SECTION 3.362. Labor Relating to Increasing Capacity in a Production Unit in a Petrochemical Refinery or Chemical Plant

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Allied chemical product--A consumer or end-user product manufactured from basic or intermediate chemicals. Examples include drugs, soaps, detergents, paints and agricultural chemical formulations.

(2) Basic or intermediate chemical--Basic chemicals are the initial building blocks or raw materials that are processed and combined to manufacture intermediate chemicals. Intermediate chemicals are products that are manufactured from basic chemicals and other intermediate chemicals and are manufactured into finished chemical products. Examples of basic chemicals include alkalies, chlorine, nitrogen, sulfur, benzene, ethylene, propylene methane, and sodium carbonate. Examples of intermediate chemicals include synthetic fibers, polymers, resins, elastomers, dyes, and pigments.

(3) Chemical plant--

(A) A facility that in a single continuous operation or using a batch processing method manufactures a basic or an intermediate chemical.

(B) A chemical plant may be either a single facility existing by itself or a facility within a chemical plant complex consisting of a number of separate chemical plants each of which produces a single basic or intermediate chemical product. A chemical plant complex may include any combination of distinct facilities that manufacture basic chemicals, intermediate chemicals, or allied chemical products. In a chemical plant complex, each facility is considered individually to determine whether it qualifies as a chemical plant.

(C) The term does not include:

(i) a facility that manufactures "allied chemical products"; or

(ii) a facility, other than one that produces a basic or an intermediate chemical, that generates any chemical as a waste product or a by-product.

(4) Crude oil--A mixture of hydrocarbons that exists in liquid phase in underground reservoirs and remains liquid at atmospheric pressure after passing through surface-separating facilities. The term includes liquid condensate and liquid hydrocarbons produced from tar sands, gilsonite, and oil shale. Drip gases are also included, but topped crude oil (residual oil) and other unfinished oils are excluded. Liquids produced at natural gas processing plants and mixed with crude oil are likewise excluded where identifiable.

(5) Increased capacity--

(A) Increasing the capability of the manufacturing or processing production unit to produce:

(i) more of the same product measured by units per hour or units per year; or

(ii) a new product.

(B) Increasing a unit's capability to produce more of an existing product and less of another existing product is not increasing the unit's capacity unless the overall production unit capability is increased. For example, if a production unit that produces 50 units of product X and 50 units of product Y is modified so that it produces 60 units of product X and 40 units of product Y, the production unit's capacity has not been increased.

(6) Manufacturing or processing production unit--A group of manufacturing and processing machines and ancillary equipment that together are necessary to create or produce a physical or chemical change beginning with the first processing of the raw material and ending with a finished product. Examples of such equipment include reactors, distillation columns, catalytic crackers, fractionators, or other primary process equipment, and ancillary equipment such as heat exchangers, cooling towers, computer control units, piping, valves, and actuators. Another example of ancillary equipment is quality control equipment that is used during the manufacturing process, but not equipment used to test products before the process begins or after it is completed. The production unit does not include maintenance equipment; research and development laboratory equipment; waste handling or treatment equipment; equipment for the storage of feedstock, catalysts, or finished products; loading and unloading equipment; or any other equipment that is not used in the actual processing or manufacturing operation.

(7) New product--A product that has different product properties and a different commercial application than the product previously manufactured or processed by that production unit. Examples of new products include chlorine produced from sodium chloride; styrene from benzene; aqueous hydrogen chloride (HCl) from anhydrous HCl; and soft polyethylene from hard polyethylene if the soft polyethylene is used to manufacture different end products than the hard polyethylene. Producing gasoline with a 91-octane rating instead of an 89-octane rating for use in motor vehicle engines is not producing a new product. Changes caused by straining or purifying an existing product or cosmetic changes such as adding or removing color or odor to or from an existing product will not create a new product. For example, the manufacture of a different grade of the same product, such as technical sulfuric acid which is colored and contains impurities and anhydrous 100% sulfuric acid which is colorless and odorless, does not qualify one as a new or different product from the other.

(8) Petrochemical refinery--A facility that manufactures finished petroleum products from crude oil, unfinished oils, natural gas liquids, other hydrocarbons, and oxygenates. Products of these refineries include gasoline, diesel, kerosene, distillate fuel oils, liquefied petroleum gas (LPG), residual fuel oils, lubricants, and other products refined through alkylation, coking, cracking, dewaxing, desulphurization, distillation, hydrotreating, isomerization, polymerization, or other chemical processes. These facilities also produce petrochemical feedstock for use by chemical plants. The term does not include facilities at an oil or gas lease site that remove water or other impurities and merely make the product more marketable.

(b) Tax responsibilities of persons who make improvements to a manufacturing or processing production unit of a petrochemical refinery or chemical plant.

