Is natural gas used to fuel boilers at a towel rental (industrial laundry) business exempt from Texas sales and use tax as gas used in processing?

Subject

Towel Rental Services — Boilers Not Equipment Used In Processing Rental Towels — Gas Not Exempt

Plain-English summary

A towel rental company (an industrial laundry that rents out towels to customers and launders them) asked the Comptroller for a ruling on a natural gas study it had submitted to support a refund claim. The company wanted the natural gas used to fuel its boilers treated as exempt, presumably under Texas's exemption for gas and electricity used directly in processing or manufacturing.

The Comptroller said no. The letter gives two independent reasons. First, the boilers themselves are "not equipment directly used in processing the rental towels" — so gas burned in the boilers doesn't qualify for the processing exemption regardless of how the study was done. Second, even setting that aside, the Comptroller found the study itself unreliable: the facility had burned down and been rebuilt several times, additional space and equipment had been added over the years, and only part of the plant area was actually used for processing — not the 90% the study assumed for the heater. Because of that mismatch between the study's assumptions and the plant's real history, the study wasn't representative of the four years covered by the refund claim.

What this means for you

Industrial laundries, towel/uniform rental companies, and similar processors

If you're claiming a gas or electricity exemption based on a percentage-of-use study (a common way to support "predominant use" claims for processing/manufacturing equipment), this ruling is a reminder that the equipment itself has to be directly used in the processing activity — boilers that merely heat water or provide steam/heat to a facility, without being part of the towel-cleaning process itself, may not qualify, at least on the facts described here.

Anyone relying on a percentage-of-use study to support a refund claim

The ruling shows the Comptroller will look past the study's stated percentages to the underlying facts. A study assuming a fixed percentage of use (like 90%) for a piece of equipment has to actually reflect how the plant operated during the whole refund period. If the facility changed significantly during that period (rebuilding after fires, adding space and equipment), a single static study covering all those years is likely to be rejected as unrepresentative.

Common questions

Q: Was the natural gas used for the boilers exempt from Texas sales/use tax?
A: No. The Comptroller ruled it was not exempt because the boilers are not equipment directly used in processing the rental towels.

Q: Why else was the refund claim rejected?
A: The Comptroller found the taxpayer's gas study unrepresentative for the four years covered by the refund claim, because the facility had burned several times and additional space and equipment had been added, and only part of the plant area (not the 90% the study assumed for the heater) was actually used for processing.

Q: Can this taxpayer's competitor rely on this letter for their own gas exemption claim?
A: No. This is a private letter addressed to one taxpayer ("Dear ***"), based on that taxpayer's specific facts. Under Texas STAR rules, it can only be the basis of a detrimental-reliance claim for the taxpayer it was issued to, and it isn't binding precedent for anyone else.

Q: Does the letter cite any specific Tax Code section or rule?
A: No — the letter as published doesn't cite a specific statute or rule; it states the Comptroller's factual and policy conclusions directly.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9305L1239F14

Original ruling text

May 20, 1993

Dear ***:

The natural gas study that you sent for your client, * dba
*, has been reviewed.

The natural gas for the boilers is not exempt. The boilers are not equipment
directly used in processing the rental towels. Further, based on our
information of the business, the study is not representative for the four
years for which the refund is claimed. Our information indicates that the
facility burned several times and additional space and equipment have been
added. Also, only a part of the plant area is for processing, not 90% as
indicated for the heater.

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 additional information, you may call me toll
free at 1800-531-5441, extension 3-4666. or the regular Austin number
512/463-4666. You may write to Tax Administration Division.

Sincerely,
Jo Ann Dieck
Tax Administration Division.