Is installing propane piping and equipment for a meat smoker and water heater in a food-processing plant taxable, and does a water heater used for both smoker humidification and equipment wash-down qualify for the manufacturing exemption?

Plain-English summary

A meat-processing company added a large propane-fired smoker and a propane water heater to a new building addition. The Comptroller addressed two separate work orders.

Smoker installation (Work Order #4531): running propane piping (underground line to the building, up the wall, hanging from the ceiling to the smoker), regulators (stepping tank pressure down in two stages), and a flex connector to power the smoker's burners. The materials are taxable, but the labor to install this equipment counts as new construction and is not taxable.

Water heater installation (Work Order #4718): additional piping to a new propane water heater used two ways -- providing water mist to humidify the smoker (reducing meat shrinkage during processing) and washing down processing equipment. The piping/vent/installation materials are taxable. The water heater itself is a genuine dual-use item: the portion of its use that humidifies the smoker qualifies for the manufacturing equipment exemption (it's part of the actual food-processing operation), but using it to wash down equipment is a separate, taxable use. The company can accept a manufacturing exemption certificate for the water heater up front, but must then self-accrue and pay sales tax on the fair market rental value of the heater for the time it's used in the taxable (wash-down) manner -- the "divergent use" accrual mechanism under Rule 3.287(e).

What this means for you

Food processors installing utility equipment (smokers, water heaters, piping)

Materials used to connect and power processing equipment are generally taxable even when the installation labor (as new construction) is not -- track materials and labor charges separately on your invoices.

Anyone buying equipment used for BOTH a manufacturing purpose AND a non-manufacturing purpose

A single piece of equipment can be part-exempt, part-taxable based on how it's actually used over time. You can still accept an exemption certificate up front, but you're then responsible for self-accruing tax on the fair market rental value for the portion of time the equipment serves a non-exempt use.

Contractors billing installation work for manufacturers

Separately state materials and labor -- the new-construction labor exemption applies regardless of whether the connected equipment itself is taxable or exempt.

Common questions

Q: Is the labor to install piping and equipment for a new smoker taxable?
A: No, per this letter -- it's treated as new construction labor, which is not taxable (though the materials themselves are).

Q: If a water heater is used for both an exempt manufacturing purpose and a taxable purpose, is it fully exempt or fully taxable?
A: Neither -- per this letter, it splits: the manufacturing-use portion is exempt, and the company must self-accrue tax on the fair market rental value for time used in the taxable (non-manufacturing) manner.

Q: Can I accept an exemption certificate for equipment I know will have some non-exempt use?
A: Yes, per this letter -- but you (the buyer) then owe use tax on the fair market rental value for the divergent, taxable use period, under Rule 3.287(e).

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.287(e) (exemption certificates -- divergent-use accrual)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911875L

Original ruling text

November 9, 1999

Dear **:

Thank you for your recent letter concerning the taxability of labor and
materials used in performing work at ** (COMPANY A).

Both the smoker and the water heater where installed in a new addition to an
existing building, that COMPANY A added approximately the same time you did the
installations.

Description of Transaction:

Work Order #4531 (12/29/97): COMPANY A installed a large smoker in order to
smoke meats that they process and sell. Your work order was for labor and
materials to install piping from yard line (pipe in ground from tank to
building, installed previously) to smoker and final connection to the smoker,
pressure test system. The materials listed allow propane to flow to the burners
in the smoker to create heat in the smoker. The pipe was installed up the
outside wall, enters the building near ceiling height, and then hangs from the
ceiling to the smoker. The flex connector is the transition piece from the
ridge pipe to the smoker connection. The first stage regulator reduces the
propane tank pressure from 200 psi to 50 psi and the second stage regulator
reduces the 50 psi to the 6.5 ounces pressure required at the smoker.

Response: The piping installed underground from the propane tank to the pipe
hanging from the ceiling, regulator reducers, a flex connector, and the other
materials used in the installation are taxable. The labor to install this
equipment is considered new construction and is not taxable.

Description of Transaction:

Work Order #4718 dated 04/14/98): This work order is to run more piping from
where gas enters building to new propane water heater provided by you. The
water heater is used by COMPANY A to wash down equipment and provides water
mist to humidify the smoker (reduces meat shrinkage). This work order is to run
more piping from where gas enters building to new propane water heater provided
by us. The water heater is used by COMPANY A to wash down equipment and
provides water mist to humidify the smoker (reduces meat shrinkage).

Response: The separately stated charge for the piping, vent and materials used
in the installation are taxable. The separately stated charge for the water
heater qualifies for the manufacturing equipment exemption to the extent hot
water is used to humidify the smoker.

Use of the water heater to wash down equipment is a taxable use. You may accept
an exemption certificate for the water heater. COMPANY A is responsible for
accruing and paying sales tax on the fair market rental value of the water
heater for the period of time it is used in a divergent manner (washing down
equipment). See Rule 3.287(e) concerning exemption certificates.

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. My direct line is 512/463-4683. You may
also write to the Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division

cc: **