Is proof coil chain used to lower and dip raw materials into cleansing and galvanizing vats exempt from Texas sales/use tax as manufacturing equipment, or is it taxable intraplant transportation equipment?

Plain-English summary

Company C uses two overhead cranes in its plant. One crane is used exclusively for lowering and dipping raw material into vats in the chemical cleansing and galvanizing departments; the other is used strictly for transporting raw material from one process to another (intraplant transportation). A separate piece of "proof coil chain" — distinct from the chain used on the transportation crane — is used solely to attach the raw material to the dipping crane so it can be lowered into the vats.

The raw material and the proof coil chain are both lowered into caustic chemicals that remove impurities from the raw material. Because the chain is submerged along with the raw material, it is consumed and rendered unusable for safety purposes and has to be replaced. The same chain is also used to dip the raw material into the galvanizing substance that coats the product, and the intense heat and galvanizing substance likewise consume the chain at each use, again requiring replacement.

The Comptroller explained that Tax Code Section 151.318(a)(2) exempts tangible personal property used or consumed in actual manufacturing, processing, or fabrication if that use is necessary or essential to the operation. However, Subsection (c)(2) excludes "intraplant transportation equipment" and other equipment or materials used only incidentally in the manufacturing operation, even if the exemption under (a)(2) would otherwise apply. Citing an Administrative Law Judge's comments in Hearing 28,700 — that equipment does not qualify for the manufacturing exemption unless it makes an actual physical or chemical change in the item being manufactured — the Comptroller concluded that the proof coil chain does not itself process anything; the processing occurs in the vats. The cranes used for dipping are transportation equipment, and nothing in the sales tax law limits "transportation" to horizontal movement — vertical movement, i.e., dipping, is transportation too. On that basis, the proof coil chain is excluded from the manufacturing exemption as intraplant transportation equipment.

What this means for you

Manufacturers using cranes, chains, or hoists to move materials through a process

Even if a piece of equipment (like this proof coil chain) is consumed and has to be replaced frequently because of harsh chemicals or heat, that consumption alone does not make it exempt manufacturing equipment. What matters is whether the item itself performs the actual processing, or whether it merely moves or holds material while the processing happens elsewhere (in this case, in the vats).

Businesses classifying equipment for sales/use tax exemption purposes

This letter treats vertical movement — lowering and dipping — the same as horizontal movement for purposes of the "intraplant transportation equipment" exclusion in Tax Code Section 151.318(c)(2). Don't assume that only conveyors, forklifts, or horizontal-moving cranes count as transportation equipment; equipment that raises and lowers material into a vat can also be classified as transportation equipment and therefore excluded from the manufacturing exemption.

Accountants and tax professionals

The ruling reiterates the Comptroller's longstanding "actual physical or chemical change" test (as articulated by the ALJ in Hearing 28,700): machinery and equipment must actually process or fabricate the raw goods to qualify for the manufacturing exemption under Section 151.318(a)(2). Equipment that merely attaches to, holds, or moves the product into the location where processing occurs is "incidental" under Subsection (c)(2), regardless of how essential it may be to the overall operation or how quickly it wears out.

Common questions

Q: Why isn't the proof coil chain exempt, given that it's necessary to get the raw material into the cleansing and galvanizing vats?
A: Necessity alone doesn't satisfy the exemption. The Comptroller found that the actual processing occurs in the vats, not in the chain, and that the chain's role is to move (lower and dip) the material — which is classified as intraplant transportation equipment and specifically excluded under Tax Code Section 151.318(c)(2).

Q: Does "intraplant transportation" only mean moving things sideways, like on a conveyor?
A: No. The letter states there is nothing in the sales tax law that limits transportation to horizontal movement, and that vertical movement (i.e., dipping) is transportation.

Q: Does the fact that the chain is consumed and has to be replaced after each use change the answer?
A: No. The letter addresses the consumption of the chain as background fact but bases its taxability conclusion on the chain's transportation function, not on how often it must be replaced.

Q: Can other taxpayers rely on this letter for their own equipment?
A: This opinion is rendered based on the facts submitted by this particular taxpayer, and the letter itself notes that other facts, though similar, may yield different results.

Citations and references

• Tax Code Section 151.318(a)(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;"
• Tax Code Section 151.318(c)(2): "intraplant transportation equipment, maintenance or janitorial supplies or equipment, or other machinery, equipment, materials, or supplies that are used incidentally in a manufacturing, processing or fabrication operation;."
• Hearing 28,700 (Administrative Law Judge comments on the "incidental" equipment standard, as quoted in this letter).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9502L1345E14

Original ruling text

February 9, 1995

Dear *****:

Thank you for your recent letters regarding property used in
manufacturing. The focus of this response is the proof coil chain
discussed in your letters of September 30, 1994, and January 27, 1995.

Your letter of January 27, 1995, provides the following additional
information:

The proof coil chain in question is considered separate and apart from
chain used on the overhead crane (intraplant transportation). The proof
coil chain is used solely for attaching the raw material to the overhead
crane and is not to be considered as intraplant transportation. Company
C has two cranes; one is used exclusively for lowering and dipping raw
material in the chemical cleansing and galvanizing departments, the
other is used strictly for transporting the raw materials from one
process to another. The raw material and proof coil chain are lowered
into the chemicals used to remove impurities from the raw material. Due
to the caustic nature of these chemicals and the fact that the proof
coil chain is submerged along with the raw material, the chain is
consumed and rendered unusable for safety purposes, and therefore,
replaced with new proof coil chain. This same proof coil chain is also
used to dip the raw material into the galvanized substance which coats
the product. Intense heat and the galvanizing substance itself consumes
the chain at each use, rendering it unusable and requiring replacement.

Response: Tax Code Section 151.318(a)(2) exempts from tax:

"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;"

However, Subsection (c)(2) excludes from the exemption:

"intraplant transportation equipment, maintenance or janitorial supplies
or equipment, or other machinery, equipment, materials, or supplies that
are used incidentally in a manufacturing, processing or fabrication
operation;."

The Administrative Law Judge (ALJ) in Hearing 28,700 makes the following
comments on a related issue:

The Comptroller has also long held that machinery and equipment do not
qualify for the manufacturing exemption if they do not perform actual
processing or fabrication upon the raw goods or products being
fabricated or assembled. I take this to mean that the Comptroller has
defined "incidental" so as to include any machinery and equipment which
does not actually make a physical or chemical change in the item being
manufactured, assembled, processed, or fabricated.

In our opinion, proof coil chain is excluded from the exemption as
intraplant transportation equipment.

a. The processing occurs in the vats.
b. The cranes used for dipping are transportation equipment.
c. There is nothing in the sales tax law that limits transportation to
horizontal movement.
d. Vertical movement (i.e. dipping), is transportation.

This opinion is rendered based on the facts you submitted. Other facts,
though similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct
line is 512/463-4680. You may also write to Tax Administration,
Comptroller of Public Accounts.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9502060L