A business stores liquid in tanks and, before selling it to final consumers, filters out impurities using a pump-and-filter system — without this filtration, the product isn't marketable. Does that filtration equipment qualify for the manufacturing exemption?

Plain-English summary

A business sells purified liquid to customers. Unprocessed liquid is stored in tanks until it's processed for sale, and before it can reach the final consumer, impurities must be removed through filtration — a pump draws the liquid through a filter to purify it. The business described this filtration step as "necessary and essential": without it, the product simply isn't marketable. The business asked whether its filtration equipment qualifies for the manufacturing exemption.

The Comptroller found the request didn't contain enough information to fully answer the question, but gave the key distinguishing test: if the client receives the liquid already in a MARKETABLE state, and is only filtering out impurities that arose from the client's OWN storage or dispensing activities — the letter specifically gives the example of moisture and contaminants picked up from underground gasoline storage tanks — then the client is properly classified as a repackager or retailer, not a manufacturer, and citing Administrative Hearing No. 34,352, that means the filtration equipment would not qualify for the manufacturing exemption. The unresolved question was whether the liquid genuinely arrives unmarketable/unfinished (which could support a manufacturing classification) or already marketable with only storage-related contamination to remove (which would not).

What this means for you

Businesses filtering, purifying, or "cleaning up" a liquid or product before final sale

The manufacturing exemption doesn't automatically apply just because filtration is "necessary and essential" to make your product marketable. The key question is whether you're filtering out contamination the PRODUCT ITSELF came with (potentially manufacturing) versus contamination that accumulated from YOUR OWN storage/handling/dispensing process (repackaging/retailing, not manufacturing).

Fuel distributors, bulk liquid handlers, and similar repackaging businesses

If your "purification" step is really about removing contaminants your own storage tanks or dispensing equipment introduced — the classic example being moisture/sediment from underground storage tanks — expect to be classified as a repackager/retailer rather than a manufacturer, which generally means your filtration equipment won't qualify for the manufacturing exemption.

Accountants and tax professionals

This letter, together with Administrative Hearing No. 34,352, is a useful reference for the repackager-vs-manufacturer line in filtration/purification scenarios — the test turns on the SOURCE of the contamination being removed (from the product itself vs. from the taxpayer's own storage/handling), not merely on whether filtration is essential to marketability.

Common questions

Q: Does filtering out impurities to make a liquid marketable automatically qualify the filtration equipment for the manufacturing exemption?
A: Not automatically — it depends on whether the contamination came from the product itself or from the taxpayer's own storage/dispensing activities.

Q: What if the contamination is from my own underground storage tanks or dispensing equipment?
A: That points toward a repackager/retailer classification (not manufacturer), per Administrative Hearing No. 34,352 — meaning the filtration equipment likely would not qualify for the manufacturing exemption.

Q: Why couldn't the Comptroller give a full answer here?
A: The request didn't include enough facts about whether the liquid arrives already marketable (repackaging) or genuinely unfinished (potentially manufacturing).

Q: Can I rely on this letter for my own filtration/purification business?
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

No specific Tax Code section or rule number was cited in this letter; it references Administrative Hearing No. 34,352 for the repackager-vs-manufacturer distinction in a similar filtration context.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9803433L

Original ruling text

March 20, 1998

Dear **:

Thank you for your letter of February 27, 1998, concerning the taxability of
equipment used to filter liquids for sale.

Scenario. Client is in the business of selling a purified liquid to its
customers. Unprocessed liquid is stored in tanks until it is processed for sale
to the final consumer. Before the liquid can be sold to the ultimate consumer,
impurities must be removed through a filtration process. The filtration is
accomplished by using a pump to draw the liquid through a filter. The purified
liquid is then sold to customers. The filtration is necessary and essential; if
the liquid does not go through this filtration process, then the product is not
marketable.

Response. Your request does not contain enough information to adequately
address your question. If your client receives the liquids in a marketable
state and is only filtering out impurities associated with their own storage or
dispensing activities (for example moisture and contaminants from underground
gasoline storage tanks), the client will be considered a repackager or retailer
instead of a manufacturer. See enclosed Administrative Hearing Number 34,352.

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