Is a scrap metal processing service — cutting, chopping, and separating aluminum and copper conductors for electric utilities and co-ops — taxable, and does the machinery used qualify for the Texas manufacturing exemption?

Plain-English summary

This is a May 19, 1995 letter from the Texas Comptroller's Tax Administration Division (signed by Lindey Osborne) responding to a taxpayer who cuts, chops, and separates bare and insulated aluminum and copper conductors for publicly owned electric utilities and co-ops. That processing increases the resale value of the utility companies' scrap metal products. The taxpayer asked two questions: (1) whether the processing service is taxable, and (2) whether the machinery used qualifies for the manufacturing exemption.

The Comptroller held that the processing service is taxable. However, the utility company customer may give the processor a valid, properly completed resale or exemption certificate — in lieu of paying tax — stating that the service is purchased to further the processing of tangible personal property that will be resold.

On the equipment question, the answer depends on what the machinery is used for:

• Exempt: machinery, equipment, replacement parts, and accessories used in the actual processing operation, including the chopper unit and the scales.
• Not exempt: the tractor/trailer unit — its chassis is instead subject to motor vehicle tax.
• Not exempt: conveyor systems and forklifts, because transportation equipment is specifically excluded from the manufacturing exemption under Subsection (c)(3) of Comptroller Rule 3.300.
• Undetermined: the separator — the Comptroller said it needed more information to decide whether it qualifies for the exemption.

The letter notes the opinion is based on the facts presented and could change if the facts differ, and it references a prior accession number, 9505134L, for the same letter.

What this means for you

Scrap metal processors who cut, chop, or separate conductors or other metal for resale

Your processing service is taxable to your customer, but you don't have to absorb or collect the tax if your customer (such as a utility company or co-op) gives you a valid resale or exemption certificate stating the service is purchased to further processing of property that will be resold. Keep that certificate on file.

Businesses buying processing machinery and equipment

Equipment used directly in the actual processing operation — like a chopper unit or scales — qualifies for the manufacturing exemption. But don't assume everything on your yard qualifies: transportation-type equipment such as conveyors and forklifts is specifically carved out of the exemption under Rule 3.300(c)(3), and a tractor/trailer used to haul materials is not exempt either — its chassis is instead taxed as a motor vehicle.

Accountants and tax professionals

When advising a scrap processing client, separate equipment into (1) direct processing equipment (exempt), (2) transportation/material-handling equipment like conveyors and forklifts (excluded from exemption by rule), and (3) licensed motor vehicles like tractor/trailer units (taxed separately as motor vehicles, not sales/use tax). For equipment that doesn't clearly fall into a category — like the separator here — expect the Comptroller to request more facts about its function before ruling.

Common questions

Q: Is a service that cuts, chops, and separates scrap conductors for a utility company taxable in Texas?
A: Yes, the processing service itself is taxable.

Q: Can the processor avoid charging tax on this service?
A: Yes, if the utility company customer provides a valid, properly completed resale or exemption certificate stating the service is purchased to further processing of tangible personal property that will be resold.

Q: Does the chopper unit and scales used in processing qualify for a tax exemption?
A: Yes, machinery, equipment, replacement parts, and accessories used in the actual processing operation — including the chopper unit and scales — are exempt.

Q: Is the tractor/trailer used to haul scrap exempt?
A: No. The exemption does not cover the tractor/trailer unit, and the tractor/trailer chassis is instead subject to motor vehicle tax.

Q: Are conveyors and forklifts used in the scrap operation exempt?
A: No. Transportation equipment such as conveyors and forklifts is specifically excluded from the manufacturing exemption under Subsection (c)(3) of Comptroller Rule 3.300.

Q: What about the separator — is it exempt?
A: The Comptroller did not decide; it said it needed more information about the separator to determine whether it qualifies for the exemption.

Citations and references

Regulations:

• 34 Tex. Admin. Code Rule 3.300 (Manufacturing; Custom Manufacturing; Fabricating; Processing), Subsection (c)(3)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9505L1349G06

Original ruling text

May 19, 1995

Dear ***:

Thank you for your letter of May 5, 1995. You asked whether the service you
provide is taxable and whether the machinery you use qualifies for the
manufacturing exemption.

As I understand it, you cut, chop, and separate bare and insulated aluminum
and copper conductors for publicly owned electric utilities and co-ops. By
processing these materials, you increase the resale value of the utility
companies scrap metal products.

The processing service you provide is taxable. However, the utility company
may issue a valid, properly completed resale or exemption certificate to you,
in lieu of tax, stating your services are purchased to further the processing
of tangible personal property that will be resold.

Machinery, equipment, replacement parts, and accessories used in the actual
processing operation are exempt. This would include the chopper unit and
scales. The exemption does not cover the tractor/trailer unit. The
tractor/trailer chassis is subject to motor vehicle tax. Also, the exemption
does not include the conveyor systems or forklifts. Transportation equipment,
such as conveyors and forklifts, is specifically excluded from the exemption in
Subsection (c)(3) of the enclosed Rule 3.300. I need more information on the
separator to determine if it qualifies for exemption.

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

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct line is
512/475-0037. You also may write to Tax Administration Division, Comptroller
of Public Accounts.

Sincerely,

Lindey 0sborne
Tax Administration Division

NOTE: Previous Accession Number 9505134L