Manufacturing Exemptions in Texas

The manufacturing sector in Texas has contributed more than $241 billion annually to the Texas gross state product and has directly employed about 900,000 Texans and supported about 2.2 million other Texas jobs. More than a quarter of all working Texans depend on the state’s manufacturers for their paychecks. The manufacturing sector is highly diverse, and it includes subsectors such as computers and electronic products, machinery, petroleum and coal products, fabricated metal products, and even business such as restaurants, television stations, and photographers. If a taxpayer does qualify as a manufacturer, tax exemptions are available for certain purchases.

Exemptions in Manufacturing

State sales and use tax exemptions are available for taxpayers who manufacture, fabricate or process tangible personal property (TPP) for sale, this includes:

• ingredient or component of an item that is manufactured for sale
• taxable services performed on a product to make it more marketable
• TPP that makes a chemical or physical change in the product being manufactured and is necessary and essential in the manufacturing process

Who Qualifies:

Manufacturers and sub-manufacturers who perform any of the following activities are eligible to make a claim:

• Manufacturing TPP for sale
• Performing one or more of the manufacturing operations for a manufacturer
• Fabricating or assembling components into TPP for ultimate sale
• Modifying or changing the characteristics of the product being manufactured for ultimate sale, or its component parts

Contractors or people repairing real or personal property belonging to others or service providers such as data processors or service providers do not qualify.

What Items and Services are Exempt?

Manufacturing exemptions apply to any machinery or equipment that causes a physical or chemical change in a product to make it saleable. Manufacturing starts at the first stage of production, this is typically when changes are made to raw material or ingredients of the product, and ends when the product has the same physical properties as when sold or transferred by the manufacturer to another, this would include packaging. In the case of software, the manufacturing process includes the design and writing of code as well as testing and demonstrating the software.

Manufacturers can also make claims when buying TPP for their manufacturing process this includes TPP that is:

• used directly and is essential to the manufacturing process and makes a chemical or physical change in the product that is being manufactured or to an intermediate or preliminary product that will become an ingredient or component part of the product.
• Used for quality control, such as testing the product for final sale
• Used for pollution control such as cooling towers, compressors, hydraulic units, and steam production
• Specifically installed to reduce water use and wastewater flow, recycle/reuse wastewater or treat wastewater from other sources to replace the use of fresh water.

Manufacturing exemptions can also be requested when purchasing, renting, or leasing the following items:

• Chemicals, catalysts, and other materials that make a product more marketable produce a chemical or physical change or remove impurities.
• Gas and electricity used in powering exempt manufacturing equipment, not including equipment used in the preparation or storage of prepared food, are subject to a predominant use study.
• Lubricants, chemicals, gases, and liquids that are necessary to prevent the failure or deterioration of exempt manufacturing equipment
• Safety apparel that is required for the manufacturing process that the manufacturer buys and does not resale to its employees such as earplugs, gloves, hairnets, goggles, etc.
• Wrapping and packaging supplies.

For a complete list of exempt items click here.

What Items are Not Exempt?

The following items do not qualify for manufacturing exemptions:

• Hand tools
• Intraplant transportation such as conveyors, pipes, forklifts, hoists, cranes, and hydraulic lifts.
• Janitorial equipment and supplies
• Machinery, equipment, or materials that are used
  • for the manufacturer’s use rather than for sale
  • to maintain or store the manufactured products
  • in sales and distribution activities
• Office supplies
• TPP that is not used in the actual manufacturing operations; is rented or leased for less than a year
• Items used for transportation
• Items used in research and development of new products

In general machinery and equipment that is used to support manufacturing but is not directly used in the manufacturing process does not qualify for the exemption. Some examples of taxable manufacturing support equipment include air conditions for employee comfort, equipment that makes molds or dies, and equipment that is then used to make a product for sale.

How to Claim an Exemption:

If a taxpayer does qualify as a manufacturer, they can complete Form 01-339 Texas Sales and Use Tax Exemption Certificate and give it to their vendor instead of paying tax on the qualifying equipment, materials, and supplies.

It is important to note that exemptions can vary within manufacturing subsectors. If your company needs any assistance filling out an exemption form or you believe that your company has overpaid and is subject to a refund, contact us!