34 TAC §3.300
The Comptroller of Public Accounts adopts an amendment to §3.300,
concerning manufacturing; custom manufacturing; fabricating; processing, with
changes to the proposed text as published in the February 2, 2001, issue of
the
Texas Register
(26 TexReg 1109).
The amendment reflects changes made to Tax Code, §151.318, by the
legislature. The amended section limits, with certain exceptions, the exemption
for tangible personal property used in the manufacturing process to property
that makes or causes a chemical or physical change in the product being manufactured
or in an intermediate or preliminary product that becomes a part of the product
manufactured for sale. These new limitations do not apply to semiconductor
fabrication cleanrooms, pollution control equipment, and a stipulated list
of equipment used to power, supply, support or control qualifying manufacturing
equipment or pollution control equipment (such as actuators, steam production
equipment, cooling towers, transformers, pumps, compressors, computerized
control units, etc.). The amendment exempts water conservation equipment used
by manufacturers and clarifies that computer software manufacturing begins
with the design and writing of the program and includes testing or demonstration.
Comments on the proposal were received from the Texas Taxpayers and Research
Association, Clark, Thomas and Winters, and the SALT Group expressing concerns
that subsection (i) disallowed exemptions for otherwise qualifying manufacturing
equipment that is incorporated into realty as part of a lump-sum nonresidential
repair, remodeling, or restoration contract. This subsection has been modified
to state that such equipment is presumed taxable. The presumption can be rebutted
with proper documentation and a credit allowed at a later date.
Comments concerning subsection (c)(5) were received from the Texas Cotton
Ginners' Association and the SALT Group. The SALT Group felt that subsection
(c)(5) should be limited to piping. However, the statutory exclusion from
exemption for transportation equipment is not limited to pipe. The Cotton
Ginner's Association is concerned that the subsection taxes transportation
equipment even if manufacturing or processing activities occur during the
transportation. The association asserts that cotton gin drying and loading
systems have evolved over the years to incorporate processing activities into
equipment that also transports. House Bill 1855, 75th Legislature, 1997, was
in part a response to a court case that involved piping in which manufacturing
activities (mixing and pollution control) also took place. For this reason,
the subsection was not changed. However, the comptroller will review additional
information to determine if the equipment is qualifying manufacturing equipment
as opposed to transportation equipment.
Comments concerning subsection (d)(10) were received from the SALT Group.
The writer wanted frocks used in meat packing plants to be used as an example
of qualifying work clothing. Modifications were made to include specialized
clothing in the list of examples of exempt items required by law. However,
the specific example cited by the writer was not added because the statutory
requirement for the clothing could not be substantiated.
This amendment is adopted under Tax Code, §111.002, which
provides the comptroller with the authority to prescribe, adopt, and enforce
rules relating to the administration and enforcement of the provisions of
Tax Code, Title 2.
The amendment implements Senate Bills 1 and 862, and House Bill 1855, 75th
Legislature, 1997, and House Bill 3211, 76th Legislature, 1999.
§3.300.Manufacturing; Custom Manufacturing; Fabricating; Processing.
(a)
Definitions. The following words and terms, when used in
this section, shall have the following meanings, unless the context clearly
indicates otherwise.
(1)
Accessory--A machine fixture that causes the machinery
to operate in a specialized way.
(2)
Custom manufacturing--Producing tangible personal property
to the special order of the customer, e.g., tailor-made clothing, custom-made
draperies or slip-covers, or furniture made-to-order. Custom manufacturers
are manufacturers for the purpose of this section.
(3)
Display item--A manufactured item that is identical in
size and function to other items held for sale which it represents and that
is ultimately sold at retail. For example, manufacturer's apparel lines, furniture
showroom pieces, light fixture displays.
(4)
Equipment--Any apparatus, work clothing, device, or simple
machines used directly in production.
(5)
Fabrication--To make, build, create, produce, or assemble
components of tangible personal property, or to make tangible personal property
work in a new or different manner.
(6)
Hand tool--An instrument that is to be used, managed, and
powered by the hand (e.g., paint brush, trowel, hammer, screwdriver, files).
Equipment that is controlled or operated by the hand, but is moved or powered
by electricity, gas, steam, or other fuel, is not a hand tool (e.g., electric
drill, chain saw, jack hammer).
(7)
Machinery--All power-operated machines.
(8)
Manufacturer--A person who is engaged in manufacturing.
The definition includes processors, fabricators, submanufacturers, and custom
manufacturers.
