34 Tex. Admin. Code § 3.300 - Manufacturing; Custom Manufacturing; Fabricating; Processing (Tax Code, Sections 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.
Notes
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