Does Texas's manufacturing exemption for water-reduction/wastewater equipment cover the connecting piping, and are lubricants used to maintain exempt manufacturing equipment also exempt?

Plain-English summary

A manufacturer's representative asked the Comptroller three related manufacturing-exemption questions.

1. Does piping connecting water-reduction/wastewater equipment qualify for the exemption? Senate Bill 1 (effective July 1, 1997) added a manufacturing exemption under Tax Code Sec. 151.318(g) for machinery and equipment that reduces water use and treats wastewater flow from a manufacturing operation. But a separate amendment, House Bill 1855, excludes intraplant transportation equipment — including general pipes or conveyors used to move product or raw material — from the manufacturing exemption entirely. The Comptroller's answer: piping only qualifies for the water-reduction exemption if it's a genuine component part of a single piece of exempt equipment, not general transport piping moving material between separate pieces of equipment.

2. Are lubricants/chemicals used on exempt equipment (in-process flow-through tanks, cooling towers, generators, compressors) also exempt? No. Maintenance lubricants and chemicals for this equipment are not exempt. However, chemicals that become an actual ingredient or component part of a resold product (like the water being treated) would separately qualify for the resale exemption — a distinct exemption pathway from the equipment's own manufacturing exemption.

3. Is bagging equipment to package a manufactured resin product exempt? Yes — the manufacturer's bagging equipment used to package its ethylene vinyl resin product for customers is exempt under Rule 3.300(a)(9)(A).

What this means for you

Manufacturers with water/wastewater treatment systems

Don't assume all the piping connecting your exempt water-reduction or wastewater equipment is automatically exempt — House Bill 1855's intraplant-transportation exclusion means only piping that's a genuine component PART of a single exempt machine qualifies; general connective/transport piping is taxable.

Manufacturers buying lubricants and maintenance chemicals

Lubricants and chemicals used just to maintain your exempt manufacturing equipment are taxable, even though the equipment itself is exempt — the exemption doesn't automatically extend to consumables used to keep it running. But chemicals that actually become part of a product you resell (like water treated for resale) are separately exempt as resale items.

Manufacturers packaging their product for sale

Bagging or other packaging equipment used to package your manufactured product for customers can qualify for the manufacturing exemption under Rule 3.300(a)(9)(A).

Common questions

Q: Is all piping connected to exempt water/wastewater treatment equipment tax-exempt?
A: No, per this letter — only piping that's a genuine component part of a single piece of exempt equipment qualifies; general intraplant transport piping is excluded by House Bill 1855.

Q: Are lubricants used to maintain exempt manufacturing equipment tax-exempt?
A: No, per this letter — maintenance lubricants and chemicals are taxable, though chemicals that become part of a resold product are separately exempt.

Q: Is packaging/bagging equipment for a manufactured product exempt?
A: Yes, per this letter, under Rule 3.300(a)(9)(A).

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.318(g), as amended by Senate Bill 1 (eff. 1997-07-01) (exemption for water-use-reduction/wastewater treatment equipment)
• Tex. Tax Code § 151.318, as amended by House Bill 1855 (excludes intraplant transportation equipment, including general piping/conveyors)
• 34 Tex. Admin. Code Rule 3.300(a)(9)(A) (packaging equipment exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9805499L

Original ruling text

May 11, 1998

Dear Mr. **:

This is in response to your request for a ruling on behalf of your client,
requesting clarification on certain manufacturing situations. I have restated
the information and questions that you provided below, followed by my response:

1. Senate Bill 1 (Effective 07/01/97) allows manufacturers to claim a sales
   tax exemption on the purchase of water conversion equipment installed to reduce
   water use and to treat wastewater flow volumes from the manufacturing
   operation. In light of House Bill 1855, does piping used to carry out this
   endeavor qualify for exemption under Senate Bill 1?

Response: The amendment to Tax Code 151.318(g) under Senate Bill 1, allowing
an exemption for machinery and equipment used to reduce water use and treat
wastewater from manufacturing operations, is limited by the amendment to
151.318 under House Bill 1855. House Bill 1855 excludes from exemption
intraplant transportation equipment, including pipes or conveyors, used to move
a product or raw material in connection with the manufacturing process.
However, pipe that is a component part of a single piece of exempt
manufacturing or pollution control equipment would qualify for exemption.
Therefore, only piping that is a "component" of machinery or equipment used to
reduce water use or treat wastewater from a manufacturing operation would be
exempted.

2. House Bill 1855 specifically exempts certain equipment such as in-process
   flow-through tanks, cooling towers, generators, compressors, etc. Therefore,
   are the purchases of lubricants and chemicals for this equipment also exempt?

Response: Lubricants and chemicals to maintain this equipment are not exempt.
Chemicals that become an ingredient or component part of a product that is
resold (i.e., water) would qualify for exemption from sales tax.

3. Your client manufactures ethylene vinyl resins. Special bagging equipment
   is used to package this product for its customers. Is the purchase of the
   bagging equipment exempt under Rule 3.300 (a)(9)(A)?

Response: Yes.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division