An electrical contractor's customer used a sales tax recovery firm to seek a refund of tax paid on several jobs, claiming a manufacturing exemption -- which of the contractor's charges (moving equipment, repairing manufacturing equipment, upgrading a building's electrical system, partial demolition) actually qualify?

Plain-English summary

An electrical contractor's customer hired a sales tax recovery firm to seek refunds on several past jobs, submitting a power of attorney, a manufacturing exemption certificate (per Rule 3.300), and invoices showing tax had been paid. The contractor wasn't sure the exemption was valid or how to process the refund, and the invoices didn't clearly show what work was actually done. The Comptroller walked through the taxability of each likely job type: simply moving equipment between plants, setting it in place, and hooking it up to the existing electrical system is a nontaxable service (no exemption certificate even required, assuming the contractor isn't also selling equipment to the customer). Repairing or modifying equipment the customer uses to manufacture products for sale IS covered by the Rule 3.300 manufacturing exemption (effective since January 1995), so the contractor can accept the certificate and refund that tax. But upgrading a building's electrical system to serve the manufacturer's needs, or partially demolishing a building, are both taxable as remodeling of commercial realty under Rule 3.357 -- covering both materials and labor -- regardless of the manufacturing exemption certificate submitted. Once the contractor validly refunds tax to the customer, it can recover that money itself either by seeking reimbursement from the state or taking a credit on its next return (reducing reported taxable sales) under Rule 3.325(b)(2) -- but only where it had a valid reason to accept the exemption certificate in good faith.

What this means for you

Electrical and general contractors handling manufacturing-plant customers

Not every job for a manufacturing customer is covered by that customer's manufacturing exemption certificate. Relocating/hooking up equipment and repairing/modifying manufacturing equipment can be nontaxable or exempt, but upgrading a building's own electrical system or doing partial demolition is taxable remodeling of commercial realty regardless of the certificate -- break out and classify each job type on your invoices rather than applying one blanket exemption.

Businesses using sales tax recovery firms to seek refunds

A manufacturing exemption certificate doesn't automatically validate a refund claim across an entire invoice history -- the contractor (and the state) will look at what work was actually performed, job by job.

Accountants and tax professionals

This letter is a clean four-way breakdown of contractor-charge taxability for manufacturing-plant customers: (1) equipment relocation/hookup -- nontaxable service, no certificate needed; (2) manufacturing equipment repair/modification -- exempt per Rule 3.300 since Jan. 1995; (3) building electrical upgrades -- taxable remodeling under Rule 3.357; (4) partial demolition -- taxable remodeling under Rule 3.357. The refund mechanics (refund customer, then seek state reimbursement or take a credit) are covered by Rule 3.325(b)(2).

Common questions

Q: Is simply moving and hooking up equipment between plants taxable?
A: No, per this letter -- it's a nontaxable service, and no exemption certificate is needed.

Q: Does the manufacturing exemption cover repairing or modifying a customer's manufacturing equipment?
A: Yes, per this letter, effective since January 1995 under Rule 3.300.

Q: Is upgrading a building's electrical system for a manufacturer's needs exempt under the manufacturing certificate?
A: No, per this letter -- it's taxable as remodeling of commercial realty under Rule 3.357, covering both materials and labor.

Q: Is partial demolition of a building taxable?
A: Yes, per this letter -- also as remodeling under Rule 3.357.

Q: How does a contractor recover tax it refunds to a customer on a valid exemption?
A: Per this letter, by seeking reimbursement from the state or taking a credit on its next return (reducing reported taxable sales) under Rule 3.325(b)(2).

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.300 (manufacturing exemption)
• 34 Tex. Admin. Code Rule 3.325(b)(2) (refund/credit procedure)
• 34 Tex. Admin. Code Rule 3.357 (taxable remodeling of commercial realty)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9705387L

Original ruling text

May 9, 1997

Dear ***:

Thank you for your letter dated March 6, 1997, concerning a refund request from
a customer.

A sales tax recovery firm has requested a refund on various jobs that your
firm, an electrical contractor, performed for their clients. The recovery firm
enclosed a power of attorney, an exemption certificate claiming a manufacturing
exemption per Rule 3.300, and the applicable invoices on which tax as paid.
You were questioning the validity of the exemption as well as procedures for
requesting a credit.

Response: I have enclosed Rule 3.325, concerning refund procedures. See
Section (b)(2) which states that after you have refunded taxes, you may seek
reimbursement from the state per subsection (a) or take a credit on your next
return. This is done by reducing the reported taxable sales. This is all of
course, presuming that there is a valid reason for exemption for you to accept
an exemption certificate in good faith.

However, it is very difficult to determine, from the invoices submitted, what
work was actually performed. I will discuss the taxability of several charges
the invoices may represent and you can accept the certificate if a valid
exemption applies or deny the request if the services are taxable.

Moving equipment- If your firm was hired to simply move the equipment between
plants, set it in place, and hook it up to the existing electrical system, you
were providing a non taxable service. An exemption certificate was not
required to claim this exemption. I am presuming that you are not also selling
equipment to your customer.

Repairing or modifying manufacturing equipment- If your firm is repairing or
making modifications to the client's equipment that they use in manufacturing
tangible personal property for sale, the exemption certificate is valid and you
may refund the taxes. This work has been exempt since January, 1995.

Upgrading building's electrical component- If your firm is upgrading the
electrical system of a building in order for the system to handle your
customer's electrical needs as a manufacturer, the charge is taxable as
remodeling of commercial realty. See enclosed Rule 3.357. This includes
material and labor used in the remodeling.

Partial demolition of building (Job # R-2393)- The partial demolition of a
building is also taxable as remodeling per enclosed Rule 3.357.

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

If you have any questions or need more information, 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