(9)
Manufacturing--Each operation beginning with the first
stage in the production of tangible personal property and ending with the
completion of tangible personal property. The first production stage means
the first act of production, and it shall not include those acts in preparation
for production. For example, a lumber company that cuts trees or a manufacturer
that gathers, arranges, or sorts raw materials or inventory is preparing for
production. The first production stage for the manufacturing of software is
the design and writing of the code or program, and manufacturing includes
the testing or demonstration of the software. Manufacturing includes the repair
or rebuilding of tangible personal property that the manufacturer owns for
the purpose of being sold, but does not include the repair or rebuilding of
property that belongs to another.
(A)
Completion of production means the tangible personal property
has all the physical properties, including packaging, if any, that it has
when transferred by the manufacturer to another. For example, a manufacturer
of raw rubber has completed production when the raw rubber is ready to be
transferred to a manufacturer of rubber goods.
(B)
Processing and fabrication are two activities that are
performed during manufacturing. For example, the person who takes raw steel
and makes pipe is engaged in fabrication. The workers who coat or thread the
pipe are engaged in processing.
(10)
Processing--The physical application of the materials
and labor necessary to modify or to change the characteristics of tangible
personal property. The repair of tangible personal property, belonging to
another, by restoring it to its original condition is not considered processing
of that property. The mere packing, unpacking, or shelving of a product to
be sold will not be considered to be processing of that property. Processing
does not include remodeling.
(11)
Remodeling--To make tangible personal property belonging
to another over again, in a similar but different way, or to change the style,
shape, or form, without causing a loss of its identity, or without causing
the property to work in a new or different manner.
(12)
Replacement part--Any repair part attached to the machinery,
equipment, or accessory.
(13)
Sample--A scale model or representative piece of a manufactured
product held for sale. For example, cloth swatches and wallpaper books.
(14)
Semiconductor fabrication cleanrooms and equipment--All
tangible personal property, without regard to whether the property is affixed
to or incorporated into realty, that is used in connection with the manufacturing,
processing, or fabrication in a cleanroom environment of a semiconductor product,
without regard to whether the property is actually contained in the cleanroom
environment. The term includes integrated systems, fixtures, and piping; moveable
cleanroom partitions and cleanroom lighting; all property necessary or adapted
to reduce contamination or to control airflow, temperature, humidity, chemical
purity, or other environmental conditions or manufacturing tolerances; production
equipment and machinery; all tangible personal property that moves the product
or other materials that are necessary and essential to the process, including
piping that is used to move gas, liquids, deionized water, and hazardous waste
material; silicon wafer moving, handling, and tracking systems; and electrical
supply and control equipment, such as switches, wiring, and monitoring equipment
that is incorporated into the realty. The term does not include the building
or any permanent, nonremovable structural component part of the building,
such as vibration-isolation platforms and vibration columns.
(15)
Submanufacturer--A person who performs one or more of
the manufacturing operations described in paragraph (9) of this subsection
upon a product, or upon an intermediate or preliminary product, for a manufacturer.
(b)
Manufacturer's responsibilities.
(1)
Collection of tax. Persons who are engaged in the business
of fabricating, manufacturing, processing, or custom manufacturing must collect
sales tax on the total sales price of the manufactured item or accept a resale
or exemption certificate in lieu of the tax. The sales price includes the
cost of materials, labor or service costs, and all expenses that are connected
with production. Persons who fabricate, custom manufacture, or process tangible
personal property that the customer furnishes, either directly or indirectly,
must collect tax on such fabricating, custom manufacturing, or processing
charge. Manufacturers shall pay or accrue sales or use tax on all items used
in the manufacturing process that do not qualify for exemption from tax. A
manufacturer who purchases tangible personal property tax free by means of
an exemption certificate or resale certificate and subsequently uses the item
for a nonexempt purpose must remit the tax to the comptroller based on the
purchase price of the item or the fair market rental value of the equipment
for the period of time during which the equipment is used for purposes other
than manufacturing. Reference should be made to §3.285 of this title
(relating to Resale Certificate; Sales for Resale), §3.287 of this title
(relating to Exemption Certificates), and §3.346 of this title (relating
to Use Tax).
