Which utilities used to stone-wash, press, bag, package, and move garments counted as exempt processing use?

Plain-English summary

The business stone-washed or acid-washed garments, pressed them, and sometimes added tags, bagged them, packaged the bags, and shipped them to stores.

The Comptroller treated washing and pressing as processing. Exempt utility uses included operating washing and pressing equipment, heating wash water, and operating garment-bagging equipment. Lighting, heating, and air conditioning qualified only when directly used in the processing area.

Utilities for equipment that packaged the bagged garments for shipment, conveyors moving garments between areas, offices, storage, warehouses, laboratories, cafeterias, restrooms, and exterior signs or lights were taxable uses. Utilities included in rent or reimbursed by a third-party tenant were taxable regardless of the tenant's use.

Each utility and meter qualified separately. Because a meter served both exempt and taxable uses, more than 50% had to be exempt, supported by a Rule 3.295(e) study. A four-year refund could be claimed when historical use and operating facts were unchanged.

What this means for you

The line between processing and post-processing logistics mattered. Meter-by-meter documentation was required, and leased-area utilities remained taxable to the business under the stated facts.

Common questions

Were washing and pressing utilities exempt uses? Yes.

Was garment bagging exempt? Yes, but packaging the bags for shipment was taxable use.

Were conveyors exempt? No, under this letter.

What predominant-use threshold applied? More than 50% exempt use for each utility and meter.

Citations and references

• 34 Tex. Admin. Code Rule 3.295(e) — predominant-use utility study

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9104L1101G12

Original ruling text

April 16, 1991

Dear **:

Thank you for your letter regarding sales tax exemption on natural
gas and electricity used in your business.

As I understand from our telephone conversation, you receive
garments from ** which may or may not be totally finished. You
wash the garments using chemicals, stones, etc. to stone wash and
acid wash and then press the garments. A few garments require
"full finish" which means that you put the tags on the garments,
put the garments in bags, package the bags for shipment, and ship
the garments to various stores as directed by ****.

Based on the above information, the washing and pressing is
processing. The utilities directly used in the processing are
exempt use. Exempt uses include the utilities used to operate the
washing and pressing equipment, to heat water used in washing the
garments, and the equipment used to bag the garments. Utilities
for lighting, heating, and air conditioning are exempt use only
when used directly in the processing area.

The utilities used to operate equipment used to package the bagged
garments for shipment to the stores and used to operate conveyors
used to move the garments from one area to another are taxable.
Other taxable uses include, but are not limited to, uses in an
office, storage, warehouse, laboratory, cafeterias/break rooms,
rest rooms, and outside signs, lights, etc. I also understand
that a part of the building at ** is leased to a third
party. The utilities included in the lease payment or for which
you receive reimbursement from the third party are taxable uses
regardless of how the tenant uses the utilities.

Because you have both exempt and taxable uses of utilities on a
single meter, you will need to determine that over 50% of a
utility is for exempt use before claiming exemption. Each utility
and each meter qualifies for exemption on its own.

A study must be performed for each meter. Please refer to Section
(e) of Rule 3.295 - Natural Gas and Electricity regarding the
utility study necessary to determine predominant use. If a
utility qualifies for sales tax exemption, you may issue a
properly completed exemption certificate to the utility supplier.
If the past use of the utility was the same, meaning that you have
the same building size, equipment, operating hours, type of
business, utility consumption, etc., you may claim a sales tax
refund for the statute of limitation period of four years. The
refund request must be in writing to the utility supplier and state
the billing periods for which the refund is being claimed.

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

If you have any questions regarding the exemption or study or
you need additional information, you may call me toll free at 1-
800-252-5555, extension 3-4666. You may write to me at Tax
Administration Division.

Sincerely,

Jo Ann Dieck
Tax Administration Division