real property services.

Tax professionals advising on manufacturing exemption claims

Use this ruling as a checklist of common overreach on manufacturing exemption claims: (1) foundations — never exempt; (2) intraplant piping/valves/regulators — taxable transportation equipment, not exempt production equipment; (3) catwalks/stairs for access — exempt only if physically integral to the machinery, not merely necessary for access. Each of these is a recurring audit issue in capital-intensive manufacturing projects.

Common questions

Q: Can foundations poured specifically to support exempt manufacturing equipment qualify for the manufacturing exemption?
A: No. The Comptroller held that foundations are real property, not machinery or equipment, and do not qualify for the partial manufacturing exemption or refund under any circumstances shown in this ruling.

Q: We're building new manufacturing lines inside our existing plant building — does that construction count as exempt "new construction"?
A: Not under the facts of this ruling. Because the new lines were built within the existing structure (a "structure within a structure") rather than as a separate freestanding building, the foundation, wall, electrical, and plumbing work did not qualify as new construction under Rule 3.357.

Q: Is demolishing old equipment foundations to make way for new equipment a nontaxable service?
A: Generally no. The ruling states that demolition is nontaxable only when an entire structure is demolished and the service is separately identified; partial demolition, and the hauling away/disposal of the debris, are taxable real property services under Rule 3.356.

Q: What about process piping and access catwalks tied to exempt equipment — do those qualify?
A: Process piping, valves, and pressure regulators that move product between processing steps are classified as taxable intraplant transportation equipment, not exempt production equipment. Catwalks and stairs providing access to qualifying equipment likewise don't qualify for the partial exemption unless they are attached as an integral part of the machinery or equipment itself.

Citations and references

• 34 Tex. Admin. Code Rule 3.357 (governs whether construction work qualifies as nontaxable "new construction" versus taxable real property repair/remodeling)
• 34 Tex. Admin. Code Rule 3.356 (governs taxable real property services, including demolition and hauling)
• Comptroller Hearing No. 28,070 (cited by the Comptroller as involving separate structures side by side, distinguished from this taxpayer's "structure within a structure")

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9406L1306D01

Original ruling text

June 29, 1994

Dear *****:

This is in response to your letter dated June 8, 1994,
requesting an opinion regarding sales tax as it applies to
the situation described below.

FACTS: One of your clients is engaged in the business of
manufacturing in the state of Texas. Within a larger
structure, your client built, fabricated, or constructed a
manufacturing line in 1986 (the old unit). Operation of the
old unit was discontinued in 1988 and the unit was removed.
The primary reason underlying the shutdown was the fact that
the process used by the old unit had become uneconomical.

In 1994, seven years after the removal of the old unit, your
client decided to construct, build, or fabricate two new
manufacturing lines (the new units) to produce two new
products. It was further determined that the new units would
be located in essentially the same space as the previous
unit. This decision will be implemented in five phases: the
conceptual design phase; the inspection and demolition
phase; the detailed design & procurement phase; the
construction phase; and the commissioning & start-up phase.
The work begun in 1994 and will be concluded by the end of 1994.

The old unit that was completely removed in 1988 with the
related items and equipment sold or scrapped. No part of the
old unit will be used as part of the new units.

Foundations for equipment and items making up the old unit
are being demolished down to the dirt and removed as
preparation for the new units. Foundations for the equipment
and items making up the new units will be poured or
constructed.

The details of the project are as follows:

Foundations: 20,886 square feet of new foundations and new
floor slabs will be excavated and poured in order to meet
structural requirements for the new manufacturing lines.
This foundation work represents approximately 33% of the
total project construction area of 64,234 square feet. In
addition to the new foundations and slab, new footings for
380 linear feet of new walls will be required.

Walls: 4,700 square feet of existing walls will be
demolished. 5,460 square feet of new walls will be erected.
The demolition includes structural walls as well as eight
(8) structural columns.

Electrical and Plumbing: Permanent electrical services and
plumbing will be added. This includes 80 linear feet of new
process drains, 1,800 linear feet of process piping and 547
feet of cable tray will be utilized for electrical power for
new processes, building utilities and control purposes.

Computer Cabling and Telephone Lines: New cabling will be
run to operate production process equipment. New Footage for
additional telephone lines will also be installed.

Fire Sprinklers: Changes required by code will be made to
extend the fire sprinkler system.

RULING REQUEST

Real Property Activities

1. That the foundation, plumbing, electrical and wall
   construction qualify as "new construction" under Rule 3.357.
   RESPONSE: We disagree. information presented indicates
   this is a structure within a structure. Hearing 28,070
   involved separate structures side by side.

2. That the work involving the telephone and cabling
   qualifies as "new construction".
   RESPONSE: We disagree.

3. That the work involving the fire sprinkler system
   qualifies as "new construction".
   RESPONSE: We disagree.

4. That the demolition to the existing structure is a non-
   taxable service.
   RESPONSE: We disagree. Only when an entire structure is
   demolished and the service separately identified will it
   qualify as nontaxable demolition.

5. That the hauling away and disposal of the demolished
   structure is not a taxable service.
   RESPONSE: We disagree. This phase is a taxable service
   under Rule 3.356.

Manufacturing Equipment

6. That the foundations for qualifying manufacturing
   equipment are considered part of the equipment and are
   eligible for the partial manufacturing exemption. RESPONSE:
   We disagree. Foundations are considered real property and
   not machinery or equipment and do not qualify for the refund
   or partial exemption.

7. That the process piping used to make qualifying
   manufacturing equipment operational is considered part of
   the equipment and is eligible for the partial manufacturing
   exemption.
   RESPONSE: We disagree. Piping, valves, pressure regulators
   etc., necessary to move the product from one process to
   another is classified as intraplant transportation
   equipment and does not qualify for the partial exemption or
   refund.

8. That structural steel catwalks which are necessary and
   essential to permit access to qualifying packaging equipment
   considered part of the equipment and eligible for the
   partial manufacturing exemption.
   RESPONSE: We disagree. Stairs and walkways to allow
   access to eligible equipment does not qualify for the
   partial exemption (unless attached as an integral part of
   the machinery or equipment).

This opinion is based on the facts you submitted. Other
facts, though similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 50330. The
direct line is 512/475-0330. You may also write to Tax
Administration, Comptroller of Public Accounts.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9406430L