In an oil refinery's crude distillation unit -- where a furnace, distillation tower, and stripper each perform one step of separating petroleum into fractions -- is the whole crude unit treated as a single item of manufacturing equipment under House Bill 3211, and which pipes, pumps, and fittings qualify for the manufacturing exemption?

Plain-English summary

A refinery asked the Comptroller a detailed set of eleven questions about how House Bill 3211's 1999 changes to the manufacturing exemption apply to a crude oil distillation unit — the equipment that separates crude oil into fractions like naphtha, kerosene, diesel, heavy fuel oil, and asphalt by heating crude in a furnace and running the resulting vapor/liquid mix up through a distillation tower with trays that collect fractions at different heights.

Is the whole crude unit one item of equipment, or several? H.B. 3211 added Sec. 151.318(f), which says an integrated group of manufacturing/processing machines that operate together to make a product (or an intermediate/preliminary product) is not treated as a single item of manufacturing equipment. So the crude unit as a whole doesn't get exemption analysis as one unit — instead, the furnace, the distillation tower, and the stripper are each their own separate single item of manufacturing equipment, since each performs its own distinct step (heating, separating, further refining).

What about the pipe connecting them? Pipe running between separate single items of equipment — like furnace-to-tower or tower-to-stripper pipe — is taxable intraplant transportation equipment, not exempt manufacturing equipment. But pipe that recycles or circulates product in a loop between one single item of equipment and its own supporting ancillary equipment (like a heat exchanger looped with the distillation tower) is exempt under Sec. 151.318(c)(1)(B), because in that case the equipment and its ancillary support operate together to perform one specific manufacturing step.

Component-part status doesn't depend on inside-vs-outside. Pipe genuinely incorporated into a single item of equipment (like piping built into a furnace) is a component part of that equipment and shares its exemption status — and pipe located physically outside the equipment isn't automatically disqualified either; it's a facts-and-circumstances question either way. But utility piping carrying something that never becomes part of the product itself (chilled water, for example) can never qualify for exemption, since only piping for the product or an intermediate/preliminary product qualifies. Pumps are exempt under Sec. 151.318(a)(4) only if they power, supply, support, or control equipment that itself qualifies for exemption — a pump's exemption isn't automatic just because it sits inside the crude unit. And valves, flanges, gaskets, and other fittings follow the same taxable/exempt treatment as the pipe or equipment they're attached to.

What this means for you

Refineries and chemical plants applying H.B. 3211's manufacturing exemption

Don't treat an entire multi-step production unit (like a crude unit) as one exempt item — break it down into the individual machines that each perform a discrete manufacturing step, and analyze the connecting pipe, pumps, and fittings separately based on what they connect, transport, and support.

Engineers/tax staff classifying plant piping

The key line is whether pipe transports the actual product (or an intermediate/preliminary version of it) versus a utility medium like chilled water that never becomes part of the product — utility piping never qualifies, no matter how essential it is to the process.

Accountants and tax professionals

One of the more detailed applications of H.B. 3211's "single item of manufacturing equipment" test seen in this corpus — useful precisely because it walks through eleven distinct sub-questions (pipe location, ancillary equipment, pump function, fittings) rather than giving one general answer.

Common questions

Q: Is an entire multi-step production unit (like a crude distillation unit) treated as one item of manufacturing equipment?
A: No — under Sec. 151.318(f), an integrated group of machines operating together is not a single item; each machine performing its own step (furnace, tower, stripper) is analyzed separately.

Q: Is pipe connecting two separate pieces of manufacturing equipment exempt?
A: No — pipe between separate single items of equipment is taxable intraplant transportation equipment.

Q: Is pipe that loops a piece of equipment together with its own supporting ancillary equipment exempt?
A: Yes, under Sec. 151.318(c)(1)(B), if the equipment and its ancillary support operate together on one specific manufacturing step.

Q: Can utility piping (like chilled water lines) ever qualify for the manufacturing exemption?
A: No — only piping that carries the product or an intermediate/preliminary product that becomes part of the product can qualify.

Q: Can I rely on this letter for my own refinery/plant equipment?
A: No. It's based on the specific facts and diagram presented and can be relied on only by the taxpayer to whom it was issued; other facts, even if similar, may produce a different result.

Citations and references

Statutes and rules:

• Texas Tax Code Section 151.318(f) (integrated group of manufacturing machines is not a single item of equipment)
• Texas Tax Code Section 151.318(c)(1)(B) (exempt piping between a single item of equipment and its supporting ancillary equipment)
• Texas Tax Code Section 151.318(a)(4) (exempt pumps powering/supplying/supporting/controlling qualifying 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/9908625L

Original ruling text

August 10, 1999

Dear ** and ****:

Thank you for your letter asking for information on House Bill 3211 and
manufacturing exemptions available to refineries.

