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
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?
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?
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.
Harold R. Lee
Director, Tax Administration.