(2)
Installed items. Generally, the charge for labor to install
an item sold is taxable when the item sold is taxable. Persons who manufacture
and install items that become improvements to residential realty or are incorporated
into new real property structures are contractors and are subject to the provisions
of §3.291 of this title (relating to Contractors). Example: cabinetmakers
who also affix the cabinets as a part of a new-construction contract. Persons
who manufacture and install items that become improvements to existing nonresidential
realty are subject to 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). Persons who manufacture
and install items as a part of a contract to repair tangible personal property
are subject to the provisions of §3.292 of this title (relating to Repair,
Remodeling, Maintenance, and Restoration of Tangible Personal Property). Example:
fabricating a propeller shaft for a customer as a part of an outboard motor
repair. Persons who manufacture and install items that do not become improvements
to realty or that are not part of a repair must collect sales tax on the total
charge. Example: a retailer who makes and installs draperies for a home owner.
(3)
Molds, dies, patterns. The manufacturer's purchase of molds,
dies, patterns, jigs, tooling, photo engraving, and other manufacturing aids,
and their raw materials or component parts, may qualify for exemption under
subsection (d) of this section.
(A)
Written agreement--sale. A separate charge by the manufacturer
for the aid will be considered a sale of the aid to the customer only if a
written agreement exists between parties that clearly makes the customer the
owner of the aid. As owner of the aid, the customer will owe tax on the amount
that the manufacturer charged, unless the customer is also manufacturing a
product for sale.
(B)
No written agreement--no sale. When no written agreement
exists between the manufacturer and the customer, and the manufacturer separates
the charge for the aid from the charge for the items produced by means of
the aid, a sale will not be considered to have occurred. The combined charges
constitute the sales price of the manufactured item. (Charge for aid plus
charge for items produced equals sales price of items.) The total charge shall
be taxable or nontaxable depending on the taxability of the items produced.
(4)
Samples. Since the sole use of such samples is to demonstrate
not the sample but the other items that the sample represents, the purchase
of the raw materials that are used to make the sample is subject to sales
or use tax, regardless of the fact that the sample itself may be ultimately
sold.
(c)
Nonexempt manufacturing items. Certain items are specifically
subject to tax:
(1)
taxable items that are not otherwise exempted by this section;
(2)
machinery, equipment, replacement parts, and accessories
that are rented or leased for a term of less than one year;
(3)
items that are merely useful or incidental to the operation,
such as office machines, office supplies, transportation equipment, maintenance
supplies, cleaning supplies, lubricants, and other items that are incidental
to the manufacturing process and are not otherwise exempted by this section;
(4)
hand tools;
(5)
intraplant transportation equipment, unless exempted in
subsection (d)(17) and (18) of this section, including equipment that is used
to move a product or raw material in connection with the manufacturing process,
and specifically including all piping, conveyor systems, and related pumps
(unless otherwise exempted), meters, valves, or rollers. Intraplant transportation
equipment is taxable even if manufacturing or processing activities (such
as cooling, mixing, or pollution containment) occur during the transportation
of product or component parts of the product;
(6)
machinery and equipment or supplies that are not otherwise
exempted in this section, but that are used to maintain or store tangible
personal property (for example, refrigeration equipment that a restaurant
uses);
(7)
tangible personal property that is used in the transmission
or distribution of electricity, including transformers, cable, switches, breakers,
capacitor banks, regulators, relays, reclosers, fuses, interruptors, reactors,
arrestors, resistors, insulators, instrument transformers, and telemetry units
that are not otherwise exempted under this section, and lines, conduit, towers,
and poles.
(d)
The following items are exempted from the taxes imposed
by Tax Code, Chapter 151, if purchased, leased, or rented by a manufacturer
for storage, use, or consumption:
(1)
tangible personal property that will become an ingredient
or component part of tangible personal property that is manufactured, processed,
or fabricated for ultimate sale;
(2)
tangible personal property that is directly used or consumed
in or during the actual manufacturing, processing, or fabrication of tangible
personal property for ultimate sale, if the use or consumption of the property
is necessary or essential to the manufacturing, processing, or fabrication
operation and directly makes or causes a chemical or physical change to:
(A)
the product that is being manufactured, processed, or fabricated
for ultimate sale; or
(B)
any intermediate or preliminary product that will become
an ingredient or component part of the product that is being manufactured,
processed, or fabricated for ultimate sale.
