Is infrared inspection of industrial furnace linings taxable, and is refractory brick sold to repair a kiln exempt from Texas sales tax?

Plain-English summary

A company that inspects industrial heat enclosures — boilers, petrochemical process furnaces, waste incinerators, mineral processing furnaces, and rotary kilns used to make lime, Portland cement, alumina, and calcined petroleum coke — asked the Comptroller about two of its activities.

The first activity is a computer-aided infrared inspection service. The company scans the equipment with infrared instruments that record thousands of temperature measurements, which its microcomputer assembles into color-coded "thermograms." The purpose is to determine the condition and effectiveness of the refractory lining materials (firebrick and high-temperature concretes) that protect the inside surfaces of the equipment from extreme heat. The Comptroller ruled this testing service is nontaxable.

The second activity is selling refractory lining materials (like kiln brick) used to repair and maintain the heat-resistant internal linings of the same kind of equipment. These materials wear out from very high heat and mechanical abrasion, with a useful life anywhere from a few days to fifteen-plus years. The Comptroller explained that refractories sold as component parts of new capital equipment are generally exempt as parts of a larger nontaxable manufacturing item (with tax instead due on the finished product). For refractories used in ongoing maintenance of existing equipment, the Comptroller pointed to Tax Code § 151.318, which exempts property that becomes an "ingredient or component part" of a manufactured product, or that is used/consumed in manufacturing when necessary or essential to the process. Citing two Comptroller hearing decisions (Nos. 22,430 from 1988 and 26,984 from 1992), the letter states that kiln brick that becomes an ingredient of the manufactured product through abrasion qualifies for exemption under the current rule language.

The letter also flags a caveat: the administrative law judge in Hearing No. 22,430 had recommended a stricter three-part test for a possible future rule amendment (intent at purchase to become part of the final product; an identifiable part actually became an ingredient; and the presence was significant, not merely incidental). That amendment had not been adopted as of this 1992 letter, so the more lenient current-rule standard controlled — but the Comptroller warned that if such an amendment were adopted later, future refractory sales would need to be evaluated for exemption on a case-by-case basis.

What this means for you

Companies that inspect industrial furnaces, boilers, or kilns

Non-destructive testing services — like infrared scanning to assess the condition of refractory linings — are treated as nontaxable services in this ruling. You are not selling tangible personal property; you're providing an inspection/diagnostic service.

Sellers or buyers of refractory materials (kiln brick, firebrick, high-temperature concrete)

Whether refractory materials you sell for repair and maintenance of industrial heat equipment are exempt depends on whether the material becomes an ingredient of the manufactured product (through abrasion or wear) as required by Tax Code § 151.318. This letter treated that as generally satisfied for kiln brick based on two Comptroller hearing decisions, but warned the standard could tighten if a proposed rule amendment were adopted — so don't assume this exact analysis still applies without checking current rules.

Accountants and tax professionals

This is a 1992 letter that explicitly rests on hearing decisions and a rule-amendment proposal that, at the time, had "not been proposed or adopted." Given more than three decades have passed, confirm whether Tax Code § 151.318 or its implementing rules have since been amended before relying on this reasoning for a current transaction.

Common questions

Q: Is testing furnace or boiler linings for wear taxable in Texas?
A: In this ruling, no. Infrared, non-contact inspection service to determine the condition and effectiveness of refractory lining materials was ruled a nontaxable service.

Q: Is refractory brick sold to repair a kiln exempt from sales tax?
A: It can be, under the Tax Code § 151.318 manufacturing exemption, if the brick becomes an ingredient or component part of the manufactured product (for example, through abrasion during the manufacturing process). The Comptroller based this conclusion on two hearing decisions involving kiln brick.

Q: What about refractory materials sold as part of new equipment?
A: The letter says there's usually no exemption question for refractories sold as ordinary component parts of new capital equipment — they're generally exempt as parts, with tax due instead on the finished product.

Q: Could this exemption analysis have changed since 1992?
A: Possibly. The letter itself notes a proposed rule amendment with a stricter three-part ingredient test that had not been adopted at the time. It cautions that if adopted, future refractory sales would need to qualify case by case. Given this letter's age, confirm current Comptroller rules before relying on it.

