Was restoring a customer's dirty solvent and returning that same solvent taxable repair or manufacturing processing in Texas?

Plain-English summary

The Comptroller corrected part of a November 12, 1991 opinion. When a company took a customer's dirty solvent, restored it to usable condition, and returned that same solvent to the same customer, the work was repair of tangible personal property, not processing.

Rule 3.292(a)(6) defined repair as restoring damaged, worn, defective, or malfunctioning property to working condition. Rule 3.300(a)(10) expressly excluded restoration to original condition from processing. Calling the service “recycling” did not change the classification.

Different facts produced different results. Selling a customer solvent other than what the customer supplied was a sale of tangible personal property. Recycling solvent owned by the company for later sale was processing property for ultimate sale.

The letter also addressed mixed manufacturing and repair operations. Equipment used predominantly in manufacturing or processing for ultimate sale could qualify for the manufacturers' refund or phased-in exemption if otherwise eligible and supported piece by piece. Supplies bought for both exempt manufacturing and nonexempt repair could initially be purchased tax free when some exempt use was known, but the purchaser had to accrue tax on the portion later used in repair.

What this means for you

Recycling and restoration businesses

Track ownership and return of the material. Restoring the same customer's property pointed to repair; processing your own material for sale pointed to manufacturing or processing.

Accountants and tax professionals

This letter expressly revises an earlier opinion. For mixed-use machinery and supplies, maintain predominant-use evidence and accrue tax when initially exempt purchases move into nonexempt repair work.

Common questions

Was returning restored solvent to the same customer processing? No. It was repair.

What if the company sold different solvent to the customer? That was a sale of tangible personal property.

Could mixed-use machinery qualify for the manufacturing benefit? Yes, if predominantly used in qualifying manufacturing or processing and otherwise eligible, with documentation for each item.

What happened when tax-free supplies were later used in repair? The purchaser had to accrue tax on the nonexempt-use portion.

Citations and references

• 34 Tex. Admin. Code Rule 3.292(a)(6) (repair of tangible personal property)
• 34 Tex. Admin. Code Rule 3.300(a)(10) (processing excludes restoration to original condition)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1158A08

Original ruling text

February 13, 1992

Dear ***:

I am writing to answer additional questions raised in a telephone
conversation I had with *** shortly after your company
received my opinion letter of November 12, 1991, and to revise
some of the answers provided in that opinion. I incorporate into
today's letter, by reference, the statements of fact set out in
my November 12, 1991 letter.

Question 1 (Raised by ***): In Scenarios 1 and 2,
you said that Company A was providing "processing" when it
recycled dirty solvents and returned the same solvents to
the person who brought them to Company A for recycling. Is
this not repair of the solvents, as opposed to processing?

Answer: My response of November 12, 1991, is incorrect.
Company A is repairing tangible personal property (under
Scenarios 1 and 2) when it restores a customer's dirty
solvents to usable condition and returns them to the same
customer who brought them in.

The solvents are tangible personal property. Repair of
tangible personal property is defined as follows:

To mend or restore to working order or operating condition
tangible personal property that was broken, damaged, worn,
defective, or malfunctioning. Rule 3.292 (a)(6).

"Processing" is defined as follows:

The physical application of the materials and labor necessary
to modify or to change the characteristics of tangible personal
property, belonging to another, by restoring it to its original
condition is not considered processing of that property
. . . . Rule 3.300 (a)(10).

As you can see, repair of tangible personal property is expressly
excluded from the definition of "processing". After discussing
extensively possible distinctions between "recycling" and "repairing"
a customer's tangible persona; property, we were forced to
conclude that Company A's treatment of a customer's dirty solvents
in order to restore them to usable condition and to return them to
the same customer who brought them in must be considered to be a
"repair". Calling the service "recycling" would not change it from
repair to processing in this situation.

If Company A sells to a customer solvents other than the ones the
customer brought in, then the customer is simply purchasing tangible
personal property from Company A (as opposed to repair services). If
Company A processed or recycled the solvents that it sold to a customer
(as opposed to "repaired for a customer"), then Company A would be
processing tangible personal property for ultimate sale in that instance.

Question 2: Is machinery or equipment used both in processing TPP for
sale and repairing TPP eligible for the manufacturers refund/phased-in
exemption (assuming it qualifies in all other respects)?

Answer: Machinery or equipment that is used predominantly in
manufacturing or processing of TPP for ultimate sale is eligible for the
refund/phased-in exemption, assuming the machinery or equipment qualifies
in all other respects. The manufacturer/repairman must be able to
document the exempt predominant use of each piece of machinery or
equipment for which a refund or exemption is claimed.

Question 3: Assuming it is necessary and essential to the
manufacturing, processing, or fabrication, is tangible personal property
used or consumed in or during the actual manufacturing, processing, or
fabrication of tangible personal property for ultimate sale exempt from
tax if it may also be used or consumed in providing repair services?

Answer: At the time of purchase, a person engaged in both manufacturing
and repair activities may issue an exemption certificate to purchase
such TPP tax free if the person knows that a portion of the TPP
purchased will be used in an exempt manner (such as in actual
manufacturing). The purchaser is, however, responsible for accruing
tax on the portion of such TPP that is subsequently used in a nonexempt
manner (such as in repair).

The taxability responses to Scenarios 3 and 4 are correct as written
in the opinion of November 12, 1991.

I apologize for any inconvenience this has caused. I appreciate your
calling to my attention the problems with my original response.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers. If you have further questions,
feel free to write or call me at 1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration Division