(3)
services that are performed directly on the product that
is being manufactured prior to the product's distribution for sale, and for
the purpose of making the product more marketable;
(4)
actuators, steam production equipment and its fuel, in-process
flow through tanks, cooling towers, generators, heat exchangers, transformers
and the switches, breakers, capacitor banks, regulators, relays, reclosers,
fuses, interruptors, reactors, arrestors, resistors, insulators, instrument
transformers, and telemetry units that are related to the transformers, electronic
control room equipment, computerized control units, pumps, compressors, hydraulic
units, and related accessories that are used to power, supply, support, or
control equipment that qualifies for exemption under paragraph (2) or (6)
of this subsection or to generate electricity, chilled water, or steam for
ultimate sale;
(5)
transformers located at an electric generating facility
that increase the voltage of electricity generated for ultimate sale, the
electrical cable that carries the electricity from the electric generating
equipment to the step-up transformers, and the switches, breakers, capacitor
banks, regulators, relays, reclosers, fuses, interruptors, reactors, arrestors,
resistors, insulators, instrument transformers, telemetry units, and related
accessories that are associated with the step-up transformers; and transformers
that decrease the voltage of electricity generated for ultimate sale and the
switches, breakers, capacitor banks, regulators, relays, reclosers, fuses,
interruptors, reactors, arrestors, resistors, insulators, instrument transformers,
telemetry units, and related accessories that are associated with the step-down
transformers;
(6)
tangible personal property that is used or consumed in
the actual manufacturing, processing, or fabrication of tangible personal
property for ultimate sale, if the use or consumption of the property is necessary
and essential to a pollution control process;
(7)
lubricants, chemicals, chemical compounds, gases, or liquids
that are used or consumed during the actual manufacturing, processing, or
fabrication of tangible personal property for ultimate sale, if their use
or consumption is necessary and essential to prevent the decline, failure,
lapse, or deterioration of equipment that is exempted by this section;
(8)
gases that are used on the premises of a manufacturing
plant to prevent contamination of raw material or product, or to prevent a
fire, explosion, or other hazardous or environmentally damaging situation
at any stage in the manufacturing process or in loading or storage of the
product or raw material on premises;
(9)
tangible personal property that is used or consumed during
the actual manufacturing, processing, or fabrication of tangible personal
property for ultimate sale, if the use or consumption of the property is necessary
and essential to a quality control process. For example, equipment that is
used to test the product after the item is produced, but prior to wrapping
and packaging. Equipment that is used to test raw materials prior to processing
does not qualify for this exemption;
(10)
safety apparel or work clothing that is used during the
actual manufacturing, processing, or fabrication of tangible personal property
for ultimate sale, if the manufacturing process would not be possible without
the use of the apparel or clothing and the apparel or clothing is not resold
to the employee. Examples are specialized clothing, safety goggles, gloves,
ear plugs, or hairnets that the law requires employees to wear during processing,
or static wrist guards that manufacturing personnel wear in a manufacturing
process that must be free of static electricity. A regulation that requires
employees to wear clean clothing is not sufficient to qualify uniforms for
exemption;
(11)
tangible personal property that is used or consumed in
the actual manufacturing, processing, or fabrication of tangible personal
property for ultimate sale, if the use or consumption of the property is necessary
and essential to comply with federal, state, or local laws or rules that establish
requirements for public health purposes. For example, disinfectants that are
used in a meat packing operation to sanitize work areas are exempt. Tangible
personal property that is required to be on site, but used only in emergency
situations, is not considered consumed in the actual manufacturing process
(for example, fire extinguishers, eye baths, and safety signs are not exempt
under this provision);
(12)
tangible personal property that is specifically installed
to:
(A)
reduce water use and wastewater flow volumes from the manufacturing,
processing, fabrication, or repair operation;
(B)
reuse and recycle wastewater streams that are generated
within the manufacturing, processing, fabrication, or repair operation; or
(C)
treat wastewater from another industrial or municipal source
for the purpose of replacing existing freshwater sources in the manufacturing,
processing, fabrication, or repair operation.
(13)
gas and electricity when used directly in manufacturing.
See §3.295 of this title (relating to Natural Gas and Electricity).
(14)
labor charges for repair, maintenance, remodeling, or
restoration services to pollution control equipment or machinery that a law
or regulation requires, and other tangible personal property that is exempt
under this section.
(15)
wrapping, packing, and packaging supplies that are used
to further the sale of a product. See §3.314 of this title (relating
to Wrapping, Packing, Packaging Supplies, Containers, Labels, Tags, and Export
Packers).
(16)
display items and the raw materials that are used to make
display items, so long as the item is used only to demonstrate itself and
the same or similar items prior to its sale to an ultimate consumer. The item
may not be used for any purpose other than demonstration or display. Any other
use by the manufacturer is taxable as a divergent use.
