November 22, 1999
FOR IMMEDIATE RELEASE
Texas Comptroller Issues Interpretation for Exemption for Piping.
COMPTROLLER OF PUBLIC ACCOUNTS
P.O. BOX 13528
AUSTIN, TX 78711-3528
Carole Keeton Rylander
August 10, 1999
G.Brint Ryan
Ryan & Company
Three Galleria Tower
13155 Noel Road
12th Floor, LB 72
Dallas, Texas 75240-5090
Dear Brint,
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 extension 5-0613. You may also write
to Tax Policy division, Comptroller of Public Accounts.
Sincerely,
Harold R. Lee
Director, Tax Administration.
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