How did Texas classify pipe upsetting, threading, coating, heat treating, and repair work, and which inputs and utilities were exempt?

Plain-English summary

Company A upset, threaded, coated, normalized, and sometimes repaired oilfield tubular products. The Comptroller said upsetting and threading pipe made by another company was remodeling, not fabrication, because the pipe kept its identity. Coating and normalizing that pipe was processing. Company B, which mainly rebuilt and threaded used casing, was primarily a repair facility.

As a remodeler, Company A could exempt only property transferred as an integral part of the service, such as flange ends. Its paint and coating tar were exempt, while listed tools, blades, lubricants, stencils, and cutting items were taxable. Company B could exempt welding wire, coating tar, and paint but had to pay tax on flux.

Natural gas and electricity used for both taxable operations and exempt processing were treated entirely as exempt or taxable based on predominant use. More than 50% exempt use, established by a gas or electricity usage study, supported an exemption certificate to the utility.

The letter states that the refund period for Company A's paint and Company B's welding wire, coating tar, and paint went back to October 2, 1934, while Company A's coating-tar refund period went back four years. Because the reproduced date may be anomalous, this page reports it without correction.

Common questions

Was upsetting and threading another company's pipe fabrication? No. The letter treated it as remodeling.

Was coating and heat treating another company's pipe processing? Yes.

Which Company B inputs were exempt? Welding wire, coating tar, and paint; flux was taxable.

How were mixed-use gas and electricity classified? By predominant use, meaning more than 50%, documented through a usage study.

Citations and references

• Texas Comptroller Rule 3.292 — repair and remodeling.
• Texas Comptroller Rule 3.300 — processing and manufacturing.
• Texas Comptroller Rule 3.295 — natural gas and electricity.
• Delta-Pipe Fabricators v. Bullock, 638 S.W.2d 652 (Tex. Civ. App.—Austin 1982, writ ref'd n.r.e.) — cited for remodeling classification.
• Administrative Hearing 9138 — cited for processing classification.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8601L0689G01

Original ruling text

January 2, 1986

Dear ***:

Thank you for your letter of November 26, 1985, concerning the taxability of

items purchased by your clients, *** (COMPANY A) and **

(COMPANY B), which are used in their respective tubular and pipe

business operations.

Facts: COMPANY A is primarily a fabricator of oilfield tubular products that

upsets (flanges ends), normalizes (super heats) and threads pipe raw material

to make it suitable for use in the oilfield. A small percentage of their

revenue is derived from repair work by re-threading used tubing, thus COMPANY A

falls primarily under Rule 3.300 as a fabricator and partially under Rule

3.292 as a repair company.

COMPANY B is primarily a repair facility for oilfield casing pipe. The ends

of the pipe are built up by welding metal to the pipe. The pipe is then

threaded on both ends (one male end and one female). COMPANY B also does this

same procedure on some new pipe. Thus, COMPANY B is almost the reverse of

COMPANY A in that it is primarily a repair company under Rule 3.292 and

partially a fabricator under Rule 3.300.

Response: COMPANY A would be primarily a fabricator if it manufactured the

tubular products that it upsets and threads. COMPANY A is primarily a

remodeler when it performs these operations on tubular products manufactured

by another company. The tubular products are remodeled, not fabricated, when

these operations are performed on tubular products and they do not lose

their identity as tubular products. See section (a)(12) of the enclosed

Rule 3.292 and Delta-Pipe Fabricators v. Bullock, 638 S.W.2d 652 (Tex Civ

App.-Austin 1982, writ ref'd n.r.e.). COMPANY A is a processor when it coats

and normalizes (heat treats) tubular products manufactured by another

company. See section (a)(10) of the enclosed Rule 3.300 and

Administrative Hearing 9138.

COMPANY B is primarily a repair facility governed under the provisions of Rule

3.292.

As a remodeler, COMPANY A is entitled to claim exemption only on tangible

personal property which is transferred as an integral part of the remodeling

service, i.e., flange ends. The following purchases by COMPANY A are taxable:

a. natural gas and electricity

b. oil and machine lubricants

c. band saw blades

d. stencils used in painting

e. tool dies

f. punches

g. cutting tools (used for threading).

The following items purchased by COMPANY A are exempt:

a. paint

b. coating tar

The following items purchased by COMPANY B are exempt:

a. welding wire

b. coating tar

c. paint

COMPANY B is required to pay tax on purchases of flux.

The refund period for COMPANY A on paint, and for COMPANY B on welding wire,

coating tar and paint go back to October 2, 1934. However, the refund period

for COMPANY A on the coating tar goes back four years. A resale certificate

should be issued to the suppliers. The companies may take credit on future

returns rather than request refunds from suppliers by adjusting the "taxable

sales" amount on their sales tax returns by the amount of the exempt

purchases.

The natural gas and electricity used by the companies for both taxable

(upsetting, threading, painting, and re-threading) and nontaxable (normalizing

(heat treating) and coating) purposes will be either totally exempt or taxable

based on predominant use. Predominant use means over 50% and must be

determined through a natural gas or electricity usage study. If the study

reveals that over 50% of the gas or electricity is used for exempt purposes,

the utility customer should issue an exemption certificate to the utility

company. The exemption certificate and state the reason the exemption is

being claimed and be accompanied with a letter requesting a refund of tax paid

for the past four years if the utility use was the same.

I have enclosed Rules 3.292 - Repair, Remodeling, etc., and 3.295 - Natural Gas

and Electricity for reference. Please note section (b) of Rule 3.292 and

section (d) of Rule 3.295.

This opinion is based upon the facts you presented. If there are additional

or different facts, this opinion may change.

Please feel free to contact usif you have additional questions. You may write

us, call toll free 1-800-252-5555 from anywhere in Texas.

Sincerely,

Tax Policy Section

Tax Administration Division