A jewelry manufacturer converting a former map-making facility into its plant added a silver-dust pollution control system: new concrete pads, dedicated electrical switchgear, and extra HVAC units to cool the air moving through the dust collector. Which of these items and which labor charges qualify for Texas's manufacturing/pollution-control equipment exemption?

Plain-English summary

A manufacturer (Company A) bought a former map-making facility and converted it into a jewelry manufacturing plant, adding a silver-dust pollution control system to capture dust generated at workstations throughout the building. The project involved separate contracts for several distinct items, and the taxpayer's representative asked how each piece should be taxed.

New concrete pads (for loading and to serve as the dust collector's foundation): the materials are taxable, but the labor to build the new pads is exempt as new-construction labor under Rule 3.357(a)(5), since the pads represent genuinely new construction rather than repair or remodeling of an existing improvement.

Electrical switchgear dedicated to the dust collector: this qualifies as exempt under Sec. 151.318(a)(4), which the 1999 legislature clarified to cover switches, because the switchgear supplies power to exempt pollution control equipment under Sec. 151.318(a)(5) (the dust collector itself qualifies). But there's a catch — if that same switchgear also supplies power to nonexempt items, that's divergent use, and the manufacturer must accrue and pay tax either on the fair market rental value of the switchgear for the period of nonexempt use, or simply pay tax on the switchgear's original cost.

Additional HVAC units added specifically to cool the air moving through the dust-collection ductwork: even though these units exist because of the pollution control system (cooling air heated ~30 degrees by friction as it's drawn from workstations to the collector, in a sealed recirculating loop similar to an airplane's pressurized air filtration system), the Comptroller held that central heating and air conditioning systems are not pollution control equipment — only the dust collector itself qualifies as exempt pollution control equipment under Sec. 151.318(a)(5). Supporting a pollution-control device isn't enough to make surrounding HVAC infrastructure itself exempt.

What this means for you

Manufacturers installing new pollution control systems

Expect a narrow reading of "pollution control equipment" — the device that actually captures/treats the pollutant (here, the dust collector) qualifies, but supporting infrastructure like HVAC units, even if added specifically because of the pollution control system's needs, generally does not.

Manufacturers building new concrete pads/foundations for equipment

Materials for a new pad are taxable, but the construction labor itself is exempt new-construction labor if there's no prior improvement being remodeled — keep labor and materials separately identified to capture that exemption.

Manufacturers using shared electrical infrastructure (switchgear, panels) for exempt and nonexempt equipment

If a switch or panel dedicated to an exempt device also powers something nonexempt, you can't treat the whole item as exempt — you owe tax on either the fair market rental value for the nonexempt-use period or the item's original cost, under the standard divergent-use mechanic.

Accountants and tax professionals

A useful worked example distinguishing the pollution control device itself (narrowly exempt) from dedicated power equipment supporting it (exempt if power flows only to exempt equipment, divergent-use rules otherwise) from supporting HVAC infrastructure (not exempt at all, regardless of purpose).

Common questions

Q: Is labor to build a new concrete pad for pollution control equipment taxable?
A: The materials are taxable, but the labor is exempt new-construction labor under Rule 3.357(a)(5) if there's no existing improvement being remodeled.

Q: Is electrical switchgear dedicated to powering pollution control equipment exempt?
A: Yes, under Sec. 151.318(a)(4), as long as it powers only exempt equipment — if it also powers nonexempt items, divergent-use tax applies.

Q: Are HVAC units added specifically to support a pollution control system exempt as pollution control equipment?
A: No — central heating and air conditioning systems are not pollution control equipment, even when added because of a pollution control system's cooling needs.

Q: Can I rely on this letter for my own facility's pollution control installation?
A: No. It's based on the specific facts submitted and can be relied on only by the taxpayer to whom it was issued; other facts, even if similar, may produce a different result.