Citations and references

Statutes:

• Tex. Tax Code § 151.318(a)(1)–(2) (manufacturing exemption for tangible personal property that becomes an ingredient or component part of a manufactured product, or that is used/consumed as necessary or essential to manufacturing)

Referenced hearing decisions:

• Comptroller Hearing No. 22,430 (1988)
• Comptroller Hearing No. 26,984 (1992)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9212L1209A09

Original ruling text

December 4, 1992

Dear **:

Thank you for your letter regarding the taxability of two major categories of
specialized activities that your company performs. I have restated these
activities below followed by my response.

FIRST ACTIVITY: ** performs at computer-aided infrared inspection
service for industrial heat enclosures such as boilers, petrochemical process
furnaces, waste incinerators, mineral processing furnaces; plus rotary kilns
used in producing lime, Portland cement, alumina, calcimined petroleum coke,
and other substances requiring very high temperature processing.

The primary purpose of HRS's non-destructive,, non-contact inspection service
is to determine the condition and effectiveness of the various refractory
lining materials (firebrick and high-temperature concretes) used to protect the
inside surfaces of such equipment from destructive effects of the very high
temperature processes.

**'s service involves operating infrared scanning instruments which
produce thermal data recordings in the memory of **'s hybrid
microcomputer. These recordings are actually thousands of temperature
measurements which the microcomputer assembles into color-coded images called
"thermograms".

RESPONSE: The service you describe for testing materials, equipment, or
structures for the purpose of determining the condition and effectiveness of
the various refractory lining materials is a nontaxable service.

SECOND ACTIVITY: This activity is the sale of refractory lining materials
(tangible personal property) used to repair and maintain internal
heat-resistant lining in industrial plant heat enclosures and furnace type
equipment such as boilers, incinerators, rotary kilns, petrochemical process
heaters and other process equipment requiring internal refractory (ceramic)
linings to resist the destructive effects of very high temperatures and
mechanical abrasion. Refractories are inherently consumed by the processes
that use them. Useful life ranges from a few days to fifteen or more years,
depending on specific application.

Some refractory sales are for new, capital equipment as ordinary component
parts of such new equipment. There is usually no question of tax liability in
this case because of the component nature which usually leads to exemption on
the individual parts, but tax is due on the finished product.

Are uses of refractory materials for industrial equipment maintenance taxable?
Are there any cases such as very rapid consumption in certain processes that
would render the refractories so consumed exempt due to being considered a
consumed ingredient in the manufacture of a product or operation of a process
which results in a processed end product?

RESPONSE: Section 151.318 of the Texas Tax Code provides:

(a) The following items are exempted from the taxes imposed by this chapter:

(1) tangible personal property that will become an ingredient or component
part of tangible personal property manufactured, processed, or fabricated for
ultimate sale;

(2) tangible personal property used or consumed in or during the actual
manufacturing, processing, or fabrication of tangible personal property for
ultimate sale if the use or consumption of the property is necessary or
essential to the manufacturing, processing, or fabrication operation; and

RESPONSE: Hearings Nos. 22,430 (1988) and 26,984 (1992) concluded that, based
on the current language contained in Section 151.318 (a) (1) , brick used in
kilns that become (through abrasion, etc.) an ingredient of the product being
manufactured are exempted from sales tax.

The administrative law judge in Hearing No. 22,430 recommended that this agency
adopt a rule amendment containing the following test,, to ascertain if kiln
brick (or other refractory lining materials) qualify for exemption rather than
just granting automatic exemption.

• was the item intended at the time of purchase to become a part of the final
  product;

• did an identifiable part of the item become an ingredient; and

• even though the quantity or part of the item may have been small, was its
  presence in the product significant as opposed to being merely incidental

Since, this rule amendment has not been proposed or adopted to date, the ALJ in
Hearing No. 26,984, concluded that the kiln brick in question in that hearing
qualified for exemption. I would caution that should a rule amendment
containing this or a similar test be proposed and adopted in the future, the
refractory lining materials that your company sells would have to qualify for
exemption on a case by case basis.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

If you have other questions or need more information, you may call me at
1-800-252-5555, extension 3-4502. The regular number is 512/463-4600. You may
also write to Tax Administration Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division