Was electricity used to make metal frames exempt when the business both sold frames over the counter and installed frames into real property?

Plain-English summary

The business manufactured metal frames and also installed them. A utility study concluded that electricity was used predominantly for manufacturing, but an auditor questioned the exemption because the business acted as a contractor.

The Comptroller split the electricity use by the destination of the frames. Under Texas Tax Code § 151.317, electricity used to manufacture frames sold over the counter as tangible personal property was exempt. Electricity used to prepare frames incorporated into real property—whether in new construction or repair and remodeling—was commercial use and taxable.

When the same manufacturing equipment served both uses, the utility study had to allocate the equipment between exempt and taxable work. The letter required actual equipment hours: time spent making items for sale compared with time spent preparing material for incorporation into customer property. Revenue was not an acceptable allocation measure.

What this means for you

A contractor can have both exempt manufacturing electricity and taxable commercial electricity in the same operation. The letter makes documentation decisive: mixed-use equipment should be allocated by actual operating time for each kind of work, not by sales dollars.

Common questions

Was all electricity used to make the frames exempt? No. Only electricity used for frames sold as tangible personal property was exempt.

What about frames installed into real property? Electricity used to prepare those frames was taxable commercial use.

How should mixed-use equipment be allocated? By the actual number of hours used for exempt over-the-counter production versus taxable real-property work.

Could the business allocate based on revenue? No. The letter expressly rejected revenue as the allocation measure.

Citations and references

• Texas Tax Code § 151.317 — electricity directly used in manufacturing tangible personal property for sale

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9104L1109C10

Original ruling text

April 29, 1991

Dear ***:

Thank you for your letter regarding sales tax exemption on elec-
tricity used in your business.

As I understand from your letter, you manufacture metal frames
that you install. ****** performed a utility study
to determine predominant use and thinks that you should qualify
for sales tax exemption since the electricity is predominantly for
manufacturing the metal frames. One of our auditors does not
think that you qualify for the exemption because you are a con-
tractor and not a manufacturer.

Section 151.317 of the Texas Tax Code provides that electricity
directly used in manufacturing tangible personal property for sale
as tangible personal property is exempt. This means that the
electricity to manufacture items that you sell "over the counter"
and do not incorporate into real property is exempt use.

The electricity to prepare items that you incorporate into real
property (either new construction or repair or remodeling of real
property) is commercial use and taxable. You are considered to be
a contractor or repair/remodeler of real property and not a
manufacturer of tangible personal property for sale as tangible
personal property.

When electricity is used to operate manufacturing equipment that
is used for both exempt and taxable uses, the equipment is to be
listed in the study under both exempt and taxable uses with appro-
priate allocations of time for each use. Revenue generated is not
an appropriate measure for allocation. The actual number of hours
the equipment is used to manufacture items for sale versus the
time used in preparing material to incorporate into a customer's
property should be calculated.

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

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

Sincerely,

Jo Ann Dieck
Tax Administration Division