Do the foundations and support structures for rock-crushing-plant equipment (a crusher, screens, a logwasher) qualify for Texas's manufacturing exemption?

Plain-English summary

A company building a new rock crushing plant asked whether the support structures for its crusher, screens, and logwasher -- engineered structures with stairs and catwalks, attached to a concrete slab with anchor bolts and grouted in place -- qualify for the manufacturing exemption.

The Comptroller first applied the three-part test from Hutchins v. Masterson, 46 Tex. 551 (1887), which controls over Rule 3.347 where the two conflict, to determine whether property affixed to land becomes an improvement to realty: (1) was there real or constructive annexation to the realty; (2) was the article fit or adapted to the realty's use; and (3) did the party intend the item to become a permanent accession -- with intent being the most important factor. Because the taxpayer's letter didn't address intent, the Comptroller presumed for purposes of the letter that the plant becomes an improvement to realty.

Under Rule 3.300(f)(2), manufacturing equipment qualifies for exemption only if it's used in actual manufacturing/processing/fabrication/repair of property to be sold and isn't purchased under a lump-sum real property improvement or repair contract -- so the letter advises separately stating material and labor in the contract, and not commingling qualifying and non-qualifying equipment. Applying that framework, the Comptroller's established position is that support foundations -- reinforced concrete slabs, sometimes with concrete piers and anchor bolts -- do not qualify because they are real property, not machinery or equipment, even though they support the equipment's weight, reduce vibration stress, and ensure safe performance. By contrast, peripheral supports and structural steel that are part of the machinery/equipment itself do qualify, as do electrical wiring, breakers, switches, and control panels/wiring that directly control or operate the production equipment. Piping, valves, pressure regulators, and conveyors that move product between processes are classified as intraplant transportation equipment and don't qualify, though the letter flags that this policy "may be affected by recent court cases."

What this means for you

Manufacturers building or expanding processing plants

Concrete foundations and support structures for your equipment are treated as real property and are taxable, even if their sole purpose is to support manufacturing equipment. Structure your construction contract to separately state materials and labor, and don't commingle exempt machinery/equipment with non-qualifying foundation work, or you risk losing the exemption on equipment that would otherwise qualify.

Construction contractors on industrial projects

Peripheral structural steel and supports that are genuinely part of the machinery/equipment itself remain exempt, but the foundation/slab work supporting that equipment is a taxable real property improvement or repair.

Accountants and tax professionals

This letter is a clear statement of the Comptroller's foundation-vs-equipment line, grounded in the Hutchins fixture test and Rule 3.300(f)(2)'s lump-sum-contract exclusion -- useful for structuring contracts on manufacturing plant construction to preserve the exemption on qualifying equipment.

Common questions

Q: Do concrete foundations supporting manufacturing equipment qualify for the exemption?
A: No. Per this letter, support foundations (concrete slabs, piers, anchor bolts) are real property, not machinery or equipment, and don't qualify for the manufacturing refund or exemption.

Q: What equipment-adjacent items DO qualify?
A: Per this letter, peripheral supports and structural steel that are part of the machinery/equipment itself qualify, as does electrical wiring, breakers, switches, and control panels that directly control or operate the production equipment.

Q: What about piping and conveyors moving product between processing steps?
A: Per this letter, these are classified as intraplant transportation equipment and don't qualify for the partial exemption or refund, though the letter notes recent court cases may affect this policy.

Citations and references

Rules and cases:

• 34 Tex. Admin. Code Rule 3.300(f)(2) (manufacturing exemption requirements, lump-sum contract exclusion)
• 34 Tex. Admin. Code Rule 3.347 (real property services)
• Hutchins v. Masterson, 46 Tex. 551 (1887) (fixture/annexation test)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9702237L

Original ruling text

February 10, 1997

Dear **:

Thank you for your letter of January 29, 1997, concerning the taxability of
components of a new rock crushing plant.

You submitted drawings of support structures for a crusher, screens and a
logwasher which are components of a new rock crushing plant and a narrative
overview of the project.

These structures are engineered and built for the piece of equipment they will
be supporting. They typically have stairs and catwalks built on the structure
in order that the crusher or screen can be reached. These structures will be
attached to a concrete slab with anchor bolts and grouted.

Hutchins v. Masterson, 46 Tex. 551 (1887) controls over any of parts of Rule
3.347 that conflict with the tests set out in Hutchins to determine whether
property has been affixed to realty in such a way as to become an improvement
to the realty. As discussed in that hearing, Hutchins essentially asks the
following questions:

1. Has there been a real or constructive annexation of the article in
   question to the realty?

2. Was there a fitness or adaptation of such article to the uses or
   purposes of the realty with which it was connected?

3. Was it the intention of the party making the annexation that the
   chattel become a permanent accession to the freehold?

Further, the third factor is the pre-eminent factor to consider. Although your
letter does not discuss intent, I will presume for the purposes of this letter
that the plant becomes an improvement to realty.

Rule 3.300, concerning manufacturing exemptions, Subsection (f)(2) states that,
"Manufacturing machinery, equipment, replacement parts, and accessories
purchased by a manufacturer qualify for a refund, a reduction in the amount of
tax paid , or for exemption :

(A) if it will be used in the actual manufacturing, processing, fabrication, or
repair of tangible personal property to be sold, and the use of the item is
necessary and essential to the manufacturing, processing, fabrication, or
repair operation or a pollution control process resulting from the operation;
and

(B) is not purchased under a lump-sum contract to improve real property or
under a lump-sum real property repair or remodeling contract." (emphasis added)

As a result, you would want to ensure that the contract is separately stated
into its material and labor components. The material should be separated out
such that qualifying and non qualifying equipment is not commingled such that
the exemption is lost for otherwise qualifying equipment.

This office has held that support foundations for equipment consist of
reinforced concrete slabs, sometimes further supported by placing concrete
piers into the ground with anchor bolts extending above the surface to fasten
equipment or steel supports in place do not qualify for exemption. These
foundations are constructed to support the weight of the equipment, reduce
stress caused by vibration, and generally ensure the proper safe performance of
the equipment. The foundations are considered real property and not machinery
or equipment and do not qualify for the refund or partial exemption.

The peripheral supports and structural steel for processing machinery and
equipment qualify as part of the machinery and equipment.

Any piping, valves, pressure regulators, conveyors and other equipment that is
necessary to move the product from one process to another is classified as
intraplant transportation equipment and does not qualify for the partial
exemption or refund. However, this policy may be affected by recent court
cases.

Electrical wiring, breakers, switches, instruments, transformers, etc., that
directly control or operate machinery and equipment used directly in the
production process do qualify. This equipment includes the control panels and
wiring to the motors or other devices that consume the electricity used in
processing.

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

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