Does tri-ethylene glycol (TEG) used in natural gas processing qualify for the Texas manufacturing sales tax exemption?

Subject

Chemical (Triethylene Glycol/Teg, Triazine, Sodium Nitrate) And Equipment — Removes Impurities From Natural Gas

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9408L1312G12

Plain-English Summary

The Texas Comptroller's office responded to a company's audit comments about whether tri-ethylene glycol (TEG) should be taxed. The answer turns on how the chemical is actually used, not just what it is.

Texas exempts chemicals that are "necessary materials" to process tangible personal property held for sale. Natural gas is tangible personal property, so companies that process natural gas for sale can qualify for this manufacturing exemption on the chemicals they use in that processing.

TEG has two common uses in the natural gas business, and they come out differently:

• Used like anti-freeze in a pipeline that transports gas to an end marketer — this is a transportation use, not a manufacturing use, so it does not qualify for the exemption.
• Used to remove water and other impurities from natural gas that is being processed for sale — this is a manufacturing use, so it does qualify for the exemption.

Because TEG is not always exempt, the Comptroller confirmed the company was right to charge sales tax on TEG by default. However, a customer who actually uses the TEG for the exempt (impurity-removal) purpose can give the seller a properly completed exemption certificate claiming the manufacturing exemption, and the seller can accept that certificate instead of collecting tax.

What This Means For You

Sellers of TEG and similar processing chemicals

You should generally charge sales tax on these chemicals unless and until a customer provides a valid, properly completed exemption certificate. Don't assume a chemical is taxable or exempt based on its name alone — the customer's actual use determines the answer.

Natural gas processors and marketers

If you use TEG (or comparable chemicals) to strip water or other impurities out of natural gas you are processing for sale, that use qualifies for the manufacturing exemption, and you can furnish your supplier with an exemption certificate. If instead you use TEG as a pipeline anti-freeze to keep gas moving in transport, that use does not qualify — you owe tax on that chemical.

Auditors and tax professionals

This ruling illustrates that a single chemical can have both a taxable and an exempt use depending on function: transportation-related uses are taxable, while uses that are a necessary part of processing tangible personal property (natural gas) held for sale are exempt.

Q&A

Q: Does tri-ethylene glycol (TEG) automatically qualify for a sales tax exemption?
A: No. It depends on how it's used. TEG used to remove water/impurities from natural gas being processed for sale qualifies for the manufacturing exemption. TEG used as an anti-freeze in a transport pipeline does not.

Q: Why does the use of the chemical matter instead of just what the chemical is?
A: Texas's manufacturing exemption covers chemicals that are necessary materials to process tangible personal property (here, natural gas) held for sale. A pipeline anti-freeze use is a transportation function, not a processing function, so it falls outside the exemption even though the chemical is the same.

Q: What should a seller do if a customer claims their purchase of TEG is exempt?
A: The seller may accept a properly completed exemption certificate from the customer claiming the manufacturing exemption instead of collecting tax, as long as the certificate gives a valid reason for the exemption.

Q: Is natural gas considered tangible personal property under this ruling?
A: Yes. The ruling states natural gas is tangible personal property, which is why persons processing natural gas for sale can qualify for the manufacturing exemption on the chemicals used in that processing.

Citations

No specific statute or rule section is cited in the body of this letter; it discusses the general sales tax manufacturing exemption for chemicals used to process tangible personal property held for sale.

Original ruling text

August 24, 1994

Dear *****:

Thank you for responding to the questionnaire we sent you. In your response,
you had comments about your recent audit. This letter will focus on your
comments about taxing tri-ethylene glycol.

The sales tax statute has always provided exemptions for specific items. It
also provides exemptions for other items when used in specific ways. One
exemption is for use in manufacturing tangible personal property held for sale.

Chemicals that are necessary materials to process tangible personal property
held for sale are included in this exemption. Natural gas is tangible personal
property. Persons processing natural gas for sale qualify for the manufacturing
exemption.

Many companies were not aware that certain uses of tri-ethylene glycol (TEG)
could qualify for the manufacturing exemption. Recently, this agency has
received several questions about how sales tax applies to the uses of TEG. Some
of these uses qualified for the manufacturing exemptions and some did not. For
example:

Sometimes tri-ethylene glycol is used like an anti-freeze in a pipeline
that transports the natural gas to an end marketer; chemicals used in
transportation do not qualify for the manufacturing exemption.

Chemicals that are used to remove impurities from natural gas to be sold
qualify for the manufacturing exemption. Water is an impurity in natural
gas. TEG that is used to remove water from the natural gas is used in a
manner that qualifies for the manufacturing exemption.

Because TEG is not always exempt from tax, you were/are correct to add sales
tax to the sale of TEG. However if a customer provides an exemption certificate
claiming the manufacturing exemption, your company may accept the certificate
instead of tax. The certificate must be filled out properly and be given
a valid reason for exemption.

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

You may also write her at the Tax Administration Division. The address is
Comptroller of Public Accounts, 111 East 6th Street, Austin, Texas 78701.

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 9408528L