Does a company that manufactures aluminum tank domes and sometimes installs them keep its manufacturing sales-tax exemption on electricity, and is installing the dome an improvement to real property?

Plain-English summary

This 1993 Texas Comptroller letter ruling answers a chain of related questions from a company ("X") that designs, manufactures, and sometimes installs aluminum covers ("domes") for bulk storage tanks and reservoirs. The domes are custom-built per tank, generally bolted on (not welded), and intended to stay in place for the life of the tank. X sometimes sells a dome outright with no installation labor, and sometimes sells and installs it.

The Comptroller addressed four distinct sub-issues raised in the taxpayer's letter:

• Realty vs. tangible personal property (TPP): Installing the dome on a storage tank is an improvement to real property, not the installation of TPP.
• New construction vs. remodeling: Where the dome is added to an already-existing tank, the installation labor is remodeling labor, not new construction.
• Manufacturing exemption and the utility (predominant-use) study: Electricity X uses to manufacture domes that are sold with no installation labor is an exempt manufacturing use. Electricity used to manufacture domes that X itself will install (whether as new construction or as repair/remodeling of real property) is a taxable commercial use. Where the same equipment is used for both, the utility study must list the equipment under both the taxable and exempt categories, allocated by the actual number of hours the equipment runs for each purpose — allocating by revenue is not acceptable.
• Manufacturer who sometimes installs, or has a third party install: If X arranges for the dome to be installed (whether X's own crew does it or a third party does), X is treated for tax purposes as a prime contractor/service provider on that installation job, and whoever does the physical installation work is X's subcontractor. To claim any exemption, X's records must clearly show the time spent in each category (manufacturing-for-sale vs. installation work).

What this means for you

Manufacturers who also install their own products

If you fabricate an item and sometimes install it yourself on real property, your manufacturing exemption on electricity (or gas) does not automatically cover 100% of your equipment's use. You need to separately track and allocate the hours your manufacturing equipment spends producing units that are sold outright (exempt) versus units you will personally install (taxable), and put that hours-based split into your utility/predominant-use study. Using revenue share as a proxy for the split will not be accepted.

Contractors and service providers

Once you arrange installation of an item you manufactured onto real property — even if you subcontract the physical labor to someone else — the Comptroller treats you as the prime contractor/service provider for that job, not as a manufacturer selling at retail. That has the further effect of denying manufacturing exemptions for the manufacture of the item that goes into that installation job, unless your records isolate the time attributable to install-jobs from the time attributable to sale-only jobs.

Utility customers with mixed exempt/taxable equipment

When the same piece of equipment is used for both an exempt purpose and a taxable purpose, list it in the utility study under both categories, with the allocation based on actual measured or estimated hours of use in each category — not on the dollar value or percentage of sales the equipment's output generates.

Real-property contractors evaluating dome or similar tank-cover installations

Installing a bolted-on cover to an existing tank counts as remodeling of real property, not new construction and not installation of TPP, even though the cover can technically be removed without damaging the tank and is custom-fabricated per job.

Common questions

Q: Is attaching a bolted-on dome to a storage tank treated as installing tangible personal property or as improving real property?
A: It is an improvement to real property, according to this ruling, based on the facts that the dome is user-specific, generally intended to remain for the life of the tank, and covers a storage unit that itself qualifies as real property.

Q: If the tank already exists and the manufacturer adds a dome to it, is that new construction or remodeling?
A: It is remodeling labor, not new construction, when the labor is performed on an already-existing tank or reservoir.

Q: Can a manufacturer keep the full manufacturing exemption on electricity if it sometimes installs the items it makes?
A: No. Electricity used to manufacture units sold without installation remains an exempt manufacturing use. Electricity used to manufacture units the company will itself install is a taxable commercial use. Shared equipment must be split between the two categories in the utility study based on actual hours of use for each purpose, not on revenue.

Q: What happens to the manufacturer's tax status when it arranges for installation, either by its own crew or by hiring someone else?
A: The manufacturer is treated as a prime contractor/service provider for that installation job. Whoever performs the physical installation (even if it is a third party the manufacturer hires) is treated as the manufacturer's subcontractor. The manufacturer must keep records clearly showing time spent in each category (manufacturing-for-sale vs. installation) to claim any exemption.

Q: Can revenue percentages be used instead of hours to allocate exempt vs. taxable equipment use?
A: No. The ruling states explicitly that revenue generated is not an appropriate measure for allocation; the actual number of hours the equipment is used for each category should be listed instead.

Citations and references

The original ruling text does not cite any specific Texas statute or Comptroller rule by number — it answers the taxpayer's questions by reference to general Comptroller policy on real property improvements, remodeling vs. new construction, the manufacturing exemption, and predominant-use utility studies, without naming a Tax Code section or Title 34 Texas Administrative Code rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9303957L

Original ruling text

March 9, 1993

Dear Mr. **:

Thank you for your recent letter asking for clarification of issues involved in
improvements to realty versus installation of tangible personal property, new
construction versus real property repair and remodeling, and manufacturing
exemptions. Your facts and questions are restated below with our responses.

Your facts: Taxpayer X designs, manufactures and erects aluminum covers (domes)
for bulk storage units such as tanks and reservoirs. The dome may be designed
for a new installation or installed on an already existing unit. Generally, the
bulk storage units these domes cover qualify as real property.

The storage units may contain water, wastewater, petroleum or other bulk
storage products. The purpose of the dome is to keep unpleasant and/or harmful
vapors contained within the tank or to protect the product in the tank from
contaminants from the outside.