(1) Persons who repair, remodel, restore, or modify a manufacturing or processing production unit of a petrochemical refinery or chemical plant to increase the capacity in the production unit are not performing a taxable real property repair and remodeling service. Such persons are governed by the provisions of §3.291 of this title (relating to Contractors).

(A) Contractors performing lump-sum contracts as defined in §3.291 of this title (relating to Contractors) are consumers of all materials, consumable items, and equipment used or incorporated into a customer's property. As a consumer, a contractor must pay tax to on all such all materials, consumable items, and equipment. See §3.291 of this title (relating to Contractors) for more information on lump-sum contracts. Contractors performing lump-sum contracts for persons having direct payment permits may not accept a direct payment exemption certificate from those persons. When performing lump-sum contracts for a direct payment permit holder, the contractor must pay sales tax to the supplier or accrue and remit sales tax on incorporated materials removed from a tax-free inventory for incorporation into the direct payment permit holder's realty. Direct payment permit holders cannot authorize the contractor or any other person to purchase any taxable item using their permit. See §3.288 of this title (relating to Direct Payment Procedures and Qualifications).

(B) Contractors performing separated contracts as defined in §3.291 of this title (relating to Contractors) are considered retailers of all materials physically incorporated into the realty being improved. As a retailer, a contractor must collect tax from the customer based upon the agreed contract price of the incorporated materials. See §3.291 of this title (relating to Contractors) for more information on separated contracts. Contractors performing separated contracts for persons having direct payment permits may accept a direct payment exemption certificate from those persons in lieu of tax for all tangible personal property incorporated into customer's realty. A direct payment exemption certificate may not be accepted for tax liability incurred by the contractor on machinery or equipment rented or leased by the contractor and used in the performance of the contract. See §3.288 of this title (relating to Direct Payment Procedures and Qualifications).

(2) Repairs, remodeling, restorations, or modifications other than to the processing production unit or that do not increase the capacity of the processing production unit are governed by the provisions of §3.357 of this title (relating to Labor Relating to Nonresidential Real Property Repair, Remodeling Restoration, Maintenance, New Construction, and Residential Property).

(3) Persons who perform repair, remodeling, maintenance, or restoration services on tangible personal property are governed by the provisions of §3.292 of this title (relating to Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property). These services may be exempt under the Tax Code, §151.3111, that exempts services performed on tangible personal property if the property is exempt because of the nature of the property, its use, or a combination of its nature and its use.

(4) Where increased capacity improvements and taxable services are sold or purchased for a single charge and the portion relating to taxable services represents more than 5.0% of the total charge, the total charge is presumed to be taxable. The presumption may be overcome by the service provider at the time the transaction occurs by separately stating to the customer a reasonable charge for the taxable services. However, if the charge for the taxable portion of the services is not separately stated at the time of the transaction, the service provider or the purchaser may later establish for the comptroller, through documentary evidence, the percentage of the total charge that relates to nontaxable unrelated services. Examples of acceptable documentation include written contracts detailing the scope of work, bid sheets, tally sheets, schedules of values, and blueprints.

(5) When both increased capacity improvements and taxable services are being performed under the same contract, the parties to the contract should separately identify taxable from nontaxable labor in a contract and the charges applicable to each or the entire contract will be presumed to be for taxable services. Documentation which clearly defines the work being performed should be retained by both parties to show that had the increased capacity improvements and taxable services been done independently of each other, the cost of each would be reasonably near the allocation of charges. Examples of acceptable documentation include written contracts which detail the scope of work, bid sheets, tally sheets, schedules of values, and blueprints. If there is not a written contract signed by both parties clearly showing agreement as to the taxable and nontaxable work being performed, the customer and the service provider must prepare, at the time of the transaction, a written certification verifying the allocation of charges for increased capacity improvements and taxable services. The comptroller may recalculate the charges if the allocation appears unreasonable and either party may be held responsible for the additional tax due.

(6) A service provider's customer must be able to substantiate by way of documentary evidence that repair, remodeling, restoration, or modification services performed on a production unit increase the unit's capacity as defined in subsection (a)(5) of this section. If the person performing the service does not have the certification set out in paragraph (5) of this subsection, the service provider must presume that the service is taxable and collect tax. If the service provider's customer has documentation to prove that the labor increases the capacity of a production unit, the customer may issue an exemption certificate in lieu of paying tax to the service provider. The certificate must state that the labor increases the production unit's capacity as defined in subsection (a)(5) of this section, and that the customer will be liable for any additional tax due in the event that it is determined that taxable services were performed. A service provider who accepts such a certificate should follow the guidelines set out in paragraph (1) of this subsection and §3.291 of this title (relating to Contractors).

Source Note: The provisions of this §3.362 adopted to be effective April 3, 1996, 21 TexReg 2473.