When was electricity used to customize vehicles exempt as manufacturing electricity in Texas?

Plain-English summary

The Texas Comptroller distinguished two kinds of vehicle-customizing work. Converting or customizing vans and other vehicles was remodeling, so electricity used in remodeling, repair, and installation was taxable. Customizing vehicles for the manufacturer was a step in manufacturing the vehicle, so electricity directly used in that manufacturing activity was exempt.

For a meter to qualify, more than 50% of its electricity had to be used directly in manufacturing. Each meter had to qualify on its own, based on an electricity-use study.

The study needed to identify processing and nonprocessing equipment, describe each processing function, allocate mixed-function equipment, document heating and cooling systems, record amperage or power ratings and operating hours, account for cycling equipment and duty factors, list operating and employee-occupancy hours, and include the last twelve months of electricity bills.

If the study established qualification and past use matched the studied period, the taxpayer could claim a refund. Refunds were limited to four years from the beginning of the reporting period in which the refund request was dated. Refunds could not be claimed for inactive meters because an on-site usage study could not be performed.

An incorrect exemption could produce tax, penalty, and interest on the refund and later exempted amounts. The taxpayer could continue claiming exemption only while operational conditions did not change the meter's predominant use; if qualification ended, the exemption had to be withdrawn from the utility.

What this means for you

Vehicle customizers

The customer and purpose mattered. Work for a vehicle manufacturer could be manufacturing, while vehicle conversions and customization otherwise were treated as remodeling.

Manufacturers

Qualification was meter-specific and required more than 50% direct manufacturing use, not merely a facility-wide manufacturing business.

Accountants and tax professionals

Retain a detailed energy study and twelve months of bills, monitor operational changes, and do not claim refunds for inactive meters under this letter.

Common questions

Q: Was electricity used for ordinary vehicle remodeling taxable?
A: Yes.

Q: Was electricity used to customize a vehicle for its manufacturer exempt?
A: Direct manufacturing use could be exempt if the meter met the predominant-use test.

Q: What percentage of a meter's electricity had to be used directly in manufacturing?
A: More than 50%.

Q: Could several meters be combined for the test?
A: No. Each meter had to qualify on its own.

Q: Could the taxpayer claim a refund for an inactive meter?
A: No.

Citations and references

• The letter states a four-year refund limitation but cites no statute or administrative rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8411L0622A03

Original ruling text

November 12, 1984

Dear ***:

Thank you for your letter of October 10, 1984, regarding sales tax
exemption on electricity for meters at ***.

You stated you are predominantly involved in the manufacture of custom
interiors and exteriors of vans, trucks and automobiles which includes,
but not limited, to the design, construction and installation of
interiors using wood, upholstery and paint.

Conversions and customizing of vans and other vehicles is remodeling.
Electricity used in remodeling, repairing and installing is taxable.

Customizing vehicles for the manufacturer is a step in the manufacturing
of the vehicle and the electricity directly used in manufacturing is
exempt use.

If you are engaged in manufacturing, over 50% of the electricity must be
used directly in manufacturing to qualify for sales tax exemption. Each
meter must qualify for exemption on its own. A study of the electricity
usage must be performed.

While energy use studies way vary in form, the following elements are
essential in determining predominant use:

o A list of every item that uses electricity separated by processing
items and nonprocessing items.

o A detailed description of what each processing item does.

o If a piece of equipment has both a processing and nonprocessing
function, it should be included in both lists with appropriate
hours listed for each function.

o Identify all heating and air conditioning in terms of type (gas or
electricity) and size (tons for A/C, BTU's for heating).

o Amperage, voltage (or kilowatt rating) and hours of operation for
each piece of equipment.

o Any cycling equipment must reflect real "on" hours with a
separately stated duty factor. (Our research indicates that a 50%
duty factor, applied across-the-board to processing and
nonprocessing equipment, is generous. A variance from the 50%
across-the-board factor must be accompanied by persuasive evidence
to the contrary.)

o Hours per day and days per week the location is open.

o Hours the location is occupied by employees prior to opening and
after closing to the public.

o Copies of the last twelve months' electricity bills.

If the study shows that the electricity qualifies for exemption, a
sales tax refund can be claimed provided that the past use was the same
as the time the study was performed determining predominant exempt use.

The Statute of Limitations limits refunds to four years from the
beginning of the reporting period in which the refund request is dated.

Sales tax refunds cannot be claimed on inactive meters since an on-site
study cannot be performed to determine the energy usage.

If we should find in the course of an audit that the electricity does
not qualify for exemption, the tax plus applicable penalty and interest
would be assessed on the refund amount and the subsequent exempted
amount. This is why every effort must be made to determine that the
exemption is applicable before claiming exemption.

The sales tax exemption can be claimed as long as there are no changes
in your operation (i.e., building size, equipment, hours of operation,
change of business activity) which result in a change in the predominant
use of the electricity. If at any point the utility no longer qualifies
for exemption, the exemption must be withdrawn from the utility company.
Failure to do so will result in assessment of tax, plus applicable
penalty and interest for the period of taxable use.

You may send a copy of the study(s) to us for review. Please feel free
to call us toll free at 1-800-252-5555, if you have any questions.

Sincerely,

Tax Policy Section
Tax Administration Division