(17)
piping or conveyor systems that are a component part of
a single item of manufacturing equipment or pollution control equipment that
is eligible for the exemption. For example, a printing press contains rollers
and pipes to transport or feed paper or ink during the manufacturing process.
The purchase of the press would continue to qualify for exemption, and rollers,
pipe, or other press repair parts would remain as qualifying accessories or
repair parts, even when purchased separately. 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.
(18)
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; and piping through which the product, or an intermediate
or preliminary product that will become an ingredient or component part of
the product, is recycled back to another single item of manufacturing equipment
and its ancillary equipment in the same manufacturing process.
(e)
Rented or leased taxable items. The exemptions provided
in this section do not apply to any taxable item rented or leased before October
1, 1995, under an operating lease to a person engaged in manufacturing. Taxable
items used in a manner exempted under this section and leased on or after
October 1, 1995, for a term of one year or more qualify for exemption.
(f)
Semiconductor fabrication cleanrooms and equipment. Semiconductor
fabrication cleanrooms and equipment as defined in subsection (a)(14) of this
section and associated materials and other items that are necessary and essential
to maintain the cleanroom environment are exempt. Semiconductor fabrication
cleanrooms and equipment are not intraplant transportation equipment or used
incidentally in a manufacturing process or fabrication operation as those
terms are used in subsection (c)(3) and (5) of this section.
(g)
Overhaul, retrofit, or repair of jet turbine engines. A
person who is engaged in the overhaul, retrofit, or repair of jet turbine
aircraft engines and their component parts may claim an exemption from tax
on the purchase of machinery, equipment, or replacement parts or accessories
with a useful life in excess of six months, or supplies, including aluminum
oxide, nitric acid, and sodium cyanide, used in electrochemical plating or
a similar process, that are used or consumed in the overhauling, retrofitting,
or repairing of jet turbine aircraft engines or their component parts.
(h)
Persons engaged in printing tangible personal property.
A person who is engaged in printing or imprinting tangible personal property
for sale or production of a publication for the dissemination of news of a
general character and of a general interest that is printed on newsprint and
distributed to the general public daily, weekly, or at some other short interval,
free of charge, may purchase tax free, in addition to other items that are
exempted under this section, the following items that are necessary and essential
to and used in connection with the printing process: pre-press machinery,
equipment, and supplies, including computers, cameras, film, film developing
chemicals, veloxes, plate-making machinery, plate metal, litho negatives,
color separation negatives, proofs of color negatives, production art work,
and typesetting or composition proofs.
(i)
Separated and lump-sum contracts to improve realty. A contractor
who incorporates into realty any equipment or materials that qualify for exemption
under subsection (d) of this section may accept an exemption certificate in
lieu of tax from the manufacturer for the separately stated exempt materials
sold under a separated contract. Taxable materials, such as foundation materials
and items that are noted under subsection (c) of this section must be separately
stated from qualifying equipment, or a single charge for qualifying and nonqualifying
materials will be presumed taxable. When nonresidential repair, remodeling,
or restoration of realty is performed, qualifying equipment should be separately
stated from both nonqualifying materials and taxable labor. A lump-sum charge
to repair, remodel, or restore nonresidential realty is presumed 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 qualifying manufacturing equipment
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 exempt qualifying
manufacturing equipment. Examples of acceptable documentation include purchase
invoices, bid sheets, or schedules of values. See §3.357 of this title
(relating to Labor Relating to Nonresidential Real Property Repair, Remodeling,
Restoration, Maintenance, New Construction, and Residential Property). A lump-sum
charge to perform new construction as covered in §3.291 of this title
(relating to Contractors) is not taxable. The contractor is the consumer of
all the goods that the contractor uses in the performance of a lump sum new
construction contract, and neither the contractor nor the manufacturer may
claim an exemption on otherwise qualifying manufacturing equipment.
(j)
A taxpayer who claims an exemption under this section must
prove that the exemption applies and that no exclusion under subsection (c)
of this section applies.
This agency hereby certifies that the adoption has been reviewed
by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of
the Secretary of State on June 20, 2001.
TRD-200103492
Martin Cherry
Deputy General Counsel for Tax Policy and Agency Affairs
Comptroller of Public Accounts
Effective date: July 10, 2001
Proposal publication date: February 2, 2001
For further information, please call: (512) 463-3699