Does a company that collects and processes human blood plasma for sale to out-of-state pharmaceutical manufacturers qualify for Texas's manufacturing exemption on its equipment, packaging, and utilities purchases?

Plain-English summary

A company operating 8 Texas locations that collects human blood plasma, processes it, and sells it to out-of-state pharmaceutical companies for further manufacturing asked a five-part question about Texas manufacturing exemptions. The Comptroller answered all five favorably:

1. Manufacturing equipment exemption applies. Under Tax Code § 151.318, machinery and equipment directly used to physically or chemically change the plasma qualifies, along with pollution-control equipment and supporting equipment (compressors, computerized control units). Recent legislation (House Bill 3211) clarified that lubricants for exempt equipment and legally required safety clothing (like safety goggles) also qualify — but hand tools and items used in nonmanufacturing activities (office supplies, storage, transportation) are specifically excluded.
2. Packaging/container resale exemption applies. Nonreturnable containers, bottles, cartons, and labels that become part of the finished packaged product are tax-free for resale under Rule 3.314(b) — the manufacturing process is considered complete once the product is packaged as it will be sold.
3. Permit filing: the correct form is AP-201 (Texas Application for Sales Tax Permit, Use Tax Permit) — not AP-201-3.
4. Multi-location filing: no separate form is needed per location; a separate sheet can be attached for each additional location on one application.
5. Utilities exemption is available via a predominant-use study. Where natural gas or electricity is metered together for both exempt manufacturing and taxable purposes, the entire meter's usage is treated as exempt or taxable based on which use predominates, established through a 12-month predominant-use study under Rule 3.295(d).

What this means for you

Blood plasma processors and similar biologics manufacturers

Your processing equipment (centrifuges, chemical/physical-change equipment, pollution control, supporting compressors/control units) can likely be purchased tax-free under the manufacturing exemption. Packaging materials that end up as part of the product you ship (bags, bottles, labels, containers) are also tax-free via resale certificate. But hand tools, office supplies, storage equipment, and transportation items don't qualify — budget sales tax on those.

Any Texas manufacturer with mixed exempt/taxable utility usage

If a single utility meter serves both manufacturing and non-manufacturing purposes, you don't need to split the bill — the whole meter's usage is exempt or taxable based on which use predominates, proven with a 12-month usage study under Rule 3.295(d).

Accountants and tax professionals

This letter is a compact five-part checklist covering the core manufacturing exemption analysis: equipment classification (§ 151.318, as clarified by HB 3211), packaging/resale treatment (Rule 3.314(b)), permit mechanics (AP-201, multi-location), and utilities (Rule 3.295(d) predominant-use studies) — useful as a template for any manufacturer's first exemption-scoping inquiry.

Common questions

Q: Can a blood plasma processor buy its processing equipment tax-free in Texas?
A: Yes, machinery and equipment directly used to physically or chemically change the plasma qualifies for the manufacturing exemption under Tax Code § 151.318, along with supporting and pollution-control equipment.

Q: Are shipping containers, bottles, and labels used for the finished product taxable?
A: No — nonreturnable containers and packaging supplies that become part of the completed, packaged manufactured product are tax-free for resale under Rule 3.314(b).

Q: Do hand tools used in the manufacturing process qualify for the exemption?
A: No. Hand tools are specifically excluded from the manufacturing exemption, along with items used in nonmanufacturing activities like office supplies, storage, and transportation.

Q: How do I prove my utilities are used predominantly for exempt manufacturing?
A: Through a 12-month predominant-use study under Rule 3.295(d), for anyone who continually performs a processing, manufacturing, or other qualifying function.

Q: Can I rely on this letter for my own business?
A: No. This opinion is based on the facts presented; other facts, though similar, may provide a different result.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.318 (manufacturing exemption for machinery/equipment)
• 34 TAC Rule 3.314(b) (nonreturnable containers/packaging supplies complete the manufacturing process)
• 34 TAC Rule 3.295(d) (predominant use studies for electricity/natural gas)
• House Bill 3211 (clarifying manufacturing-exemption items: lubricants, required safety clothing)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200005295L

Original ruling text

May 11, 2000

To: **

Dear **:

Thank you for your e-mail inquiry.

Our company collects human blood plasma, processes it and sells it to
pharmaceutical companies for further manufacture. All of our customers are
outside of Texas. We have 8 locations in Texas.

1. Would we qualify for any manufacturing exemptions for our purchases?

Response: Yes. Manufacturers may claim exemption for certain manufacturing
items exempted by Tax Code Section 151.318. Examples of items that are exempt
include machinery and equipment directly used in the manufacturing process to
make or cause physical or chemical changes to the product (blood plasma). The
exemption also includes pollution control equipment used to control pollution
resulting from the manufacturing operation, and equipment, such as compressors
and computerized control units, used to power, supply, support, or control the
exempt manufacturing equipment discussed above.

Recent legislation, House Bill 3211, provides a clarification of other
necessary and essential items used during the manufacturing process that
qualify for exemption. Examples of these items include lubricants used in
exempt manufacturing machinery and equipment and work clothing, such as safety
goggles specifically required by law for use during the manufacturing process.

Some items are specifically excluded from the manufacturing exemption such as
hand tools and items used in nonmanufacturing activities (e.g., office
supplies, storage of the product, and transportation). House Bill 3211 is
available on-line at www.capitol.state.tx.us if you have access to the
Internet. Under "Search Bills" click on "By Bill Number." Enter HB3211 in the
box and click on the "Submit" button. Next click on "text" to the right of
"Bill History" and click on "Enrolled Version."

2. I believe we would qualify for resale exemptions on some of our purchases
   (containers, cartons, labels, etc.) which become part of the final product. Is
   this correct?

Response: Yes. Sales or use tax is not due on [editor's note: nonreturnable] containers or packaging supplies
purchased by manufacturers for use as a part of the completion of the
manufacturing process. The manufacturing process is complete when the tangible
personal property being produced has been packaged by the manufacturer as it
will be sold. See Rule 3.314(b).

3. A supplier suggested we file for a registration number for either
   manufacturing or resale. Would I submit form AP201-3 - Application for sales
   tax permit, or is there another form I should submit?

Response: You should complete AP-201 Texas Application for Sales Tax Permit,
Use Tax Permit.

4. Would I have to submit a separate form for each location?

Response: No, you may attach a separate sheet for each additional location.

5. I also received a call from a consulting company who suggested we should not
   be paying sales tax on our utilities if we are a manufacturer. Would you please
   advise if this is accurate?

Response: Natural gas or electricity used during a regular monthly billing
period for both exempt and taxable purposes under a single meter is totally
exempt or taxable based upon the predominant use of the natural gas or
electricity measured by that meter. A person who performs a processing,
manufacturing, or other noncommercial function continually must establish
predominant use on 12 consecutive months of use. See Rule 3.295 (d) for
information on predominant use studies for electricity and natural gas. Tax
rules can be accessed online:
www.window.state.tx.us/taxinfo/rulendx/ruleindex.html

You may complete a sales tax application online and then download and sign the
form. Applications are available at:
www.window.state.tx.us/taxinfo/taxforms/01-forms.html

The State Tax Automated Research system may be accessed online at:
www.window.state.tx.us/

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:
[email protected]

Gilbert Zamora
[email protected]
Tax Policy Division