If a manufacturer generates its own electricity on-site using natural gas engine generators, does the natural gas used to make that electricity qualify for the same manufacturing sales tax exemption as purchased electricity?

Plain-English summary

A plastic injection molding company already had a sales tax exemption on its purchased electricity, backed by an engineering study showing that 95% of that electricity was used in the injection molding process. The company then planned to start generating its own electricity on-site, using natural gas engine-driven generators, instead of buying electricity from a utility. It asked the Comptroller whether the natural gas used to run those generators would also qualify for exemption.

The Comptroller confirmed it does. Texas sales tax law exempts natural gas and electricity used in processing tangible personal property for sale. Since the natural gas here is simply the fuel used to generate the electricity that powers, supplies, supports, or controls the company's already-exempt manufacturing equipment, the natural gas itself qualifies for the same exemption as the electricity it produces.

What this means for you

Manufacturers considering self-generated power

If you already qualify for the manufacturing exemption on purchased electricity (typically backed by a predominant-use engineering study), switching to self-generation with natural gas generators doesn't cost you that exemption — the natural gas fuel used to make the electricity for your exempt equipment is itself exempt.

Accountants and tax professionals

This letter treats self-generated power as functionally equivalent to purchased power for exemption purposes: what matters is the end use of the electricity (powering, supplying, supporting, or controlling exempt manufacturing equipment), not whether the utility or the taxpayer itself produces it. Keep the underlying engineering/predominant-use study current, since the exemption traces back to the equipment's actual use.

Common questions

Q: If a manufacturer generates its own electricity with natural gas generators, is the natural gas taxable?
A: No, per this letter — the natural gas qualifies for the same manufacturing exemption as the electricity it produces, as long as the electricity is used in an exempt manufacturing process.

Q: Does the manufacturer still need an engineering study?
A: The letter describes a company that already had an engineering study supporting a 95% exempt-use finding for its purchased electricity; the ruling doesn't waive that kind of documentation requirement for self-generated power.

Citations and references

No specific Tax Code section or Comptroller rule number is cited in this letter; the Comptroller applied its general manufacturing gas/electricity exemption policy to these facts.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9810909L

Original ruling text

October 21, 1998

Dear Mr. **:

Thank you for your recent letter concerning the taxability of natural gas used
by a manufacturer to produce electricity for use in its manufacturing
operations.

Scenario:

A plastic injection molding company currently has a sales tax exemption for
electricity purchases based on an engineering study that shows 95% of the
electricity is used in the injection molding process.

This company plans to produce its own electricity for use in its injection
molding process by using natural gas engine driven generators.

Question: Will the natural gas used by this company to produce the electricity
used in its injection molding process qualify for sales tax exemption? If not,
why not?

Answer: The natural gas used to generate the electricity used in the
manufacturing operation will qualify for exemption. The sales tax law exempts
natural gas and electricity used in processing tangible personal property for
sale as tangible personal property. The natural gas is used to generate
electricity that the injection molding company uses to power, supply, support
or control equipment that qualifies for exemption.

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 1-800-531-5441, extension 3-4683 if you have any
questions or need more information. The direct line is 512/463-4683. You may
also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division