A refined sugar producer built three large 'conditioning silos' that dehumidify sugar as a final processing step before packaging. Sugar cycles through silo #1 for 24-36 hours, then may go on to silo #2 or #3 for additional, variable-length dehumidification. Do all three silos qualify for Texas's manufacturing equipment exemption?

Plain-English summary

A refined sugar producer built three 150-foot "conditioning silos" as part of its manufacturing process. Fresh sugar, still hot from granulating and holding unacceptable moisture, cycles through silo #1 for 24-36 hours while cool dehumidified air flows up through the bed of sugar, exchanging heat and moisture. After silo #1, the sugar may return to the refinery or continue into silo #2 or #3 for additional dehumidification (at variable dwell times, with half the airflow of silo #1). This final dehumidification isn't meant to preserve the sugar or prevent deterioration — it's the last step needed to produce a free-flowing, packageable product. The taxpayer asked whether all three silos qualify for Texas's manufacturing equipment exemption.

The Comptroller applied House Bill 1855's 1997 amendment, which limits the manufacturing exemption to property used DIRECTLY in the process that causes a chemical or physical change in the product (or an intermediate product that becomes part of it) — mere necessity/essentialness to the process isn't enough, and the amendment specifically excludes intraplant transportation equipment and equipment/supplies used to maintain or STORE tangible personal property.

Silo #1 qualifies for exemption (assuming it's treated as a single piece of manufacturing equipment, not a structure housing equipment, and its components — not the foundation — aren't installed under a lump-sum realty-improvement contract), because it's used consistently and for a set time period purely for manufacturing, not storage.

Silos #2 and #3 are murkier, and the taxpayer bears the burden of proving they're not excluded as storage/maintenance equipment. Three possible scenarios, each with a different outcome: (1) if the sugar is already a complete, packageable product right after silo #1, then using silos #2/#3 afterward is just taxable maintenance/storage of a finished product; (2) if the product is tested after silo #1 and sent to #2/#3 for genuinely additional dehumidification for a variable period determined by that testing, those silos count as processing too, just like silo #1; (3) if the product is tested and sent to the other silos for additional dehumidification, but then just sits there to maintain that processed state after the actual manufacturing is complete, that's taxable "divergent use," even though real manufacturing happened earlier.

What this means for you

Manufacturers with multi-stage equipment where later stages are ambiguous (processing vs. storage)

The manufacturing exemption's post-HB-1855 direct-causation requirement means every piece of equipment in your process needs its own purpose analysis — equipment further down the chain that LOOKS like it's still processing may actually be storage/maintenance if the product is already complete and marketable by that point.

Businesses relying on multi-vessel or multi-stage systems (silos, tanks, dryers in series)

Document what triggers movement between stages (a fixed time period vs. a quality test result) and what condition the product is in at each stage — that documentation is what will let you prove (or disprove) that later-stage equipment is still "processing" rather than "storing/maintaining" an already-finished product.

Accountants and tax professionals evaluating post-HB-1855 manufacturing exemption claims

This letter is a clear illustration of the "divergent use" doctrine: manufacturing can genuinely occur in part of a system, while a later or continued stage of that SAME system is separately taxable because its function has shifted to storage/maintenance once the product is already complete.

Common questions

Q: Does the first-stage silo in this sugar-conditioning process qualify for the manufacturing exemption?
A: Yes — assuming it's a single piece of manufacturing equipment (not a housing structure) used for a set period purely for manufacturing, not storage.

Q: Do the second and third-stage silos automatically qualify the same way?
A: Not automatically — it depends on whether the product is already complete/packageable after the first silo (taxable storage if so) or genuinely still being processed based on test results (exempt if so), or whether it just sits to maintain a finished state (taxable divergent use).

Q: Who has to prove the silos qualify for the exemption?
A: The taxpayer — House Bill 1855 requires the taxpayer claiming the exemption to prove the purchase qualifies and isn't specifically excluded.

Q: Can I rely on this letter for my own multi-stage manufacturing equipment?
A: No. It's based on the facts presented, and the letter notes the opinion may change on additional or different facts.

Citations and references

• House Bill 1855 (1997), amending the Tax Code's manufacturing exemption effective October 1, 1997, to require direct causation of a chemical/physical change and to exclude storage/maintenance equipment

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9803327L

Original ruling text

March 20, 1998

Dear **:

Thank you for your letter of March 6, 1998, concerning the taxability of
"conditioning silos" and equipment used in the manufacturing of refined sugar.

Stipulated Facts: Your client is a producer and marketer of refined sugar.
The client has begun construction of three 150 foot "refined sugar conditioning
silos." The silos are used to condition the sugar to a point that the sugar
can be packaged. This process consists of exposing the sugar to a system of
dehumidification equipment as the sugar passes through the silos on its way to
being packaged. Once the sugar has been produced, dried, cooled and
conditioned for a few hours, there is still enough moisture migration to
warrant additional curing. The silos are used in this process. The
dehumidification process is not conducted for the purpose of maintaining the
life of the sugar or preventing its deterioration but is a final part of the
manufacturing process which produces the desired end result as a free flowing
product.

All fresh sugar, still hot from the granulating process and with unacceptable
levels of moisture, is cycled through silo #1 for a 24 to 36 hour period. As
the sugar flows down through the silo, cool dehumidified air flows up through
the bed of sugar. Heat and moisture is exchanged from the sugar into the
passing air. Once the silo exits from silo #1 it will either be returned to
the refinery or placed into silo #2 or #3. The dwell times in these silos are
variable and the amount of air percolated up through each of these silos is one
half that of silo #1.

Response. As you are aware, House Bill 1855, effective October 1, 1997, limits
the exemption for tangible personal property used in the manufacturing process
to property used directly in the process and that makes or causes a chemical or
physical change in the product being manufactured for sale or in an
intermediate or preliminary product that becomes a part of the product
manufactured for sale. Exemptions are not granted to equipment solely because
it is necessary and essential and used during the manufacturing process.

The amendment specifically excludes from the exemption intraplant
transportation equipment (including pipes or conveyors), used to move a product
or raw material in connection with the manufacturing process (unless the pipe
is a component part of a single piece of exempt manufacturing or pollution
control equipment ), and equipment or supplies used to maintain or store
tangible personal property.

My response presumes that each silo is a single piece of manufacturing
equipment and not a structure used to house or protect manufacturing equipment.
Silo #1 appears to be used in all cases and for a set period of time relating
only to the manufacture and not the storage or maintaining of product for sale.
As such the silo components (not including the foundation) that are not
installed under a lump-sum contract to improve, remodel, or repair realty
qualify for exemption.

The facts concerning the use of silo #2 and #3 are not as clear. The amendment
also clarified that a taxpayer claiming the manufacturing exemption must prove
that the purchase qualifies for exemption and that items purchased are not
specifically excluded from exemption. As such, your client would need to prove
that the silos are not excluded by subsection (c)(5) which states that
machinery or equipment used to maintain or store tangible personal property are
taxable.

If the product is complete after silo #1 as evidenced by the fact that sugar
can be packed after silo #1, the use of silo #2 and #3 would be seen as
maintenance of the property and therefore taxable.

If the product is tested after exiting silo #1 and enters silo #2 and #3 for
additional dehumidification for variable periods determined by the testing,
silos #2 and #3 will be considered processing like silo #1.

If the product is tested after exiting silo #1 and enters the other silos for
additional dehumidification, yet remains in the silos to maintain the product
in that state after processing (accounting for the variable dwell times),
manufacturing has occurred and the additional storage or maintenance after the
production is complete is divergent use and is taxable.

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