As a Texas taxpayer, you already know that the state applies an 8.25% state sales tax to the sales of most goods and some services. However, there are several Texas sales tax exemptions, one of which applies to the manufacturing industry. According to the Texas tax code, sales and use tax exemptions apply to personal property that becomes a component of an item manufactured for sale—and any taxable services that make an item more marketable. But what exactly is exempt, and what is not?
Eligibility: Do You Qualify?
Before we cover what items are exempt, it is helpful to understand which manufacturers and processors qualify for the exemption. For example, to qualify for the manufacturing tax exemption, you must do one of the following:
- Manufacture, fabricate or process tangible personal property for sale
- Repair tangible personal property from your own inventory for rental
- Repair tangible personal property from your own inventory for sale (rebuild)
It is important to know that the manufacturing exemption does not apply to contractors or those who repair property belonging to others. That includes service providers, even if they manufacture tangible personal property for use in providing their services. Now that we have a better understanding of who is eligible, we’ll turn to the sometimes murkier issue of what is exempt.
Related Blog: Sales and Use Tax Considerations for Manufacturers
Which Items and Activities are Exempt?
So, what qualifies for the Texas sales tax exemption? We know that the exemption pertains to manufacturing purchases that are essential to the manufacturing process. To be very specific, the exemption includes any equipment or machinery that causes a physical or chemical change in a product for the purposes of selling that product. It also includes component parts for qualifying equipment.
The best way to describe what is exempt and what is not is by providing the following representative lists.
Representative Exempt Items
- Manufacturing equipment
- Services performed on the finished product to make the product more marketable
- Component parts for qualifying equipment
- Repairs to items that qualify for a manufacturing exemption
- Items that test products during the manufacturing process
- Items used in manufacturing if necessary and essential to pollution control
- Safety apparel and work clothing required by the manufacturing process, if not resold to employees, and items used in manufacturing if necessary and essential to comply with public health laws and rules
- Chemicals, catalysts and other materials used during the manufacturing process to produce a chemical or physical change, to remove impurities, or to make the product more marketable
- Packaging supplies
Representative Non-Exempt Items
- Taxable items not used in the actual manufacturing operation
- Taxable items used in research and development of new products
- Hand tools
- Intraplant transportation equipment, such as conveyors, forklifts and hydraulic lifts
- Office supplies and equipment
- Taxable items used for transportation
- Machinery and equipment used to make items for the manufacturer's use rather than for sale
- Machinery or equipment used to maintain or store the product
- Machinery, equipment, or repair parts rented or leased for less than one year.
- Machinery, equipment, materials, and supplies used incidentally in manufacturing
In addition to the exemptions available to all manufacturers, there are specific exemptions available to certain manufacturers. Examples include:
- Newspaper publishers (and printers) for pre-press equipment, machinery, and supplies
- Production companies for the purchase or rental of certain items essential to, or consumed directly in, the production of motion pictures and recordings that are sold, licensed, distributed, broadcast or otherwise exhibited
- Semiconductors manufacturers for fabrication cleanrooms and equipment
If you are not already taking advantage of the Texas manufacturing sales tax exemption, and think you may qualify, you must complete the Texas Sales and Use Tax Resale/Exemption Certificate. You also have the opportunity to request a refund from the Texas Comptroller’s office for any exempt items that were erroneously taxed, but keep in mind that the statute of limitations is 48 months.
While we have provided examples of which manufacturing activities are exempt, it is best to work with a professional to determine your eligibility for significant tax savings. Careful planning can help you take fuller advantage of the exemption to maximize savings.
For more information about the Texas manufacturing sales tax exemption, or our service offerings to help you optimize your manufacturing business, please contact Kevin Harris, CPA, at 214-365-2473. Learn more about the Manufacturing and Distribution Services Group at Goldin Peiser & Peiser.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.