9609L1435A12 [Tax Type: Sales] [Document Type: Letter/Memo]

STAR System Disclaimer - Important information for STAR System users!

System Disclaimer The Comptroller of Public Accounts maintains the STAR system as a public service. STAR provides access to a variety of document types that may be useful in researching Texas tax law and tax policy. Documents which provide the Comptroller's interpretation of the tax laws are accurate for the time periods and facts presented in the documents. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued. Documents on STAR that no longer represent current policy may be completely or partially superseded, but there is no assurance that a document on STAR represents current policy even if it has not been marked as superseded.

Tax laws are complex and subject to change. Interpretations of the laws may be affected by administrative hearings, court opinions, attorney general opinions and similar authorities. STAR is a research tool, not a substitute for legal advice. If there is a conflict between the law and the information found on STAR, any decisions will be based on the law.

Print This Document


Texas Comptroller of Public Accounts STAR System


September 3, 1996


Dear **************:

This is in response to your request for a ruling oil field equipment that 
qualifes for the manufacturing exemption and the necessary steps to apply for
the sales tax exemption.

Response:  In general, machinery or equipment will qualify for exemption if
used directly in  processing oil or gas that will be resold, or if it is 
required by law or regulation to control pollution that results directly 
from the activity of processing oil or gas that will be resold.  
Replacement parts  for and labor to repair qualifying machinery or 
equipment also qualify for exemption. Based on previous inquiries, we 
have developed the following guidelines regarding the oil and gas industry:

* Compressors in the field that are used to increase the pressure of the 
gas stream to get it to the plant are considered transportation equipment, 
not processing equipment, and therefore they do not qualify.  However,  
compression equipment necessary for the operation of field dehydrators, 
heater treaters, separators and scrubbers are considered processing 
equipment, as are these individual pieces of equipment.  Therefore, they 

* The following items will qualify for exemption as processing equipment 
provided that you issue a properly completed exemption certificate to the 
vendor citing the exemption for manufacturing equipment:

gun barrel
weighted float
heater treater
water knockout

* Storage tanks, knee brackets, stairways and walkways for storage tanks 
do not qualify.   

Effective January 1, 1995, a manufacturer may claim an exemption from 
state and local taxes when buying machinery and equipment necessary and 
essential to and used directly in manufacturing, processing or fabricating 
or repairing or rebuilding products that will be sold, including air 
compressors used to run manufacturing equipment. That means a manufacturer 
may also claim an exemption on taxable services, such as maintenance, 
repair, restoration or remodeling of the exempt equipment. 

To claim the exemption, the manufacturer must give the seller or service 
provider a completed  exemption certificate stating that the equipment will 
be used in manufacturing products for sale. 

A manufacturer that paid tax in error on manufacturing equipment, may go 
back to the equipment supplier for a tax refund. The manufacturer should 
give the supplier a completed exemption certificate claiming the exemption.
When the supplier has refunded the tax to the manufacturer, the supplier may
then apply for a refund of the tax from the Comptroller or adjust its 
taxable sales to reflect the price of the equipment on which the tax was 

Machinery or equipment purchased on or after January 1, 1995 and on which 
the full sales tax exemption is claimed, is subject to tax on either the 
fair market rental value or on the full purchase price when the equipment 
is used for any purpose other than manufacturing. Machinery and equipment 
purchased between January 1, 1990 and December 31, 1994, and on which the 
reduced tax was paid, must be used primarily or predominantly in the 
manufacturing process.  For equipment purchased prior to January 1, 1995, 
no additional tax is due on a divergent use provided the divergent use is 
less than 50 percent of the overall use.  

* Once installed as a permanent improvement to realty, the machinery or 
equipment is no longer tangible personal property; it is real property.
The exemption I mentioned earlier for repair, remodeling or restoration 
services does not extend to services performed on realty. 

This opinion is based on the facts presented.  Other facts though similar
may provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502.  The 
direct line is 512/463-4502.  You may also write to Tax Policy Division, 
Comptroller of Public Accounts. My Internet address is: 


Gilbert Zamora
Tax Policy Division  

NOTE: Previous Accession Number 9609654L

DATE:  09/03/1996

Privacy and Security policy | Accessibility policy