Is an on-site-built glass-melting furnace ('Tank') tangible personal property that qualifies for the manufacturing exemption, or a taxable improvement to realty?

Plain-English summary

A glass manufacturer built a large melting furnace ("Tank") on-site out of dense ceramic "Refractor" bricks, asking whether it qualifies for the manufacturing sales tax exemption. The threshold question was whether the Tank counts as tangible personal property (TPP) — which can qualify for the exemption — or an improvement to realty, which would not.

The Comptroller applied Texas's longstanding three-part test from Hutchins v. Masterson & Street (1877): (1) was there real or constructive annexation to the realty, (2) was the item fitted/adapted to the realty's use, and (3) did the party intend the item to become a permanent part of the building — with intent given the most weight. Here, the facts pointed clearly away from realty: the Tank is deliberately semi-temporary (lasting only 3-5 years due to extreme 2,500°+ temperatures), built without mortar specifically so damaged bricks can be replaced, and fully demolished at the end of its life. That evidence of non-permanent intent made the Tank tangible personal property.

As TPP used directly to cause a physical/chemical change in the glass product (melting it), the Tank — including its refractory-brick component parts — and the labor to assemble it both qualify for the manufacturing exemption. The separate combustion modules (which mix liquid nitrogen, oxygen, and natural gas to control combustion temperature) get a narrower answer: they're exempt if they're a component part of the single qualifying Tank, but if they're treated as separate equipment, they're taxable unless they independently qualify under § 151.318(a)(4) — which exempts specific supporting equipment (steam production equipment, in-process flow-through tanks, and various power/control components) tied to already-qualifying manufacturing equipment.

What this means for you

Manufacturers building custom on-site process equipment

If your equipment is built to last only a few years, assembled without permanent fasteners specifically to allow disassembly/replacement, and fully demolished at end of life, that evidence supports treating it as exempt TPP rather than taxable realty — even though it's constructed on-site and is massive/immovable in practice. Document that non-permanence intent (construction method, expected lifespan, demolition plan) since it's the deciding factor under Hutchins.

Businesses with auxiliary equipment near a qualifying furnace/tank

Don't assume everything physically connected to a qualifying piece of manufacturing equipment is automatically exempt. Ancillary equipment (like these combustion modules) needs its own component-part or independent-exemption analysis under § 151.318(a)(4) if it's not literally part of the single qualifying unit.

Accountants and tax professionals

This letter is a clean modern application of the century-old Hutchins realty-vs-TPP test to industrial equipment — useful precedent whenever a client's manufacturing equipment is built on-site and its TPP/realty classification is in question.

Common questions

Q: How does Texas decide whether custom-built manufacturing equipment is real property or personal property?
A: Using the three-part Hutchins v. Masterson & Street test: annexation to realty, fitness/adaptation to the realty's use, and (most heavily weighted) intent to make it a permanent part of the building.

Q: Does building equipment on-site automatically make it realty?
A: No. Despite being constructed on-site, the Tank here was found to be TPP because the evidence showed no intent for permanence — short lifespan, mortar-free construction for easy repair, and planned demolition.

Q: Are all components near a qualifying furnace automatically tax-exempt?
A: No. Separate components like the combustion modules are exempt only if they're a component part of the single qualifying equipment, or if they independently qualify under § 151.318(a)(4).

Q: Can another manufacturer rely on this letter for its own furnace?
A: Only the taxpayer who requested it can use it for detrimental reliance, and the ruling is expressly based on the facts and drawings submitted — a different furnace's construction details could change the realty-vs-TPP analysis.

Citations and references

Statutes and case law:

• Tex. Tax Code § 151.318(a)(4) — exemption for specific supporting/control equipment tied to already-qualifying manufacturing equipment
• Hutchins v. Masterson & Street, 46 Tex. 551 (1877) — three-part test for improvement-to-realty vs. tangible personal property (annexation, fitness/adaptation, intent)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911867L

Original ruling text

November 3, 1999

via fax **

Thank you for your recent letter concerning manufacturing exemptions.

You included a drawing of a "Tank" (furnace for melting glass). This "Tank" is
constructed on site at your manufacturing facility out of "Refractors" which
are very dense ceramic bricks. They are approximately 8" x 16" x 24" in size
and are very dense and very heavy. The material used in the "Refractors" is
one of the elements that causes a physical change in the glass (product).

You state that these "Tanks" are certainly not intended to become a part of
realty and are constructed as to be semi-temporary, since they only last 3 to 5
years. They are even constructed without any mortar to allow for easy
replacement of damaged "Refractors" and also because they are completely
demolished at the end of their life span, which is short because of the extreme
temperatures in excess of 2,500 degrees.

The openings in the side wall of the "Tank" is for gas/nitrogen burners that
are changed back and forth depending on what type of glass you are making. The
little raised squares in the middle part of the "Tank" are glass electrodes
that also create heat in the "Tank" and cause a physical change to the product.
A small distance away from the "Tank" are several combustion modules which mix
liquid nitrogen, oxygen, and natural gas to create or control the combustion
temperature.

You feel that all of the above should qualify for the manufacturing sales tax
exemptions because the tank is the heart of the manufacturing process and is
necessary and essential to the process.

Response. The first step is determining if the glass melting furnace is an
improvements to realty or tangible personal property. The basic and long
established Texas tests for determining whether a particular article or
structure is an improvement to realty was set out in the leasing case of
Hutchins v. Masterson & Street, 46 Tex. 551(1877) as follows:

(1) Has there been a real or constructive annexation of the article in question
to realty?

(2) Was there a fitness or adaptation of such article to the uses or purposes
of the realty with which it is connected?

(3) Whether or not it was the intention of the party making the annexation that
the chattel in question should become a permanent accession to the freehold?
--this intention being inferable from the nature of the article, the relation
and situation of the parties interested, the policy of the law in respect
thereto, the mode of annexation, and purpose or use for which the annexation is
made.

...And of these three tests, pre-eminence is to be given to the question of
intention to make the article a permanent accession to the freehold, while the
others are chiefly of value as evidence as to this intention....Hutchins, supra
at 554.

You have stated and provided evidence to indicate that the intent is for this
equipment to remain tangible personal property. The furnace for melting glass
(tank) is tangible personal property based upon the facts presented. The
equipment appears to be a melting furnace that is used directly in the
manufacturing process to make a chemical or physical change in the product for
sale. As such, the refractor bricks that are the component parts of the tank
qualify for exemption. Labor to assemble the tank also qualifies for
exemption.

The combustion modules used to create and control the combustion temperature
also qualify for exemption if they are a component part of a single piece of
qualifying manufacturing equipment (the "Tank"). If not, these items are
taxable unless they qualify for exemption per section 151.318(a)(4) of the
Texas Tax Code. This section exempts "actuators, steam production equipment
and its fuel, in-process flow through tanks, cooling towers, generators, heat
exchangers, transformers and the switches, breakers, capacitor banks,
regulators, relays, reclosers, fuses, interruptors, reactors, arrestors,
resistors, insulators, instrument transformers, and telemetry units that are
related to the transformers, electronic control room equipment, computerized
control units, pumps, compressors, and hydraulic units, that are used to power,
supply, support, or control equipment that qualifies for exemption under
Subdivision (2) or (5)..."

"Subdivision (2) and (5)" include items that directly cause a chemical or
physical change in the product for sale and pollution control equipment used
during the manufacturing process.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change. You may call me toll free at
1-800-531-5441, ext. 5-0613. The direct line is 512/475-0613. You may also
write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division