Does a manufacturer owe sales tax when it sells hydrogen embrittlement test bars to plating companies, who use the bars to certify the quality of their plating tanks?

Plain-English summary

A company that manufactures hydrogen embrittlement test bars asked the Comptroller's Tax Policy Division whether those bars qualify for the sales tax exemption for certain machinery and equipment used in manufacturing. The company sells the test bars to plating companies, which use them to check the quality of their plating tanks and to certify those tanks against aerospace and government standards.

The certification process works like this: a test bar is plated in the tank being certified, then sent to a testing laboratory where it's placed under a static load for 200 hours. Afterward, the bar is usually scrapped or thrown away — it's a consumable testing item, not a component that becomes part of a product or stays in production use.

The Comptroller determined that these test bars do not qualify for the manufacturing/processing exemption under Rule 3.300. The reasoning: testing and certifying the plating tanks is not part of the plating company's actual manufacturing/processing operation — it's a pre-production activity that happens before (and outside of) the manufacturing process itself.

What this means for you

Manufacturers who sell testing or certification equipment/consumables

If you sell items used to test, calibrate, or certify a customer's production equipment — rather than items used directly in the customer's manufacturing or processing operation — don't assume Rule 3.300's manufacturing exemption applies. The Comptroller drew a clear line here: testing/certifying equipment before it's put into (or continues in) production use is "pre-production" and falls outside the exemption, even though the certification is aimed at ensuring the equipment used in manufacturing works correctly.

Plating companies and other manufacturers buying testing supplies

If you're buying consumable test items (like hydrogen embrittlement test bars) to check or certify your own production equipment, expect to pay sales tax on those purchases. The fact that the underlying equipment being tested (the plating tanks) is itself used in manufacturing does not extend the exemption to the testing items used to certify it.

Accountants and tax professionals

This letter is a useful example of the Comptroller's "pre-production" line under Rule 3.300: equipment or consumables used to test, inspect, or certify manufacturing/processing equipment — as opposed to equipment used directly in production — is treated as outside the manufacturing exemption. It's a narrow, fact-specific letter (test bars scrapped after a single 200-hour static-load test), so confirm any similar fact pattern carefully before relying on this reasoning.

Common questions

Q: Are hydrogen embrittlement test bars sold to plating companies exempt from Texas sales tax?
A: No. The Comptroller ruled they do not qualify for the Rule 3.300 manufacturing/processing exemption.

Q: Why doesn't the manufacturing exemption apply, since the test bars are used to check equipment used in manufacturing?
A: Because using the bars to test and certify the plating tanks is considered pre-production activity, not part of the manufacturing/processing operation itself.

Q: What happens to the test bars after they're used?
A: Per the facts in the letter, the plated test bar is placed under a static load for 200 hours at a testing lab, and in most cases the bar is then scrapped or thrown away.

Q: Can another taxpayer rely on this letter?
A: No. STAR letters may generally be relied on only by the taxpayer to whom they were issued, and the Comptroller noted this opinion is based on the facts presented — different facts, though similar, may lead to a different answer.

Citations and references

Rules:

• Rule 3.300 (manufacturing exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9512L1402G10

Original ruling text

December 12, 1995

Dear **:

Thank you for your letter dated November 14, 1995, concerning the exemption
provided for certain machinery and equipment used in manufacturing.

During our telephone conversation today, you provided me with additional
information about how the bars are used in testing and certifying plating
tanks.

Facts: Your company manufactures a hydrogen embrittlement test bar that is
sold to plating companies. The bar is used by plating companies to ensure
the quality of their plating tanks and in certifying the tanks for aerospace
and government standards.

The plating tank certification is accomplished by plating the test bars. The
plated test bar is sent to a testing laboratory where the bar is put under a
static load for 200 hours. The bars are (in most cases) scrapped or thrown
away after this test.

Response: Hydrogen embrittlement test bars sold to plating companies for use
in testing the quality of manufacturing/processing equipment do not qualify
for exemption under Rule 3.300. This is not part of the
manufacturing/processing operation, it is pre-production.

This opinion is based on the facts presented and current law. Different
facts though similar, may result in different answers.

You may call or write me for additional information or if you have any
questions. The toll free number is 1-800-531-5441, and my extension is
50330. The direct line is 512/475-0330. You may also write to Tax Policy
Division, Comptroller of Public Accounts.

Sincerely,

Bettie Peterson
Tax Policy Division

NOTE: Previous Accession Number 9512098L