Citations and references

Statutes and rules:

• Texas Tax Code Section 151.318(a)(2) (exempt manufacturing equipment)
• Texas Tax Code Section 151.318(a)(4) (exempt switches/power equipment supporting exempt equipment)
• Texas Tax Code Section 151.318(a)(5) (exempt pollution control equipment)
• 34 Tex. Admin. Code Rule 3.357(a)(5) (new construction labor 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/9908636L

Original ruling text

August 3, 1999

Dear Mr. **:

Thank you for your July 13th letter to Kevin Koller concerning your client COMPANY A and the taxability of several transactions at a new manufacturing facility in CITY, Texas. I will be responding to your letter to Kevin.

Background Review

The CITY facility was previously owned by COMPANY B and used for preparing and updating various maps. The facility was air conditioned and functional in every way. COMPANY A, as a necessary part of equipping the building, added several pieces of pollution control equipment and other items. While a general contractor was involved, his contract and the contracts of each of the sub-contractors are separated contracts. Each function of the total project involved separate and distinct tasks that are commonly provided on a stand-alone basis.

The Project - Open Items

Concrete Pads, etc. - Due to the requirements of COMPANY A at the CITY facility, several new concrete pads for loading purposes and pollution control purposes were added. The materials used to create these new pads are dedicated to the foundation for the Dust Collector and the new concrete pads. After our thoughtful discussion earlier this year, we understand that all materials for these pads are taxable. However, since the pads represent new pad construction, the labor related to these items is exempt new construction labor as described in Rule. 3.357 (a) (5). Response: The concrete pad materials are taxable. The labor to construct a new concrete pad where no improvement to realty exists is not taxable because it is new construction rather than repair or remodeling labor.

Electrical - As one might imagine, a jewelry manufacturing process involves more electrical requirements than map making. Consequently, extensive wiring and voltage capacity was added. These items were added wiring. They did not replace, supplement, or upgrade existing wiring. Also, within this part of the project, a large switchgear that is dedicated to the pollution control dust collector needed to be added. The cost of that dedicated switch was $**.

You acknowledge that the electrical wiring and its associated labor are taxable remodeling to commercial real property. However, the recent Texas legislature expanded, by way of clarification, the definition of exempt manufacturing equipment to include switches. Does the Comptroller find that the switchgear dedicated to the dust collector is, by legislative clarification, exempt pollution control equipment within the new law Section 151.318(a)(4)?

Response: The switchgear qualifies if it used to provide power to exempt manufacturing equipment in Tax Code Section 151.318(a)(2) or exempt pollution control equipment in Section 151.318(a)(5). The pollution control dust collectors qualify for exemption. If the switchgear also supplies power to nonexempt items, there is divergent use and the manufacturer must accrue and pay tax on the fair market rental value of the switchgear for the period of nonexempt use or simply pay tax on the original cost of the switchgear.

HVAC - Although the existing heating and air conditioning system was functional at the time the building was purchased, the requirements of the pollution control dust collector mandated the addition of several more HVAC units. These units represent new additions and were required to accommodate the pollution control system.

Mr. **, Safety/Environmental Manager for COMPANY A, explained the unique nature of this particular pollution control device. Specifically, this pollution control device is totally isolated to the function of the collection of the silver dust that originates at work stations throughout the building. Importantly, the HVAC units are dedicated to providing cooling to the air being drawn from the workstation through a system of ductwork and ultimately through the filter. The friction of the vacuumed air from the workstation to the dust collector increases the temperature of that air by 30 degrees. This system is totally sealed and returns the cooled filtered air to the manufacturing floor for re-circulation. Our discussion found this system similar to a pressurized airplane air filtration system.

Therefore, you understand from the ** meeting and the facts of this case that the dust collector materials necessary for this item are exempt pollution control equipment within law Section 151.318(a)(5).

Response: Central heating and air conditioning (HVAC) systems are not pollution control equipment. However, the pollution control dust collectors qualify for exemption as explained in the previous question.

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. 5-0030. The direct line is 512/475-0030. You may also write to Tax Policy, Comptroller of Public Accounts.

Sincerely,

David Somerville

Tax Policy Division