Is electricity and gas used in an electroplating and precision-grinding business exempt from Texas sales tax, or does it matter whether the work is processing new parts versus repairing/regrinding existing ones?

Subject

Electroplating Process — Acting As Repairman Vs. Processor

Plain-English summary

The taxpayer is an electroplater and precision grinder of primarily industrial parts. Some parts are newly manufactured and require chrome plating and grinding, while other parts are repaired to like-new condition using the same process. The taxpayer asked the Comptroller how the sales tax exemptions for gas and electricity apply to these different kinds of work.

The Comptroller explained that Section 151.317 of the Texas Tax Code governs the taxability of gas and electricity, and that different parts of the statute cover different situations:

• Processing exemption (Section 151.317(2)(A)(i)): Gas and electricity used in processing personal property for sale as tangible personal property is exempt. This applies to electricity and gas used to chrome and grind parts as a sub-processor for original part manufacturers -- i.e., work on newly manufactured parts headed back into the stream of commerce.
• Electroplating exemption (Section 151.317(2)(A)(iv)): Electricity used in the electrical electroplating process is exempt, but only the electricity in the electroplating process itself. This exemption does not cover electricity used in grinding or other repair processes associated with electroplated parts, associated pollution control equipment, or heating and lighting in work areas.
• Jet turbine engine exemption (Section 151.317(2)(A)(v)), effective October 1, 1995: Gas and electricity used in the off-wing processing, overhaul, or repair of a jet turbine engine or its parts is exempt, but only for a certificated or licensed carrier of persons or property. This came up because the taxpayer mentioned, in a follow-up phone call, that some of its work involves aircraft cylinders and other parts.

The letter also flags that qualifying for a gas/electricity exemption does not automatically mean the related equipment used in the same processes also qualifies for exemption -- that is governed separately by Section 151.318, concerning property used in manufacturing. The Comptroller enclosed Rule 3.295 (electricity and gas purchases) and Rule 3.300 (manufacturing exemptions and qualifications) for the taxpayer's review, and noted the opinion is based on the facts presented and may change if the facts differ.

What this means for you

Electroplaters, platers, and precision grinders working on parts for manufacturers

If you chrome plate or grind parts as a sub-processor for original part manufacturers, the gas and electricity you use in that work can qualify for the processing exemption under Section 151.317(2)(A)(i). Track your gas and electricity use by process/purpose, since exemption eligibility can turn on whether the work is processing a part for sale versus repairing an already-finished one.

Businesses that both manufacture/process new parts and repair existing ones

This ruling draws a real line between processing new parts (potentially exempt) and grinding or other repair work on already-completed, electroplated parts (not covered by the electroplating exemption). Electricity used specifically in the electroplating step itself is exempt under Section 151.317(2)(A)(iv), but electricity used for grinding, repair, pollution control equipment, or simply heating and lighting your work areas is not covered by that particular exemption.

Businesses that service aircraft parts, including jet turbine engines, for licensed carriers

If you perform off-wing processing, overhaul, or repair of a jet turbine engine or its parts for a certificated or licensed carrier of persons or property, gas and electricity used in that work can be exempt under Section 151.317(2)(A)(v), effective October 1, 1995. This is a distinct exemption from the general processing and electroplating exemptions above.

Accountants and tax professionals

Remember that a gas/electricity exemption under Section 151.317 does not automatically extend to the equipment used in the same processes -- equipment exemptions are separately governed by Section 151.318. Rule 3.295 and Rule 3.300 are the implementing rules referenced in this letter and are worth reviewing alongside the statute.

Common questions

Q: Is all the electricity used in an electroplating business exempt from Texas sales tax?
A: No. Only the electricity used in the electrical electroplating process itself is exempt under Section 151.317(2)(A)(iv). Electricity used in grinding or other repair processes associated with electroplated parts, in associated pollution control equipment, or for heating and lighting work areas is not covered by that exemption.

Q: Does it matter whether the taxpayer is processing a new part or repairing an existing one?
A: Yes. The processing exemption (Section 151.317(2)(A)(i)) applies to gas and electricity used to chrome and grind parts as a sub-processor for original part manufacturers -- work tied to producing tangible personal property for sale. The letter distinguishes this from grinding and repair work, which the electroplating-specific exemption does not cover.

Q: What about gas and electricity used to repair aircraft parts, like jet turbine engines?
A: A separate exemption, Section 151.317(2)(A)(v) (effective October 1, 1995), covers gas and electricity used in the off-wing processing, overhaul, or repair of a jet turbine engine or its parts, but only for a certificated or licensed carrier of persons or property.

Q: If my gas and electricity purchases qualify for an exemption, does my equipment also qualify?
A: Not necessarily. The letter specifically notes that the availability of exemptions for gas and electricity purchases does not necessarily mean the taxpayer qualifies for exemptions on the equipment used in the same processes; equipment exemptions are addressed separately under Section 151.318.

Citations and references

Statutes and rules:

• Section 151.317 of the Texas Tax Code (taxability of gas and electricity)
• Section 151.317(2)(A)(i) (processing personal property for sale exemption)
• Section 151.317(2)(A)(iv) (electrical electroplating process exemption)
• Section 151.317(2)(A)(v), effective October 1, 1995 (off-wing jet turbine engine processing, overhaul, or repair exemption)
• Section 151.318 (property used in manufacturing)
• Rule 3.295 (electricity and gas purchases)
• Rule 3.300 (manufacturing exemptions and qualifications)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9610126L

Original ruling text

October 28, 1996

Dear ***:

Thank you for your letter of October 23, 1996, concerning the taxability of gas
and electricity purchases used in electroplating processes.

Your firm is a electroplater and precision grinder of primarily industrial
parts. Some of these parts are newly manufactured and require chrome plating
and grinding and some parts are repaired to like new condition by the same
process.

Section 151.317 of the Texas Tax Code addresses the taxability of gas and
electricity. Section (2)(A)(i) exempts gas and electricity used in processing
personal property for sale as tangible personal property. This exemption will
apply to electricity and gas used to chrome and grind parts as a sub processor
for original part manufacturers. Section (2)(A)(iv) exempts electricity used
in the electrical electroplating process. This is only the electricity in the
electrical electroplating process itself and does not include the electricity
in grinding or other repair processes associated with electroplated parts,
associated pollution control equipment, or heating and lighting in work areas.

In our phone conversation of October 28, 1996, you stated that some of your
work involves aircraft cylinders and other parts. Section 151.317 (2)(A)(v),
effective October 1, 1995, allows an exemption for gas and electricity used in
the off-wing processing, overhaul, or repair of a jet turbine engine or its
parts for a certificated or licensed carrier of persons or property.

Please note that the availability of exemptions for gas and electricity
purchases does not necessarily mean that you qualify for exemptions for
equipment used in the same processes. See Section 151.318 concerning property
used in manufacturing.

I have enclosed Rules 3.295, concerning electricity and gas purchases, and Rule
3.300 concerning manufacturing exemptions and qualifications, for your review.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,
Kevin Koller
Tax Policy Division