us-tx/regs
34 Tex. Admin. Code § 3.300 — Manufacturing; Custom Manufacturing; Fabricating; Processing (Tax Code, §§151.005, 151.007, 151.318, and 151.3181)
(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 and pharmaceutical biotechnology 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 or a pharmaceutical biotechnology 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 is responsible for tax as provided in subsection (k) of this section.
(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 Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance). 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 subsections (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 (including water purification equipment such as demineralizers and reverse osmosis units) 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, boilers (including economizers, superheaters, waterwalls, hoppers, feedwater heaters, condensers, pumps, air preheaters, draft fans, pulverizors, primary crushers, secondary crushers, oil or gas burning equipment that is related to the boilers), 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 that tests tangible personal property that is being manufactured, processed, or fabricated for ultimate sale. 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, Export Packers, and Stevedoring Materials and Supplies).
(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 and pharmaceutical biotechnology cleanrooms and equipment. Semiconductor fabrication and pharmaceutical biotechnology 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 and pharmaceutical biotechnology cleanrooms and equipment are not intraplant transportation equipment or used incidentally in a manufacturing process or fabrication operation as those terms are used in subsections (c)(3) and (c)(5) of this section. Regarding pharmaceutical biotechnology cleanrooms and equipment, the exemption applies only to pharmaceutical biotechnology cleanrooms and equipment that are installed as part of the construction of a new facility with a value of at least $150 million and on which construction began after July 1, 2003, and before August 31, 2004.
(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 Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance). 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.
(k)
Divergent use.
(1) A manufacturer who issues a resale certificate to purchase tangible personal property tax free 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 item. See §3.285 of this title (relating to Resale Certificate; Sales for Resale) and §3.346 of this title (relating to Use Tax).
(2) A manufacturer who issues an exemption certificate to purchase tangible personal property tax free and subsequently uses the item for a nonexempt purpose is responsible for tax based on the divergent use. For divergent use that occurs prior to October 1, 2001, a manufacturer owes tax based on the purchase price or the fair market rental value of the equipment. See §3.287(e) of this title (relating to Exemption Certificates). For divergent use that occurs after September 30, 2001, a manufacturer owes tax based on the guidelines that are provided in paragraph (3) of this subsection.
(3) A manufacturer must remit tax in the following manner on divergent use that occurs after September 30, 2001.
(A) No tax is due if the divergent use occurs in any month after the fourth anniversary of the equipment purchase date. Equipment that is purchased before October 1, 1997, is not subject to tax on divergent use that occurs after October 1, 2001.
(B) Except as provided by subparagraph (C) of this paragraph, a manufacturer owes tax on an item if the divergent use occurs in the month of, or during any month before, the fourth anniversary of the date of purchase. The amount of the tax that is due for the month in which the divergent use occurs is equal to 1/48 of the purchase price multiplied by the percentage of divergent use during that month multiplied by the applicable tax rate when the divergent use occurs.
(i) The 48-month period that is used in calculating divergent use begins when the equipment is purchased.
(ii) The amount of divergent use for a month can be measured either in hours or by applicable output as follows:
(I) the divergent use percentage for a month is computed by taking the total divergent use hours of operation of the equipment in a month and dividing that amount by the total hours of operation of the equipment during the same month; or
(II) the divergent use percentage for a month is computed by taking the total output of the equipment during the period of divergent use in a month and dividing that amount by the total output of that equipment during the same month.
(C) A manufacturer who uses equipment in a divergent manner in the month of, or during any month before, the fourth anniversary of the date of purchase owes no tax on that use if the divergent use percentage in that month is 5.0% or less.
(D) A manufacturer who purchases non-capitalized equipment repair parts or consumables for equipment that is routinely used in both exempt and nonexempt manners may elect to pay tax on the repair parts or consumables by applying the divergent use percentage of the equipment as provided by paragraph (2)(B) of this subsection for the month during which the manufacturer purchased the repair parts or consumable items.
(E) A manufacturer who purchases repair labor for equipment may owe tax if the manufacturer uses the qualifying exempt equipment for both exempt and nonexempt purposes. If the manufacturer was using qualifying equipment in an exempt manner at the time when the repair was needed, then no tax is due on the repair. If the manufacturer was using the qualifying equipment in a nonexempt manner when the repair was needed, then tax is due on the purchase price of the repair. If a manufacturer cannot determine whether the equipment was being used in an exempt or nonexempt manner at the time of the repair, then the manufacturer may pay tax on the purchase price of the repair multiplied by the divergent use percentage as provided by paragraph (2)(B) of this subsection for the month in which the purchase of the repair service was made.
(F) The use of "pharmaceutical biotechnology cleanrooms and equipment," as those terms are used in subsection (a)(14) of this section, to manufacture, process, or fabricate a pharmaceutical biotechnology product that is not sold is not a divergent use if the use occurs during the certification process by the United States Food and Drug Administration.
Source Note: The provisions of this §3.300 adopted to be effective January 1, 1976; amended to be effective November 16, 1979, 4 TexReg 3985; amended to be effective December 3, 1984, 9 TexReg 5930; amended to be effective March 30, 1987, 12 TexReg 825; amended to be effective November 28, 1990, 15 TexReg 6600; amended to be effective February 5, 1992, 17 TexReg 473; amended to be effective April 3, 1996, 21 TexReg 2473; amended to be effective December 6, 1996, 21 TexReg 11501; amended to be effective July 10, 2001, 26 TexReg 5057; amended to be effective July 23, 2002, 27TexReg 6537; amended to be effective October 12, 2004, 29 TexReg 9551.
Source: official text