Texas Sales and Use Tax | The Manufacturing Exemption

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Jason A. Hendrix

Jason A. Hendrix



Jason Hendrix primarily focuses on assisting individuals and businesses with a variety of state tax matters, including Texas sales and use tax, Texas franchise tax, mixed beverage taxes, and motor vehicle taxes. He has several years of experience assisting clients involving disputes with the Texas Comptroller at all levels, including pre-audit, audit, administrative appeals, and collections. He also has experience assisting clients with matters involving the Texas Workforce Commission, as well as corporate matters, including formation and structuring, and federal tax matters.

We’ve previously discussed the general rule that Texas sales and use tax are imposed on sales of “tangible personal property” or “taxable services,” [1] and that the Texas Tax Code and Comptroller’s Rules set out exemptions for these items.  A discussion of one of these exemptions, the “sale-for-resale” exemption, can be found here.  Another common exemption is the “manufacturing exemption,” which applies to the purchase of certain items by a “manufacturer.”  Similar to the sale-for-resale exemption, the concept is that because the manufacturer is not the end-consumer of the items being purchased, they should not be responsible for paying tax on the purchase, and instead the burden of paying tax on the final product is shifted downstream to the ultimate consumer.

The Manufacturing Exemption

Texas Tax Code § 151.318(a) provides an exemption from Texas sales and use tax for listed items that are sold, leased, rented to, or stored, used, or consumed by a “manufacturer.” [2] As such, in order to qualify for the exemption, the following must be satisfied: (i) the purchasing party must be a “manufacturer,” and (ii) the item at issue must be one of the items listed in Texas Tax Code § 151.318.

  1. “Manufacturer”

The term “manufacturer” is not defined by Texas Tax Code § 151.318, which can create some confusion for taxpayers. [3] The Comptroller’s definition is also somewhat unhelpful – Rule 3.300(a)(8) defines a manufacturer as “[a] person who is engaged in manufacturing.” [4] “Manufacturing,” in turn, is defined to mean “[e]ach operation beginning with the first stage in the production of tangible personal property and ending with the completion of tangible personal property.” [5] The term is also defined to include “processing” and “fabrication,” [6] which are defined as follows:

As these definitions make clear, the term “manufacturer” can be incredibly broad, but generally applies to someone engaged in the creation, or transformation, of tangible personal property.

  1. Potentially Exempt Items

Texas Tax Code § 151.318 contains a list of items that may be exempt under the manufacturing exemption.  These include, among others [9]:

Items that fall under one of these categories, or any of the other categories listed in Texas Tax Code § 151.318(a), will potentially be exempt if sold, leased, or rented to, or stored, used, or consumed by a manufacturer.

Potential Issues

Although the application of this exemption may appear straightforward, there are questions that can cause issues for taxpayers.  For example, the Comptroller has taken the position that the manufacturing exemption does not apply to “contractors,” [10] which I discussed in a separate post here.  However, certain taxpayers are engaged in activities that include elements of both manufacturing and construction, which raises the question – in what contexts should a taxpayer be considered a “contractor” vs. a “manufacturer”?  Additionally, taxpayers engaged in manufacturing often purchase materials in bulk, and may not use all of those materials for manufacturing purposes.  How should the purchase of those items be treated for purposes of the exemption?

[1] Tex. Tax Code § 151.051(a), 151.010.

[2] Tex. Tax Code § 151.318(a).

[3] See Tex. Tax Code § 151.318.

[4] Tex. Tax Code § 151.318(d); 34 Tex. Admin. Code § 3.300(a)(8).

[5] 34 Tex. Admin. Code § 3.300(a)(9).

[6] 34 Tex. Admin. Code § 3.300(a)(9)(B).

[7] 34 Tex. Admin. Code § 3.300(a)(10).

[8] 34 Tex. Admin. Code § 3.300(a)(5).

[9] Tex. Tax Code §§ 151.318(a)(1)-(3).

[10] 34 Tex. Admin. Code § 3.300(i).