Which electricity used by a Texas ship repairer and machine shop qualified for the manufacturing exemption?

Plain-English summary

Two related companies fabricated steel structures and pipe, machined replacement parts, repaired ships and customer equipment, and sold electricity as shore power at their docks.

Electricity directly used to manufacture parts, steel structures, and pipe for sale was exempt. Electricity later used to install those items on a customer's vessel, or to repair, renovate, or convert customer-owned parts or equipment, was taxable commercial use.

Each electric meter had to qualify separately. When one meter served both exempt and nonexempt uses, a 12-consecutive-month study applied the predominant-use test. More than 50% exempt use made the electricity on that meter eligible for exemption.

For shore power, the dock operator had to pay tax when buying the electricity. Its separately described charge to the vessel for electricity was not taxable. A vessel's own exempt status did not exempt the operator's purchase.

What this means for you

The letter separated making an item for sale from installing or repairing it for a customer. It also required meter-by-meter proof rather than treating the facility's electricity as one combined purchase.

Common questions

Was electricity used to fabricate parts for sale exempt? Yes.

Was electricity used to install those parts on a ship exempt? No. The letter treated installation connected with repair, renovation, or conversion as taxable commercial use.

How did a mixed-use meter qualify? A 12-month study had to show that more than 50% of its electricity was used for exempt purposes.

Was the dock operator's shore-power charge taxable? The charge to the vessel was not taxable, but the operator had to pay tax on its electricity purchase.

Citations and references

• 34 Tex. Admin. Code Rule 3.295 (natural gas and electricity)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9012L1070A07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

December 17, 1990

Dear ****:

Thank you for your letter concerning sales tax exemption on electricity
used in the manufacture of steel fabricated fixtures and pipe and the
machining of parts in your machine shop.

You stated that *** is composed of two operating corporations
as outlined below:

** corporation is topside ship repairer. We fabricate steel
structures and pipe at our fabrication building located at *,
Port Arthur, Texas. The labor used to install the fabricated fixtures and
pipe and
to repair the ships are worked at our docks at separate location, ***,
Port Arthur, Texas. The electricity to support these ship repairs are
charged out
at that location. We also do repair work on our customer's ships at oth-
er docks that we do not own.

*** is a job machine shop in which we manufacture parts to re-
place worn or broken parts of our customer equipment. We also do out-
side machinist work in industrial plants and aboard ships at our docks
and customer docks.

The electricity directly used in manufacturing parts, steel structures,
and pipe for sale is exempt. The electricity later used to sell and af-
fix the items to the customer's vessel causing a repair, renovation or
conversion is commercial use and is taxable.

Electricity used in the repair, renovation or conversion of parts or
equipment belonging to the customer is commercial use and is taxable.

Each meter must qualify for exemption on its own. Because there will be
exempt and non-exempt uses of electricity on a single meter, the predom-
inant use theory applies. A study of the electricity uses for each
meter must be performed. If a study for a particular meter shows that
over 50% of the electricity is for exempt use, the electricity qualifies
for exemption. The study(s) must be performed based on twelve consecu-
tive months of use. Enclosed is Rule 3.295 for your information regard-
ing predominant use and the study(s) required.

Your last question concerned the taxability of electricity sold as
"shore power" to customer ships at your docks. As I understand, you
meter the electricity furnished to the vessels at the dock and charge
the vessels a "marked up" price. You may also sell water to the vessels.
Or you may charge the customer a "docking" fee for a single amount which
includes all services.

You should pay tax on the electricity that you purchase for use at the
dock. The charge to the customer for the electricity is not taxable.

The fact that a vessel may be exempt does not cause your purchase of
electricity to be exempt from tax.

This opinion is based on the facts presented. If there are additional
or different facts, the opinion may change.

If you have any questions or need additional information, you may call
toll free 1-800-252-5555 or the regular number 512/463-4600. My extension
is 3-4666. You may write to Tax Correspondence, Comptroller of Public
Accounts.

Sincerely,
Jo Ann Dieck
Tax Correspondence