X manufactures the dome and then delivers fabricated pieces of the dome to the
customer's location for installation. The fabricated pieces are assembled
utilizing a bolted connection. The dome is generally bolted onto the tank,
since welding activities may be hazardous or may contaminate the items stored
in the tank.

When X receives an order for a dome it is always for a specific bulk storage
unit. The dome is then designed according to the specifications of that
particular unit. Since the domes are "user specific" no inventory of domes is
maintained. Once the dome is put in place it generally remains in place for the
remaining life of the tank.

Generally, the intention of the owner is for the dome to be a permanent
addition to the tank, although the dome could be removed without damaging the
tank should the need arise.

X may sell and install the dome or just sell the manufactured dome materials
with no installation labor.

Question: Is the installation of the dome an improvement to realty or
installation of TPP?

Response: The installation of the dome is an improvement to realty.

Question: If the installation is considered an improvement to realty is the
labor remodeling or new construction (for jobs where the tank or reservoir
already exists)?

Response: The labor is remodeling labor.

Question: If the labor is considered an improvement to realty can X allocate
jobs on a percentage basis and avail themselves to the available manufacturing
exemption for jobs that they fabricate the dome and sell it at retail with no
installation labor? For example, if 20% of their jobs involve installation,
then should that percentage be factored into the utility study for electricity?

Response: Electricity used by X to manufacture domes for sales without
installation is an exempt use. Electricity used to manufacture domes that X
will install (either as part of new construction or repair or remodeling of
real property) is a commercial use and taxable. When electricity is used to
operate manufacturing equipment that is used for both exempt and taxable uses,
the equipment is to be listed in a utility study under both the taxable and
exempt categories with appropriate 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 domes for sale without installation
versus the time used in manufacturing domes that will be installed should be
listed.

Question: What is your policy on companies who manufacture items that are
sometimes sold at retail and sometimes installed by the manufacturer? What if
the installation is conducted by a third party?

Response: If X arranges for installation, X will be treated for tax purposes as
a prime contractor/service provider. The person who does the actual
installation is a subcontractor. If X wishes to claim any exemptions, X's
records must clearly show the time spent in each category.

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

If you have any questions or need more information, you may call me toll free
at 1-800-531-5441, extension 3-4633. The regular number is 512/463-4633. You
may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division

February 16, 1993

Mr. John Sharp
Comptroller of Public Accounts
Attention: Tax Policy Group
PO Box 13528
Austin, TX 78711

Dear Sir:

We have recently addressed some taxability issues for which clarification from
your office is warranted. The issues involved include improvements to realty
versus installation of tangible personal property (TPP), new construction
versus real property repair and remodeling and manufacturing exemptions.

The facts are as follows:

Facts

The taxpayer, (X), designs, manufactures and erects aluminum covers (domes) for
bulk storage units such as tanks and reservoirs. The dome may be designed for a
new installation or installed on an already existing unit. Generally, the bulk
storage units these domes cover qualify as real property.

The storage units may contain water, wastewater, petroleum or other bulk
storage products. The purpose of the dome is to keep unpleasant and/or harmful
vapors contained within the tank or to protect the product in the tank from
contaminants from the outside.

X manufactures the dome and then delivers fabricated pieces of the dome to the
customer's location for installation. The fabricated pieces are assembled
utilizing a bolted connection. The dome is generally bolted onto the tank,
since welding activities may be hazardous or may contaminate the items stored
in the tank.

When X receives an order for a dome it is always for a specific bulk storage
unit. The dome is then designed according to the specifications of that
particular unit. Since the domes are "user specific" no inventory of domes is
maintained. Once the dome is put in place it generally remains in place for the
remaining life of the tank.

Generally, the intention of the owner is for the dome to be a permanent
addition to the tank, although the dome could be removed without damaging the
tank should the need arise.

X may sell and install the dome or just sell the manufactured dome materials
with no installation labor.

Discussion:

The first question that needs to be addressed in order to determine the
taxability implications X may face is whether or not the dome would be
considered realty or TPP. We realize that these type determinations are made on
a case by case basis, but we hope this letter provides enough information to
give us guidance on how to handle these transactions.

As we have stated the design of each dome depends on the specifications of the
storage reservoir and the specific uses the dome will serve.

If the installation of the dome is considered an improvement to realty then the
next issue is whether the installation is considered new construction or
remodeling of real property. The dome adds additional square footage to the
tank, but the square footage is generally not filled with the product in the
tank. The additional square footage is needed to retain vapors within the tank
or to give additional protection to the product.

The final issue is how to handle exemptions available to X for their
manufacturing operations. For jobs where they sell the materials to their
customer and provide no installation labor then they are purely a manufacturer
and all applicable exemptions apply. For jobs where they sell the materials and
provide installation, if the installation is considered an improvement to
realty, then our understanding is that the Comptroller's office would consider
them a contractor or repairman and no manufacturing exemptions would apply.

Questions

(1) Is the installation of the dome an improvement to realty or installation of
TPP?

(2) If the installation is considered an improvement to realty is the labor
remodeling or new construction (for jobs where the tank or reservoir already
exists)?

(3) If the labor is considered an improvement to realty can X allocate jobs on
a percentage basis and avail themselves to the available manufacturing
exemptions for jobs that they fabricate the dome and sell it at retail with no
installation labor? For example, if 20% percent of their jobs involve
installation, then should that percentage be factored into the utility study
for electricity?

What is your policy on companies who manufacture items that are sometimes sold
at retail and sometimes installed by the manufacturer? What if the installation
is conducted by a third party?

We appreciate your attention to these matters and look forward to your
response. If you have any questions or need any additional information please
do not hesitate to call me at **.

Very truly yours,