Is the electricity a company uses to chrome-plate aircraft engine parts exempt as 'processing,' or taxable because it's really 'repair and remodeling' of the engines back to their original specifications?

Plain-English summary

This is a short follow-up letter from Wade Anderson, Assistant Director of Tax Administration at the Texas Comptroller's office, to a taxpayer (redacted) after Anderson toured "Company A's" facility in Dallas, where aircraft engine parts are chrome plated. The letter addresses whether the electricity Company A uses in its chrome-plating operation qualifies for the sales/use tax exemption available for electricity used in processing tangible personal property, or whether it is instead used in taxable repair and remodeling.

Anderson references an unrelated prior matter ("the B Corp order") and says he isn't satisfied the same favorable result applies here. He also notes a more recent 1993 decision in which the chief Administrative Law Judge ruled that chrome plating of aircraft pistons was not remanufacturing, even where some of the pistons hadn't been originally chromed.

Anderson then reasons through Company A's own facts:

• Even if he accepted that Company A "reprocesses" the engines to the extent some of the 8,500-9,000 available new chrome-plating applications improve or add to the part beyond its original specs, he would still rule that the electricity used is not used in processing, but in repair and remodeling — based on predominant use.
• The facility manager and the head of the technical engineering section both told Anderson that 50% or more of the chrome-plating applications simply return engines to their original specifications (i.e., repair, not processing).
• Company A's operations involve "draw applications" 85-90% of the time, with the remaining 10-15% not requiring new applications. Working through those percentages — assuming only 10% require no new application and 50% of the remaining 90% just restore original specs — Anderson calculates that about 55% of the work performed involves applications (old and new) that return the engine to its original specifications.
• Because that majority of the work is restorative (repair/remodeling) rather than processing that creates something different from the original part, the electricity used in the operation is taxable, not exempt.

Anderson closes by noting that legislation was pending that might address Company A's underlying competitive problem going forward, but it would not retroactively cure past tax liabilities. The letter also carries a note that it replaces a previous accession number, 9504102L.

What this means for you

Aircraft parts and MRO (maintenance, repair, and overhaul) businesses that chrome plate or resurface parts

Don't assume that adding a new chrome-plating specification or "improving" a part means your operation counts as tax-exempt processing. The Comptroller looks at predominant use: if most of the work — measured here at roughly 55% — simply restores a part to its original specifications, the electricity used is treated as taxable repair/remodeling, even if some smaller share of the work does involve new applications that arguably reprocess the part.

Businesses relying on utility/electricity exemptions for manufacturing or processing

This letter is a real-world illustration of a predominant-use analysis: the Comptroller had the facility's own staff estimate the percentage breakdown of application types, then did the math to determine which use — processing or repair — predominated. If you're claiming a processing exemption on shared utility use, be prepared to show (and defend) a similar breakdown, because a majority of restorative/repair use will defeat the exemption even where some processing occurs.

Accountants and tax professionals advising manufacturing or repair clients

This letter shows the Comptroller treating "returns the part to original specifications" as the hallmark of repair/remodeling, versus applications that go beyond original specs as (potentially) processing. It also references a related 1993 ALJ decision holding that chrome plating of aircraft pistons was not remanufacturing, reinforcing that chrome plating is not automatically treated as exempt processing just because some pistons weren't originally chromed.

Common questions

Q: Does chrome plating an aircraft engine part automatically qualify as tax-exempt "processing"?
A: No. Per this letter, even assuming some of the chrome-plating applications reprocess the part beyond its original specs, the electricity used is still taxable if the predominant use of that electricity is repair/remodeling rather than processing.

Q: How did the Comptroller decide which use — processing or repair — predominated?
A: By working through the taxpayer's own facility estimates: facility and engineering staff both estimated that 50% or more of applications simply restore original specifications, and running the numbers on the 85-90% "draw application" rate produced an estimate that about 55% of the work restores original specifications (repair/remodeling), which predominates over processing.

Q: Did the Comptroller decide that none of Company A's chrome-plating work is processing?
A: Not exactly — Anderson assumes for the sake of argument that some new applications (of the 8,500-9,000 available) could be considered reprocessing. But even granting that, he still concludes that repair/remodeling predominates, so the electricity used doesn't qualify for the processing exemption.

Q: Is there other authority cited for treating chrome plating as repair, not remanufacturing?
A: Yes — the letter references a 1993 decision in which the chief Administrative Law Judge ruled that chrome plating of aircraft pistons was not remanufacturing, even though some pistons had not originally been chromed.

Citations and references

No specific Texas statutes, administrative rules, or case citations are stated in the body of this letter beyond the general reference to a 1993 ALJ decision on aircraft piston chrome plating (not further cited by name or docket number) and an unspecified "B Corp order."

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9504L1347G14

Original ruling text

April 10, 1995

Dear ** :

Thank you for the material you sent me following my tour of the
Company A facilities in Dallas. As regards the B Corp order, I
am not satisfied that the same result is applicable here. As you
know, there has been a more recent decision (1993) in which the
chief ALJ ruled that the chrome plating of aircraft pistons was
not remanufacturing even though some of the pistons had not been
originally chromed.

Even were I to accept the proposition that Company A reprocesses
the engines to the extent that they are improved by one of the
8500-9000 new applications, I would still be compelled to rule that
the electricity used is not used in processing but in repair and
remodeling. I would do so on the basis of predominant use.

The gentleman in charge of the facility when questioned about the
number of applications that were aimed at returning the engines to
original specifications stated that 50% or more did so. The head
of the technical engineering section also used 50%. As I understand
Company A's operations, 85-90% involve draw applications, the
remaining 10-15 % do not. If you assume that only 10% of the
operations do not require new applications and 50% of the remaining
90% involve applications which return the engines to original
specifications, you are left with 55% of the work done involves
applications (old and new) which return the engine to original
specifications.

Last I heard, the legislation which would cure Company A's problems
is proceeding along. I realize it won't help past liabilities, but it
will answer the competition problems for the future.

Thank you for arranging the tour of the plant. Should you have any
further questions, please contact me.

Sincerely,

Wade Anderson
Assistant Director
Tax Administration

NOTE: Previous Accession Number 9504102L