Can a warehouse get a refund of tax on the electricity it uses to refrigerate and store already-finished products, based on a predominant-use exemption certificate claiming the electricity is used in manufacturing/processing?

Plain-English summary

A city forwarded a taxpayer's exemption-and-refund request on behalf of a client claiming that 57.25% of a warehouse facility's electricity use qualified as manufacturing/processing under a predominant-use exemption certificate.

The Comptroller declined to bless the refund. The reasoning: warehouses generally provide a storage commodity or service rather than sell tangible personal property, so their electricity generally isn't exempt manufacturing-use electricity in the first place -- though the Comptroller acknowledged that some manufacturing, processing, or fabricating activity might genuinely occur at a given facility, in which case the electricity supporting that specific activity could still qualify based on predominant use.

The key rule doing the work here is Rule 3.295(a)(7), which excludes from the definition of "processing" any action taken to prolong the life of tangible personal property or to prevent deterioration of property already held for sale. Using electricity to preserve, store, or prevent deterioration of products -- even by running refrigeration equipment that lowers the temperature of finished products (manufactured and packaged by someone else) -- is not an exempt processing use.

The Comptroller was explicit about wanting to head off a recurring misunderstanding: under Rules 3.295 and 3.300, manufacturing of tangible personal property is complete once the product has the physical properties (including packaging, if any) it will have when the manufacturer transfers it to someone else. Anything after that point -- maintaining the product's condition, preventing deterioration -- is not part of the manufacturing process, no matter how essential refrigeration might be to keeping the product sellable. Any electricity used to cool already-finished products should be treated as taxable in a utility usage study.

What this means for you

Warehouse and cold-storage facility operators

Don't assume refrigeration electricity qualifies for the manufacturing exemption just because it's "processing" in a colloquial sense. Once a product is finished and packaged, cooling/storing it is preservation, not manufacturing -- and preservation-use electricity is taxable, even on a predominant-use exemption certificate.

Businesses that both manufacture AND warehouse on the same site

The manufacturing exemption can still apply to electricity genuinely used in production, fabrication, or processing activities happening at your facility -- the issue in this letter was specifically about electricity used for cold storage of already-finished goods, not a blanket denial of all warehouse-adjacent manufacturing exemptions.

Accountants and tax professionals conducting utility predominant-use studies

This is a clear, citable statement of where manufacturing "ends" for exemption purposes (physical properties/packaging fixed at transfer) -- useful when pushing back on overbroad predominant-use exemption certificates that lump post-production refrigeration/storage electricity in with genuine production electricity.

Common questions

Q: Is electricity used to refrigerate finished products in a warehouse exempt as manufacturing/processing?
A: No. Rule 3.295(a)(7) specifically excludes preservation/anti-deterioration uses from the definition of processing.

Q: When does "manufacturing" end for exemption purposes?
A: When the product has the physical properties (including packaging) it will have when transferred by the manufacturer to another party -- everything after that is preservation, not manufacturing.

Q: Can a warehouse ever claim the manufacturing exemption?
A: Yes, if genuine manufacturing, processing, or fabricating activity occurs there -- the electricity supporting that specific activity may qualify based on predominant use, but general storage/refrigeration electricity does not.

Q: Can I rely on this letter for my own facility?
A: No. It is based on the specific facts presented and can only be relied on by the taxpayer to whom it was issued.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.295(a)(7) (definition of processing; predominant use)
• 34 Tex. Admin. Code Rule 3.300 (manufacturing exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9905486L

Original ruling text

May 27, 1999

Dear **:

The City of ** forwarded the exemption and refund request that you
submitted on behalf of your client, * located at ***.

The exemption certificate claims that the predominant use (57.25%) of the
electricity is used in manufacturing, processing, or fabricating tangible
personal property for sale.

We cannot advise the City of ** to issue a refund because warehouses
generally provide a commodity or service rather than sell tangible personal
property. There may be those instances where some manufacturing, processing or
fabricating activities do occur in these facilities. In those cases, the
electricity may qualify based on predominant use.

Rule 3.295(a)(7) excludes from the definition of "processing" any action taken
to prolong the life of tangible personal property or to prevent a deterioration
of the tangible personal property being held for sale. Use of electricity by a
person to preserve, store or prevent the deterioration of products held for
sale is not an exempt processing use, even if the electricity is used to
operate refrigeration equipment that lowers the temperature of finished
products (products manufactured and packaged by others).

There clearly appears to be a misunderstanding about the use of electricity to
lower the temperature of various products. To prevent any future
misunderstanding, we want to clarify that electricity used to lower the
temperature of finished products is not exempt. Under Rules 3.295 and 3.300,
manufacturing of tangible personal property is complete when it has the
physical properties, including packaging, if any, that it has when transferred
by the manufacturer to another. Maintaining the life of tangible personal
property or preventing its deterioration after production has been completed is
not a part of the manufacturing process. Please note that any electricity used
to lower the temperature of finished products should be considered taxable when
computing utility usage studies.

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, 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 Policy Division

cc: **
Customer Service Department
City of ****

Audit Division