Texas Provides Guidance Regarding Manufacturing Exemptions

The Texas Comptroller of Public Accounts issued new guidance for manufacturing exemptions stating that exemptions for state sales and use tax apply to those who manufacture, fabricate, or process tangible personal property for sale. 

The following are exempt from Texas sales and use tax:

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

The manufacturers who qualify for the exemption include those who perform any of the following activities:

• manufacture tangible personal property for sale
• perform one or more of the manufacturing operations for a manufacturer
• fabricate or assemble components into tangible personal property for ultimate sale
• modify or change the characteristics of the product being manufactured for ultimate sale, or its component parts

Contractors, repair people, and service providers, such as telecommunications service providers or data processors, do not qualify for the exemption. While the manufacturing exemption only applies to machinery and equipment that physically or chemically change the product to make it saleable, some items, like hand tools, are not exempt (more detailed guidance for specific situations can be found here). Taxpayers should evaluate whether specified items are defined as manufacturing based on their use, and therefore such items may be qualified as exempt.