You explained that the separation of petroleum into its various fractions takes
place in a crude distillation tower. First, crude oil is heated in a furnace.
The resulting mixture of hot vapors and liquid is pumped into the closed,
vertical distillation tower. As the vapors rise, they cool and condense at
various levels where they are caught by a number of horizontal trays. The upper
trays collect the lighter petroleum fractions, such as naphtha and kerosene.
The middle trays collect light heating oil and diesel fuel. The lower trays
collect heavy fuel oils and asphalt. You submitted a diagram illustrating the
flow of crude oil and its fractions through a crude unit and asked the
following questions:

1. Is a production unit, such as the crude unit, which performs one step in
   the manufacturing process considered a single item of manufacturing equipment?

2. If a production unit performs only one step in the manufacturing process,
   such as separation, is all pipe in such a production unit exempt as
   manufacturing equipment under H.B. 3211?

3. If the crude unit is not considered a single item of manufacturing
   equipment, are the furnace, distillation tower, stripper, etc. each considered
   a single item of manufacturing equipment?

4. If so, does this mean that pipe from the furnace to the distillation tower
   and pipe from the distillation tower to the strippers is taxable, intraplant
   transportation?

Response. There are several pieces of equipment within a crude unit that
perform specific steps in the separation process. For example, the furnace
performs the step of heating the crude oil, the distillation tower separates
the petroleum fractions, the stripper performs additional refinement, etc.

House Bill 3211 adds 151.318 (f) which states in part "An integrated group of
manufacturing and processing machines and ancillary equipment that operate
together to create or produce the product or an intermediate or preliminary
product that will become an ingredient or component part of the product is not
a single item of manufacturing equipment." Therefore, the crude unit is not a
single item of manufacturing equipment. The furnace, distillation tower,
stripper, etc. are each considered single items of manufacturing equipment.

The pipe from the furnace to the distillation tower and pipe from the
distillation tower to the strippers is taxable intraplant transportation
equipment.

5. Is the pipe that circulates crude through the furnace considered a
   component part of a single item of manufacturing equipment?

Response. You did not provide enough information to determine how the pipe
that circulates crude through the furnace is attached to or incorporated into
the furnace. If the pipe is actually incorporated into the furnace, it is a
component part of the furnace.

6. Does the finding of whether pipe is a component part of a single item of
   manufacturing equipment depend upon whether the pipe is inside or outside the
   manufacturing equipment?

Response. Pipe that is inside manufacturing equipment is generally considered
a component part of the equipment. The fact that pipe is outside the equipment
does not automatically exclude it from being considered a component part. This
is a question that must be answered based on the facts in each situation.

7. If the crude unit is not treated as a single item of manufacturing
   equipment, it appears that pipe from the distillation tower to a heat exchanger
   and back to the distillation tower would be exempt under H.B. 3211 since the
   heat exchanger is ancillary support equipment for the distillation tower. Is
   this correct?

Response. Yes. Section 151.318(c)(1)(B) exempts piping through which the
product or an intermediate or preliminary product that will become an
ingredient or component part of the product is recycled or circulated in a loop
between the single item of manufacturing equipment and the ancillary equipment
that supports only that single item of manufacturing equipment if the single
item of manufacturing equipment and the ancillary equipment operate together to
perform a specific step in the manufacturing process.

8. How is a single item of manufacturing equipment distinguished from
   ancillary support equipment?

Response. An item of manufacturing equipment is equipment that makes or causes
a physical or chemical change in the product. Ancillary support equipment
might not make or cause a physical or chemical change in the product, but it
supports a single item of manufacturing equipment and operates together with
the manufacturing equipment to perform a specific step in the manufacturing
process.

9. Under H.B. 3211, it appears that only piping that transports a product or
   an intermediate or preliminary product may qualify for exemption. Does this
   mean that utility piping that furnishes chilled water, etc. to a manufacturing
   process can never qualify for exemption if the chilled water does not become an
   ingredient or component part of the product?

Response. Correct.

10. Based upon the amendments to Tax Code Section 151.318(a)(4), it appears
    that all pumps that are part of the crude unit would be exempt. Is this
    correct?

Response. The diagram you provided is not detailed enough to address the
function of each pump in a crude unit. To qualify for the exemption provided in
Section 151.318(a)(4), a pump must be used to power, supply, support, or
control equipment that qualifies for exemption under Section (a)(2) or (5).

11. Would items such as gate valves, control valves, flanges, gaskets, and
    other fittings be treated in the same manner as the pipe to which they are
    connected?

Response. Yes.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

I hope this answers your questions satisfactorily. If you have any questions,
please call me or Kevin Koller, a tax specialist in our Sales Tax Policy
Section. His number is 800-531-5441, ext. 5-0613. You may also write to Tax
Policy Division, Comptroller of Public Accounts.

Sincerely,

Harold R. Lee
Director, Tax Administration