Is natural gas used to fuel a boiler that makes steam, which then powers chemical-processing equipment, exempt from Texas sales tax, or is it too 'one step removed' from manufacturing to qualify?

Plain-English summary

A chemical manufacturer bought natural gas to fuel equipment that heats water into steam. That steam, in turn, powered other equipment used directly in processing the company's chemicals. The taxpayer asked the Comptroller whether the natural gas was too "one step removed" from the actual manufacturing process to qualify for Texas's manufacturing sales tax exemption — in other words, whether it was really just fuel for a boiler rather than something used directly in production, and therefore taxable.

The Comptroller said no: the natural gas is not one step removed from manufacturing, and it qualifies for the exemption. The taxpayer can give its natural gas supplier a properly completed exemption certificate instead of paying sales tax on the gas.

The ruling leans on a chain of earlier Comptroller decisions that all treat fuel-to-steam setups as directly tied to production, not as an indirect, generic utility expense:

• Hearing #18061 held that natural gas used to fire a boiler to produce steam was exempt, where the steam was used with other chemicals to decontaminate paint-production tanks.
• TR #1192 built on Hearing #18061 to exempt natural gas fueling a boiler whose steam ran a turbine that generated electricity to run manufacturing equipment — and squarely addressed the "one step removed" argument.
• TR #382 found that fuel oil used to fire a boiler making steam for processing corn starch could be bought tax-free.

Taken together, these rulings establish that when fuel makes steam and that steam does real work in production — whether decontaminating equipment, spinning a turbine, or powering processing machinery — the fuel itself counts as being used directly in manufacturing, not as a step removed from it.

What this means for you

Manufacturers using steam or boiler systems

If your plant burns natural gas (or another fuel) to make steam, and that steam directly powers or drives equipment used in your production process, this ruling supports treating the fuel purchase as exempt from Texas sales and use tax under the manufacturing exemption. The key fact pattern is: fuel → boiler → steam → equipment that does the actual processing work.

Claiming the exemption

To buy the fuel tax-free, give your supplier a properly completed Texas sales tax exemption certificate. Keep records showing exactly how the steam is used downstream (what equipment it powers and how that equipment is used in processing), since that chain is what makes the "not one step removed" argument work.

Where this could go wrong

The exemption depends on the steam doing something tied directly to processing — running processing equipment, decontaminating production equipment, or generating power that runs manufacturing machinery. If steam were instead used for something more general, like space heating or a purpose unconnected to the production process, the "one step removed" analysis could come out differently. This letter does not address that scenario.

Common questions

Q: What does "one step removed" mean in this context?
A: It's the Comptroller's shorthand for asking whether an input (here, natural gas) is used directly enough in manufacturing to qualify for the exemption, or whether there's an extra step (burning gas to make steam, rather than using the gas itself in production) that pushes it too far from the process to count. The Comptroller found the extra step didn't disqualify it.

Q: Does this exemption apply to any fuel, or just natural gas?
A: This ruling is about natural gas specifically, but it cites an earlier ruling (TR #382) that reached the same result for #5 and #6 fuel oil used to make steam for processing corn starch — suggesting the reasoning isn't limited to natural gas.

Q: What has to happen with the steam for the fuel to be exempt?
A: Based on the cited precedents, the steam needs to do something connected to the manufacturing process itself — power processing equipment, run a turbine that generates electricity for manufacturing machinery, or decontaminate production equipment. Simply generating steam for a purpose unrelated to processing is not addressed by this letter.

Q: How does a taxpayer actually claim this exemption?
A: By giving the natural gas (or fuel) supplier a properly completed Texas exemption certificate instead of paying sales tax on the purchase.

Q: Can another taxpayer rely on this letter?
A: Only the taxpayer it was issued to can claim detrimental reliance on it. Other taxpayers with similar facts can look to it as an indication of Comptroller policy, but should confirm current treatment since STAR letters can become outdated without being marked superseded.

Citations and references

No statutes were cited in this letter. The Comptroller instead relied on its own prior administrative decisions:

• Hearing #18061 (natural gas fueling a boiler to produce steam used with chemicals to decontaminate paint-production tanks — held exempt)
• TR #1192 (natural gas fueling a boiler whose steam ran a turbine generating electricity for manufacturing equipment — held exempt; directly addressed the "one step removed" issue)
• TR #382 (fuel oil fueling a boiler making steam used to process corn starch — held exempt)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207299L

Original ruling text

TR NO. 1305

DATE: July 21, 1992

TO: Celina Coronado, ** Audit, **

FROM: Lindey Osborne, Tax Administration Division

SUBJECT: Natural Gas

RE: TAXPAYER

Situation: The taxpayer (TAXPAYER) is a chemical manufacturer purchasing
natural gas to fuel equipment that heats water to produce steam. The steam is
used to power equipment used in processing the chemicals.

Question: Is the natural gas one step removed from the manufacturing process
and thus taxable?

Answer: No, the natural gas is not one step removed from the manufacturing
process. The taxpayer may issue a properly completed exemption certificate to
the natural gas supplier in lieu of tax.

Discussion: In Hearing #18061, the administrative law judge ruled that natural
gas used to fire a boiler to produce steam was exempt. The steam was used in
conjunction with other chemicals to decontaminate the tanks in which paint was
produced.

In TR #1192, Hearing #18061 was used as a basis for exempting natural gas used
to fuel a boiler that produced steam. This steam in turn was used to operate a
turbine that produced electricity to operate manufacturing equipment. This TR
directly addressed the "one step removed" concept.

Further evidence that fuel used to make steam is not one step removed from the
manufacturing process is found in TR #382. This TR found that #5 and #6 fuel
oil used to fire a boiler making steam used to process corn starch could be
purchased tax free.