Is the gas a rental-equipment company uses for heating its repair area and for steam-cleaning returned machinery exempt from Texas sales tax as a processing/manufacturing use?

Plain-English summary

A company that rents out machinery and equipment (welding machines, large air compressors, bulldozers, backhoes, water trucks, bucket trucks, jackhammers, etc.) asked the Comptroller three questions about the taxability of the natural gas it uses when equipment comes back from a rental. When a piece of returned equipment comes in, it is inspected, repaired if needed, and then steam cleaned — sometimes the area needing repair is steam cleaned before the repair happens.

The Comptroller's answers, grounded in the predominant-use exemption at 34 Tex. Admin. Code Rule 3.295(a)(4):

1. Gas used to heat the repair area can be exempt as a processing/manufacturing use, but only for the area and the time actually spent on repairs. If the same space is also used for non-repair activities, the taxpayer has to allocate the gas usage between exempt and non-exempt time and document the allocation method as part of a predominant use study.
2. Gas used to heat machines so they can operate to spec in cold weather can also be exempt, but the taxpayer has to show that the equipment manufacturer actually requires specific operating temperatures — for example, with operating manuals or manufacturer specification sheets. The letter also notes that oil filter crushers and air compressors do not themselves count as "machinery used in processing."
3. Gas used for steam cleaning is generally not exempt. The Comptroller had previously held that electricity used to wash and vacuum a rental vehicle is not "processing," and applied the same logic here: steam cleaning undamaged rental equipment is not exempt, and steam cleaning equipment that still needs repair is only "preparation for" processing/manufacturing — not the processing itself — so it isn't exempt either.

The letter closes by noting the answer is based on the facts presented, and that other, similar-looking facts could come out differently.

What this means for you

Equipment rental companies

If you rent out machinery and have to repair and clean it between rentals, you can't assume all the utilities used in that process are tax-exempt. Under this letter, heating gas used specifically while repairs are underway in a defined repair area can qualify for the processing exemption, but gas used to steam-clean equipment that isn't being repaired — or just to get equipment ready for repair — does not qualify.

Anyone claiming a predominant-use exemption on shared space

If the same area or equipment is used for both exempt (repair/processing) and non-exempt (general cleaning, storage, other) purposes, you need to track and document how much time is spent on each, and support that allocation with a predominant use study, per Rule 3.295(a)(4).

Businesses relying on manufacturer specs to justify heating

If you're claiming an exemption because equipment needs a certain temperature to function properly, keep the manufacturer's own documentation (operating manuals, spec sheets) on hand — the Comptroller expects that kind of proof, not just an internal assertion that heat is "necessary."

Common questions

Q: Is the gas used to heat the repair area for rental equipment always exempt?
A: Not always — it's exempt only for the area and the time actually used to repair the equipment. If the space serves other purposes too, the gas use has to be allocated between exempt and non-exempt use, documented as part of a predominant use study.

Q: Is gas used to keep equipment warm enough to operate properly in cold weather exempt?
A: It can be, but the taxpayer must show the manufacturer requires specific operating temperatures for the equipment to function properly, for example through operating manuals or manufacturer specification sheets.

Q: Is steam cleaning rental equipment exempt as part of the repair/manufacturing process?
A: No. Steam cleaning undamaged rental equipment is not exempt, the same way the Comptroller previously held that electricity used to wash and vacuum a rental vehicle isn't processing. Steam cleaning equipment that still needs repair is treated as "preparation for" processing, not exempt processing itself.

Q: Can I rely on this letter for my own business?
A: No. This letter was issued to one taxpayer based on the specific facts they described, and STAR letters can only be the basis of a detrimental-reliance claim for the taxpayer who received them. It shows how the Comptroller reasons about similar facts, but your situation may come out differently.

Citations and references

Rules cited:

• 34 Tex. Admin. Code Rule 3.295(a)(4) (predominant use exemption for gas/electricity used in processing/manufacturing)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9304L1232B09

Original ruling text

April 6, 1993

Dear **:

This is in response to your letter concerning the taxability of gas used
primarily in heating and in steam cleaning of rental equipment.

Your client rents machinery and equipment such as; welding machines,
large air compressors, bulldozers, backhoes, water trucks, bucket
trucks, jackhammers, etc. Once a piece of rental equipment is returned,
it is inspected, repaired if necessary, and then it is steam cleaned.
The area of the equipment needing to be repaired may be steam cleaned
prior to repair. You would like the following questions addressed:

1. Would the gas used in heating, of the processing area, be exempt
   pursuant to the provisions of Rule 3.295(a) (4) under the facts
   presented?

RESPONSE: Gas used in heating an area used in processing/manufacturing is
exempt. However, the only processing that your client appears to be
performing is in the repairing of property that it owns and holds for
rental.

Gas used in heating would be restricted to areas where repairs are
performed. If there are both repair and other activities performed, the
heating would be exempt only for the period of time that processing occurs
in that area.

This means it will be necessary to determine the time the area is used
for processing and non processing activities and allocate the gas usage
accordingly. Documentation explaining the allocation method must be part
of the predominant use study.

2. In cold weather, heating is necessary for the machines Taxpayer
   uses to perform up to specifications. Under this fact, would the gas
   used in heating be exempt pursuant to the provisions Rule
   3.295(a)(4)?

RESPONSE: Heating required in order for processing machinery to operate
properly is exempt. You would need to show that the machines'
manufacturer requires specific operating temperatures for these machines
to operate to claim further allocation than explained in Response 1.

Copies from operating manuals or other manufacturer supplied
specification sheets may be used for this purpose. Equipment such as
oil filter crushers and air compressors do not qualify as machinery used
in processing.

3. In taxpayers operations, is the gas used for steam cleaning exempt as
   part of the repair/manufacturing?

RESPONSE: We have previously held that electricity used to wash and
vacuum a vehicle held for rental would not be considered processing.
Therefore, steam to clean undamaged rental equipment would not be exempt.
Steam to clean an item in need of repair would be considered preparation
for processing/manufacturing rather than actual processing or
manufacturing and would not be exempt.

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
1-800-531-5441, 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