Sales & Use Tax Blog

Texas Sales Tax Exemption for Manufacturing

The Texas sales tax manufacturing exemption makes purchases that are necessary and essential to the manufacturing process non-taxable.  Under the general heading of the Texas sales tax exemption for manufacturing, there are a number of subcategories of purchases which are designated as taxable or non-taxable by the Texas Comptroller’s Office.  A manufacturer, as Texas defines, is a taxpayer who manufactures, fabricates or processes tangible personal property for sale. Texas Administrative Code 3.300 explains in detail what items specifically are exempt from sales tax and which items are not.  This list is not intended to be exhaustive, but does provide taxpayers solid guidance about what may and may not qualify for the Texas sales tax exemption for manufacturing.

Exempt Items per the Texas sales tax exemption for manufacturing:

    • Ingredient or component tangible personal property that becomes a part of the final manufactured product
    • Items that are directly used or consumed during the manufacturing process if the use or consumption is necessary or essential to the manufacturing process
    • Services performed on the finished product to make the product more marketable
    • Actuators, steam production equipment, cooling towers, generators, heat exchangers, transformers, boilers, and power related accessories
    • Items consumed in the manufacturing process necessary and essential to pollution control
    • Lubricants, chemicals, gases or liquids that are necessary and essential to keep manufacturing equipment operational
    • Gases used to protect the raw material or finished product or to avoid hazardous or environmentally damaging situations
    • Items used that are necessary and essential for quality control or testing of the product
    • Safety apparel worn by employees (provided that the apparel is not sold to the employees by the taxpayer and that the manufacturing process would not be possible without the use of such apparel)
    • Items used to reduce, recycle, and treat water
    • Gas and electricity used directly in manufacturing
    • Labor charges for repair and maintenance
    • Packaging supplies
    • Display products provided they are used only for demonstration or display
    • Piping and conveyor systems for manufacturing equipment that are housed within a single machine or phase of production
    • Semiconductor fabrication and pharmaceutical biotechnology cleanrooms, equipment and associated materials to maintain such cleanrooms
 

Taxable Items per the Texas sales tax exemption for manufacturing:

    • Material handling equipment including conveyors, forklifts and cranes
    • Janitorial supplies
    • Hand tools
    • Office supplies and equipment
    • Machinery, equipment or repair parts that are rented or leased for less than one year
    • Machinery and equipment used to maintain or store tangible personal property
    • Items used in the transmission or distribution or electricity
 

What is Divergent Use?

There is also an interesting exemption for divergent use. Divergent use is the use of property in a manner other than the way in which made that property exempt. After the 4th anniversary of the property being used, it is exempt no matter what capacity the property is being used in. For any month prior, exempt property being used in a nonexempt way is taxed at 1/48 of the purchase price times the percentage of divergent use during that month times the tax rate applicable at the time of purchase.  This way a small tax is assessed to the property for not being used in an exempt manner. Once the property has been purchased for more than 4 years though it is completely exempt no matter how it has previously been used.  For example, a thermometer can have divergent use depending on what items’ temperature it is measuring.

Texas Manufacturing Exemption Certificate

In order to take advantage of the Texas sales tax exemption for manufacturing, taxpayers need to fill out and complete the Texas Sales and Use Tax Resale/Exemption Certificate (Form 01-339) and send to their vendors. The first page is the resale certificate which is needed for cost of goods sold items that are purchased and resold as part of the finished product. The second page is the exemption certificate which is needed for manufacturing machinery, equipment and repair parts. Once the vendor has this form on file a taxpayer’s account may be set up as tax exempt moving forward.

Request a Refund from the Texas Comptroller’s Office

Manufacturers can also request a refund from the Texas Comptroller’s Office on exempt items which were taxed in error prior to establishing the Texas sales tax exemption for manufacturing with their vendors or suppliers. The statute of limitations for filing sales tax refunds in Texas is 48 months. In order file such a claim, a manufacturer will need to send in a refund claim into the Texas Comptroller’s Office at refundreq.revacct@cpa.texas.gov that specifically states in writing the basis for the refund claim.

Taxpayers who do not have a valid 11-digit Texas Comptroller’s Taxpayer Number will also need to include Texas Assignment of Right to Refunds (Form 00-985). The assignment of right to refund form needs to be signed by each and every vendor included in the refund claim. The form is needed to verify that tax was collected and remitted back to the state and to allow the Texas Comptroller to refund the manufacturer directly without going through the vendor. Once the claim has been reviewed, it will be approved, denied or deemed incomplete. For incomplete claims the Comptroller will notify the tax payer of additional information required, but the statute of limitations will not be tolled until all required information has been provided. Any denied claims can be contested by requesting a refund hearing within 60 days of receipt of the denial letter.

Reach Out to Us with Questions

As with all sales and use tax research, the specifics of each case need to be considered when determining taxability. Additional advice from Agile Consulting Group’s sales tax consultants can be found on our page summarizing Texas sales and use tax exemptions. If you have questions, comments or would like to discuss the specific circumstances you are encountering regarding this particular issue or any other sales and use tax issue, please contact our sales tax consultants at (888) 350-4TAX (4829) or via email at info@salesandusetax.com.

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