Do substation equipment items (breakers, switches, transformers, capacitor banks, regulators, relays) used to step down high-voltage electricity for distribution qualify for the manufacturing exemption?

Plain-English summary

An electric utility described its full production-and-distribution process: feed water is boiled into steam, the steam powers turbines, the turbines' generators make electricity, transformers step up the voltage for high-voltage transmission lines, the electricity reaches substations, and the substations step the voltage back down (from 69kv/138kv/230kv down to 4.16kv/13.8kv/34.5kv) before it's sent via distribution lines to end users. The substation equipment — breakers (automatically interrupt current flow on overload), switches (a manual, visible version of breakers), transformers (step voltage up or down), capacitor banks (maintain desired voltage), regulators (adjust line voltage as load changes), and relays (sense system conditions and relay corrective instructions) — sits in a confined, fenced substation area. The utility argued this equipment is an integral, necessary and essential part of manufacturing electricity, since without the substations, the high-voltage electricity leaving the power plant couldn't be sold to end users.

The Comptroller agreed: all of the listed substation equipment (breakers, switches, transformers, capacitor banks, regulators, relays) qualifies as machinery and equipment eligible for the manufacturing exemption.

Currency note: STAR annotates this 1997 letter with two related developments. First, the Texas electric industry was deregulated effective September 1, 1999 (Senate Bill 7), which split the transmission/distribution business into a separately owned Transmission & Distribution Utility (TDU), distinct from the generation/production side. STAR's editorial note explains that if a TDU sells to end-use customers, it is NOT considered a taxable service provider and may itself be eligible for certain manufacturing exemptions. Second, Tax Code § 151.318 (the manufacturing exemption statute) was overhauled effective October 1, 1999. STAR's own note states this letter's holding on the substation equipment continues to apply both before and after SB 7's passage, as long as the sale of electricity is not made to a TDU supplying an end-use customer — see Tax Code §§ 151.0101(a)(17) and 151.318(c)(5) for the current framework.

What this means for you

Electric utilities and power generation companies

Substation voltage-stepdown equipment (breakers, switches, transformers, capacitor banks, regulators, relays) can qualify for the manufacturing exemption as necessary and essential to making generated electricity marketable — but if your company structure now involves a separately owned TDU (post-1999 deregulation), check whether your specific sale is to a TDU serving end-use customers, since that fact pattern changes the analysis under the current §§ 151.0101(a)(17) and 151.318(c)(5) framework.

Accountants and tax professionals advising utilities

This 1997 letter's substantive holding on substation equipment survives the 1999 deregulation and Tax Code § 151.318 overhaul according to STAR's own annotation — but always verify current eligibility against the post-1999 statutory text directly, since the manufacturing exemption statute was substantially rewritten that year.

Common questions

Q: Does substation equipment that steps down voltage for distribution qualify for the manufacturing exemption?
A: Yes — breakers, switches, transformers, capacitor banks, regulators, and relays used for this purpose qualify as exempt manufacturing machinery and equipment.

Q: Did Texas's 1999 electricity deregulation change this holding?
A: STAR's own annotation says the holding still applies, as long as the electricity sale isn't made to a Transmission & Distribution Utility supplying an end-use customer — check §§ 151.0101(a)(17) and 151.318(c)(5) for the current rules.

Q: Can another utility rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Citations and references

Statutes:

• Tax Code § 151.0101(a)(17) (post-deregulation taxable services framework)
• Tax Code § 151.318(c)(5) (manufacturing exemption, electricity-to-TDU carve-out)

Subsequent law (post-dates this letter):

• Senate Bill 7 (76th Texas Legislature, 1999), deregulating the electric industry effective 09/01/1999
• Tax Code § 151.318 overhaul, effective 10/01/1999

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9709819L

Original ruling text

ALERT: Tax Code Section 151.318 relating to manufacturing exemptions was overhauled effective 10/01/1999. Additionally, the industry was deregulated effective 09/01/1999 which required a separate ownership of the transmission/distribution segment of the business from the production/generation segment.

September 11, 1997

Dear *****:

Thank you for writing to get our opinion on the taxability of machinery and

equipment in an electric utilities' substation.

The Electric utility generates electricity at its power facility and sells to

industrial and residential customers. You describe the production and

distribution process as follows:

• feed water is boiled to create steam

• steam powers the turbines

• turbines spin to make electricity through the generators

• voltage of the electricity is stepped up through transformers

• the electricity is sent through high voltage transmission lines to substations [Editor's note: This segment of the business is now owned by a separate Transmission & Distribution Utility (TDU) as a result of the passage of SB 7 deregulating the industry effective 09/01/1999. However if sales by the TDU are made to users other than end-use customers, the TDU is not considered a taxable service provider and may be eligible for cetain manufacturing exemptions.]

• substations step down the voltage through a series of equipment [See Editor's note above]

• the electricity is then sent via distribution lines to the end user [See Editor's note above]

The equipment at the substations consist of breakers, switches, transformers,

capacitor banks, regulators, relays, etc. The substations further process the

electricity to make it marketable for distributions to the customers. The

voltage of the electricity coming into the substations is 69kv, 138kv, or

230kv. The substations step down the voltage to 4.16kv, 13.8kv, or 34.5kv for

distribution. All the equipment is in a confined fenced area. A brief

description of the equipment is as follows:

Breakers -- interrupt the current flow by automatically opening or shutting the

line. This is done when the relay senses an overload.

Switches -- very similar to the breakers except they are manually operated

instead of automatic. The switch allows a visible open point on a circuit

unlike the breakers that may not be visible.

Transformer -- used to step-up or step-down the voltage of the electricity.

Capacitor Banks -- used for voltage control within a substation or a

distribution system. Allow for the maintenance of a desirable voltage.

Regulator -- is used to regulate the line voltage. As the load on the

distribution end changes, the voltage may rise or drop. The regulators (also

referred to as variable transformer) will adjust the voltage to the desired

lever.

Relays -- will sense conditions of the system and relay information to other

relays or distribution centers that will take corrective action. Located in

the control house of the substation.

You believe that the equipment at the substations is an integral part of the

manufacturing process. It is necessary and essential to the manufacture of the

electricity that is sold. Without the substations, the high voltage

electricity coming out of the power plants could not be sold to the end user.

Question: Does the equipment at the substation qualify for the manufacturing

exemption?

Response: The Breakers, Switches, Transformers, Capacitor banks, Regulators

and Relays located in the substation and used in the manner you describe

qualify as machinery and equipment eligible for the manufacturing exemption.

[Editor's note: This response applies to time periods prior to and after the passage of SB 7 as long as the sale of electricity is not made to a TDU supplying electricity to an end-user. See 151.0101(a)(17) and 151.318(c)(5).]

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. 3-4675. The direct line is

(512) 463-4675. You also may write to Tax Administration Division, Comptroller

of Public Accounts. My internet address is .

Sincerely,

Tom Soto

Tax Policy Division