Does a custom pump manufacturer's test-lab equipment (electric motors, discharge heads, overhead cranes) used to test sub-assemblies and finished pumps qualify for the manufacturing exemption?

Plain-English summary

A specialty custom-engineered pump manufacturer maintains a test lab with electric motors, discharge heads, and overhead cranes, used to test pump sub-assemblies (impellers, diffusers) before release to manufacturing, and to test partially/fully assembled pumps against customer specifications (either certified tests without the customer present, or witness tests with the customer watching). Because the products are custom-built, tests often fail, requiring corrective manufacturing steps (impeller balancing, diameter trimming, special coatings) followed by re-testing -- the manufacturer said its manufacturing process isn't complete until the product passes performance testing to the customer's specs.

The Comptroller's answer draws on H.B. 3211's quality-control clarification (Tex. Tax Code § 151.318(8)): items used to actually test the product after manufacturing has started and before the product is wrapped/packaged qualify for the manufacturing exemption, including this company's re-testing following corrective steps -- since the process genuinely isn't complete until the performance test succeeds.

Two limits, though. First, testing raw materials before manufacturing starts is a taxable use -- that's pre-production, not "actual manufacturing, processing, or fabrication." Second, overhead cranes and other intraplant transportation equipment used to lift or carry items are specifically excluded from the exemption under § 151.318(c)(1), which expressly denies exemption to intraplant transportation equipment -- including all piping and conveyor systems -- regardless of how central that equipment is to running the tests.

What this means for you

Manufacturers with in-house testing/quality-control labs

Equipment used to test your product after production starts and before final packaging is exempt manufacturing equipment -- even repeated re-testing after failed tests and corrective rework, as long as the manufacturing process isn't complete until the product passes. But testing done on incoming raw materials, before manufacturing begins, doesn't qualify.

Manufacturers using cranes, conveyors, or other transport equipment in their test area

Don't assume equipment used to move items within your test lab or plant is exempt just because it's part of your manufacturing/testing operation -- intraplant transportation equipment (including piping and conveyors) is specifically excluded from the manufacturing exemption by statute.

Accountants and tax professionals

The key timing test is "after actual manufacturing has started and before wrapping/packaging" for test equipment to qualify -- combined with a hard statutory carve-out for intraplant transportation equipment that applies regardless of context.

Common questions

Q: Is test-lab equipment used to inspect a partially finished product exempt from Texas sales tax?
A: Yes, per this letter, if it's used after manufacturing has started and before the product is wrapped/packaged, under the quality-control exemption in § 151.318(8).

Q: What about equipment used to test raw materials before manufacturing begins?
A: That's taxable, per this letter -- it's pre-production, not part of the actual manufacturing/quality-control process.

Q: Are overhead cranes used in a test lab exempt as manufacturing equipment?
A: No, per this letter -- § 151.318(c)(1) specifically excludes intraplant transportation equipment (including cranes, piping, and conveyors) from the manufacturing exemption.

Citations and references

Statutes:

• H.B. 3211, 76th Legislature (1999) (quality-control-process clarification)
• Tex. Tax Code § 151.318(8) (quality control exemption)
• Tex. Tax Code § 151.318(c)(1) (intraplant transportation equipment excluded)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911871L

Original ruling text

November 7, 1999

Dear **:

Thank you for your letter concerning the taxability of manufacturing related
equipment and supplies.

You are a specialty, custom-engineered pump manufacturer in the commercial and
industrial field. You would like confirmation that your manufacturing test lab
facilities are covered by the manufacturing tax exemption. Some of the
machinery and equipment you maintain in the test area include electric motors,
discharge heads and overhead cranes. The test lab that is used in the following
capacities:

1. To test semi-finished goods. Specifically, to prove sub-assemblies of our
   entire pump, e.g., the impellers and diffusers (bowl sub-assembly) prior to
   release to manufacturing.

2. To test partially and fully assembled pumps to complete the order
   requirements for either a certified test (without the customer witnessing), or
   a witness test (customer present).

The pump bowl sub-assemblies are sometimes tested with the job discharge head
or job motor, but oftentimes, with a test lab discharge head or motor instead.
Subsequently, if the test is successful, additional manufacturing, assembly,
and painting or coating is required to complete the customer order.

Due to the custom nature of your product, it is likely that the tests are not
successful. Consequently additional corrective manufacturing steps such as
impeller balancing, diameter trimming and special finishes or coatings are
required. Without these additional steps the order would not meet the
customer's requirements. These corrective actions require re-testing the
sub-assembly or semi-finished pump. If these performance tests fall short of
expectations, the customer will not accept the pump. You state that your
manufacturing process is not complete until the result of the performance test
meets the customer's specifications.

Response. House Bill 3211 was passed during the 76th legislative session, to
clarify the manufacturing statute. Section 151.318 of the Tax Code subsection
(8) allows an exemption for "tangible personal property used or consumed during
the actual manufacturing, processing, or fabrication of tangible personal
property for ultimate sale if the use or consumption of the property is
necessary and essential to a quality control process." (emphasis added) The
items used to actually test the product after the manufacturing process has
started and before the product is wrapped and packaged will qualify for this
exemption.

However, tangible personal property used to test raw materials prior to the
start of the manufacturing process is taxable. And items used in intraplant
transportation such as the overhead cranes to lift or carry items are
specifically taxable per Section 151.318(c)(1) of the Texas Tax Code. This
section states that the exemption does not include intraplant transportation
equipment, including intraplant transportation equipment used to move a product
or raw material in connection with the manufacturing process and specifically
including all piping and conveyor systems.

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