The Texas Comptroller ruled that the purchase of a battery system did not qualify for the manufacturing exemption from Texas sales and use taxes because it was used to store electricity, not manufacture it. The taxpayer operated a wind farm and began a project to participate in the Electric Reliability Council of Texas’ Fast-Responding Regulation Service (FRRS). Each participant in the FRRS was required to make energy available on demand. To do this, the taxpayer needed a battery system, which could store and maintain the electricity so it would be available and ready for distribution.
The taxpayer argued that its purchase of the battery system qualified for the manufacturing exemption – which is available for items directly used or consumed during manufacturing of tangible personal property (such as electricity) if the use or consumption is necessary for the manufacturing operation and makes or causes a chemical or physical change to the property being manufactured. The taxpayer argued that the exemption applied because the energy underwent a chemical change when the battery converted the direct current energy from the wind farm from electrical energy to chemical energy and, upon discharge, converted the chemical energy to direct current electrical energy. However, the Comptroller disagreed and ruled that the chemical change was done for storing manufactured electricity, not to manufacture electricity, and the manufacturing exemption specifically excludes property used to maintain or store tangible personal property.