Are the poles that an electric utility uses to support step-down transformers (and the transmission lines running along them) exempt from Texas sales and use tax as equipment necessary to the manufacturing of electricity?

Plain-English summary

An electric utility asked the Texas Comptroller's Tax Policy Division whether poles used to support step-down transformers qualify for the sales/use tax manufacturing exemption. Step-down transformers reduce voltage to usable levels for industrial and residential customers, and the Comptroller treats them as part of the manufacturing process. The taxpayer argued that, by extension, the poles holding up those transformers should also be exempt as necessary and essential to manufacturing, citing Gulf Marine Fabricators, Inc. v. Sharp.

The Comptroller (Al Van Allen, Tax Administration Division) disagreed. The letter explains that Gulf Marine Fabricators was actually resolved by a settlement, not a ruling on the merits: the Comptroller agreed to refund 25% of state sales and use tax on heavy cranes and winches the taxpayer showed were not used in transportation activities, while the taxpayer gave up its claim for a refund on overhead cranes and man-lifts that were used in transportation activities. The letter also quotes Bullock v. National Bancshares Corp., 584 S.W.2d 268, 272 (Tex. 1979), for the general rule that the burden is on the claimant to clearly show it falls within a statutory exemption, and that doubts are resolved in favor of the taxing authority.

Applying that standard, the Comptroller found the poles here fail the test because Tax Code Section 151.318(c)(2) excludes intraplant transportation equipment from the manufacturing exemption, and the poles in question support transmission lines in addition to the transformers. Because they also function as part of the transmission (transportation) system rather than solely as transformer supports, the poles are excluded from exemption.

An editor's note adds that this conclusion about the transformers themselves being part of the manufacturing process applies both before and after the deregulation-related SB 7 changes (effective 09/01/1999), as long as the electricity sale isn't made to a transmission and distribution utility (TDU) supplying an end-user — referencing Tax Code Sections 151.0101(a)(17) and 151.318(c)(5).

What this means for you

Electric utilities and their tax advisors

Don't assume that because a component (like a step-down transformer) qualifies for the manufacturing exemption, everything physically supporting or connected to it automatically qualifies too. Here, the transformer itself was treated as part of manufacturing, but the supporting pole was not exempt because it also carried transmission lines — a transportation/transmission function specifically excluded by Tax Code Section 151.318(c)(2).

Businesses relying on manufacturing exemption claims generally

This letter is a reminder of the general burden-of-proof rule from Bullock v. National Bancshares Corp.: the taxpayer must clearly show the property falls within the exemption, and any doubt is resolved against the claimant. Equipment that serves a dual purpose — part manufacturing-related, part transportation/transmission-related — is likely to be found taxable rather than exempt.

Accountants and tax professionals researching Gulf Marine Fabricators

Note that the letter clarifies Gulf Marine Fabricators, Inc. v. Sharp did not establish a broad legal holding on this issue — it was resolved by settlement, with the Comptroller refunding tax on some equipment (cranes/winches not used in transportation) while the taxpayer conceded on other equipment (overhead cranes/man-lifts used in transportation). It shouldn't be cited as precedent that poles supporting transformers are exempt.

Common questions

Q: Are step-down transformers used by electric utilities considered part of the manufacturing process for Texas tax purposes?
A: Yes, according to this letter — step-down transformers that reduce voltage to usable levels for industrial and residential users are treated as part of the manufacturing process.

Q: If the transformer is exempt, are the poles that support it also exempt?
A: Not necessarily. In this case, the Comptroller found the poles were not exempt because they also support transmission lines, and Tax Code Section 151.318(c)(2) excludes intraplant transportation equipment from the manufacturing exemption.

Q: Does Gulf Marine Fabricators, Inc. v. Sharp establish that utility poles are exempt as necessary to manufacturing?
A: No. That case was resolved by a settlement, not a ruling establishing a general exemption. The Comptroller refunded 25% of tax on certain cranes and winches not used in transportation, while the taxpayer waived its claim on equipment that was used in transportation.

Q: Does deregulation (SB 7) change the analysis?
A: The editor's note in the letter states that the conclusion about transformers being part of the manufacturing process applies both before and after SB 7 (effective 09/01/1999), as long as the electricity sale isn't made to a TDU supplying an end-user, per Tax Code Sections 151.0101(a)(17) and 151.318(c)(5).

Citations and references

Statutes:

• Tex. Tax Code Section 151.318(c)(2) (excludes intraplant transportation equipment from the manufacturing exemption)
• Tex. Tax Code Section 151.318(c)(5) (referenced in editor's note re: TDU sales)
• Tex. Tax Code Section 151.0101(a)(17) (referenced in editor's note re: SB 7 deregulation)

Case law:

• Gulf Marine Fabricators, Inc. v. Sharp, et al. (settlement discussed; no citation given in the letter)
• Bullock v. National Bancshares Corp., 584 S.W.2d 268, 272 (Tex. 1979)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9504L1347F08

Original ruling text

April 26,1995

Dear ***:

Thank you for your recent letter regarding the tax treatment of poles

used by electric utilities to support step-down transformers.

Step-down transformers reduce voltages to usable levels for industrial

and residential users and are thus part of the manufacturing process.

The height of live conductors such as transformers is established by the

Public Utility Commission as well as various local jurisdictions and is

detailed in Section (J) of the National Electrical Safety Code. [Editor's note: This conclusion about the manufacturing process applies to time periods prior to and after the passage of SB 7 relating to the deregulation of electric utilities (effective 09/01/1999} as long as the sale of electricity is not made to a TDU supplying electricity to an end-user. See 151.0101(a)(17) and 151.318(c)(5).].

Not only must overhead transformers be mounted on poles to meet design

and regulatory guidelines, the poles themselves must meet applicable

guidelines. Poles selected for mounting of an overhead transformer may

already exist within an active transmission system or a new pole may be

set to accommodate the application. In either case, the pole would most

likely hold a live conductor as well as the overhead transformer.

Your letter mentions the decision in Gulf Marine Fabricators, Inc. v.

Sharp, et al, and asks for a decision that the poles supporting the

step-down transformers be exempted as necessary and essential to the

manufacturing process.

Response: The Court's judgment resulted from a settlement in which the

parties agreed to the following terms.

1. The Comptroller granted a refund of 25% of state sales and use taxes

paid on heavy cranes and winches that Plaintiff demonstrated were not

used in transportation activities.

2. The Plaintiff waived its claim for a refund of 25% of state sales

and use taxes paid on overhead cranes and man-lifts that were used in

transportation activities.

"The burden of proof is on the claimant to clearly show that it comes

within the statutory exemption, "and" all doubts are resolved in favor

of taxing authority and against the claimant." Bullock v. National

Bancshares Corp., 584 S.W. 2d 268, 272 (Tem. 1979).

That will be difficult because Tax Code Section 151.318(c)(2) excludes

from the exemption intraplant transportation equipment. In my opinion,

the poles in question are excluded from exemption as they are used to

support transmission lines as well as the transformers.

This opinion is rendered 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. 3-4680. The direct

line is 512/463-4680. You may also write to Tax Administration,

Comptroller of Public Accounts.

Sincerely,

Al Van Allen

Tax Administration Division

NOTE: Previous Accession Number 9504100L