Can an aircraft engine and components/accessories overhaul company claim the sales tax electricity exemption for processors, or is what it does considered repair instead?

Plain-English summary

The taxpayer asked the Comptroller's office to treat it as a "processor" for purposes of the sales tax electricity exemption. The Comptroller declined, explaining that Texas sales tax law draws a clear line between repairers and processors: repairers take property belonging to others and restore it to working order, bringing it back to its original condition, while processors create a new item, or take an old item and make it work in a new or different way.

Reviewing the taxpayer's business, the Comptroller found that it takes existing engines and restores them to as close to original specifications as possible. The letter quotes the company's own brochure, which describes it as "a company specializing in providing turbine engine, component and accessory repair nd overhaul." Because the company does not rebuild the engines to work in a new or different way, the Comptroller concluded it is a repairer, not a processor — while noting that if the facts were different, the office would look at the matter further.

The letter grounds this conclusion in Calvert vs. Engineers & Fabricators, Inc., 440 SW2d 320 (Austin 1969, n.r.e.), where a company that replaced heating bundles in customer-owned heat exchangers and returned the same exchangers to the customers was found by the court to be repairing the exchangers, not processing them. Applying that reasoning, the Comptroller held that the taxpayer does not qualify for the Sec. 151.317, Tax Code electricity exemption — which applies to persons engaged in processing tangible personal property for sale — because it is repairing engines, not processing them.

What this means for you

Aircraft and equipment overhaul businesses

If your business takes in customers' existing engines, components, or accessories and restores them to as close to their original specifications as possible — even calling the work "overhaul" — that is treated as repair under Texas sales tax law, not processing. That distinction matters directly for the electricity exemption under Sec. 151.317, Tax Code, which is available only to processors.

Businesses claiming the processor electricity exemption

To be a "processor" rather than a "repairer," your work needs to create a new item, or take an old item and make it work in a new or different way — not simply restore existing property (typically owned by someone else) back to its original working condition. Marketing language describing your work as "repair and overhaul" can itself be read as evidence that you are a repairer.

Accountants and tax professionals

This letter applies the repairer/processor distinction from Calvert vs. Engineers & Fabricators, Inc., 440 SW2d 320 (Austin 1969, n.r.e.), where replacing heating bundles in customer-owned heat exchangers and returning the same units was repair, not processing. The same analysis was applied here to aircraft engine and component overhaul work, so it's a useful reference point when evaluating whether a client's restoration-type work could qualify for the Sec. 151.317 processor electricity exemption.

Common questions

Q: What's the difference between a repairer and a processor under Texas sales tax law?
A: Per this letter, repairers take property belonging to others and restore it to working order, bringing it back to its original condition. Processors create a new item, or take an old item and make it work in a new or different way.

Q: Why didn't this company qualify as a processor?
A: The Comptroller found that the company takes existing engines and restores them to as close to original specifications as possible, rather than rebuilding them to work in a new or different way — which the letter states is characteristic of repair, not processing.

Q: What exemption was at stake?
A: Sec. 151.317, Tax Code, which exempts electricity used by persons engaged in processing tangible personal property for sale as tangible personal property. Because the company was found to be repairing, not processing, engines, it did not qualify for this exemption.

Q: What case did the Comptroller rely on?
A: Calvert vs. Engineers & Fabricators, Inc., 440 SW2d 320 (Austin 1969, n.r.e.), in which a company replacing heating bundles in customer-supplied heat exchangers and returning the original exchangers to the customers was found by the court to be repairing, not processing.

Citations and references

• Sec. 151.317, Tax Code (electricity exemption for processing tangible personal property for sale)
• Calvert vs. Engineers & Fabricators, Inc., 440 SW2d 320 (Austin 1969, n.r.e.)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9502L1337F14

Original ruling text

February 23, 1995

Dear *****:

Thank you for bringing *'s questions to me. I asked Tax Administration to
review your request that * be considered a processor for purposes of the
electricity exemption. I regret I must advise you that * cannot be
considered a processor under the sales tax act.

The sales tax makes a clear distinction between repairers and processors.
Essentially, repairers take property belonging to others and restores it to
working order to bring it back to original condition. Processors, on the other
hand, create a new item or take an old item and make it work in a new or
different way.

Upon reviewing what * does, it would appear that they take existing
engines and restore them to as close to original specifications as possible.
As is stated in its brochure, "We're a company specializing in providing
turbine engine, component and accessory repair nd overhaul...." They do not
rebuild the engines to work in a new or different way. If this is not the case,
we would certainly look at this further.

This conclusion is supported by the decision in Calvert vs. Engineers &
Fabricators, Inc., 440 SW2d 320 (Austin 1969, n.r.e.). In this case, the
company replaced heating bundles in heat exchangers that were sent to them by
customers. The original heat exchangers were returned to the customers. The
court found the company was not a processor, but it was engaged in
repairing the heat exchangers.

Sec. 151.317, Tax Code, exempts electricity used by persons engaged in
processing tangible personal property for sale as a tangible property. *
does not qualify for the exemption because they are repairing the engines, not
processing them.

Should you have any further questions, please write Wade Anderson at 111 E.
17th Street, Austin, Texas 78774, or call him at 1-800-351-5441, extension
3-4004.

Sincerely,

Billy Hamilton
Deputy Comptroller

NOTE: Previous Accession Number 9502970L