State sales and use tax exemptions are available to taxpayers who manufacture, fabricate or process tangible personal property for sale.
Texas sales and use tax exempts tangible personal property that becomes an ingredient or component of an item manufactured for sale, as well as taxable services performed on a manufactured product to make it more marketable.
The exemption also applies to tangible personal property that makes a chemical or physical change in the product being manufactured and is necessary and essential in the manufacturing process. Some items, such as hand tools, are excluded from the exemption. A hammer, for example, is taxable even if it is used in fabricating a product for sale.
Manufacturers (including sub-manufacturers) who perform any of the following activities are eligible to claim manufacturing exemptions:
The following non-manufacturers do not qualify for manufacturing exemptions:
The manufacturing exemption applies to machinery or equipment that causes a physical or chemical change in a product in order to make it saleable. The manufacturing process begins with the first stage of production. Typically, the first activity that changes raw materials or ingredients of the product begins the manufacturing process. The manufacturing process ends when the product has the same physical properties as when sold or transferred by the manufacturer to another, including any packaging.
For software, the manufacturing process includes the design and writing of the code, as well as testing and demonstrating the software.
Manufacturers can claim an exemption when buying tangible personal property that is:
Manufacturers can also claim exemption when purchasing, renting or leasing the following items:
The following items do not qualify for the manufacturing exemption:
Machinery and equipment used for manufacturing support, but not directly in the manufacturing process, generally do not qualify for the manufacturing exemption.
Examples of non-qualifying, taxable manufacturing support equipment include air conditioning for employee comfort, equipment used to make molds or dies, and equipment used to make other equipment that is then used to make a product for sale.
Besides the exemptions available to all manufacturers, additional exemptions are available for certain classes of manufacturers.
Printers and newspaper publishers can claim an exemption for pre-press machinery, equipment and supplies that are necessary for the printing process.
Other qualifying items include:
Production companies can claim an exemption for certain items necessary and essential to, and used or consumed directly in, producing a motion picture, video, or audio master recording, if copies are sold, licensed, distributed, broadcast or otherwise exhibited. This exemption also applies to producing live cable, radio or television programs.
Qualifying items include:
Semiconductor and pharmaceutical biotechnology manufacturers can claim exemption on semiconductor fabrication cleanrooms and equipment and pharmaceutical biotechnology cleanrooms and equipment. The exemption includes all tangible personal property, without regard to whether the property is an improvement to realty, that is used in a cleanroom environment and in connection with the manufacturing, processing, or fabrication of a semiconductor product or a pharmaceutical biotechnology product.
A qualifying item can be affixed to or incorporated into realty and does not have to be contained in a cleanroom environment.
Qualifying items include:
The exemption does not apply to the building that houses the cleanroom or its permanent, nonremovable components. The exemption does not apply to intraplant transportation equipment.
If a taxpayer qualifies as a manufacturer, they can give a properly completed Form 01-339 (back), Texas Sales and Use Tax Exemption Certificate (PDF) to their vendor instead of paying tax on qualifying manufacturing equipment, material and supplies.
The exemption certificate must include the following:
Divergent use of exempt manufacturing equipment occurs when a manufacturer uses the equipment for purposes other than manufacturing items for sale. For example, a photographer uses a camera to take pictures for sale. If the photographer uses that same camera to take personal photos, the photographer has used the camera in a divergent and taxable manner.
Even though a manufacturer uses exempt equipment in a divergent way, they can give their supplier an exemption certificate (PDF) when purchasing the qualifying equipment. The manufacturer must calculate and remit tax on the amount of divergent use of the equipment.
For equipment purchased less than four years ago, divergent use is calculated on a monthly basis. The percentage of divergent use of machinery or equipment is measured either in hours of use, or by the total output.
When divergent use occurs, the manufacturer must maintain supporting documentation reflecting the exempt and non-exempt use to self-assess tax each month or other filing period. If divergent use during a month is 5 percent or less of the total use of the equipment, no tax is due in that month.
After four years, there is no tax on divergent use.