A Texas manufacturer takes items out of its tax-free resale inventory, ships them out of state for use (no Texas tax due at that point), and later brings them back into Texas. Does it owe use tax if the items come back after more than a year, and does it matter whether the items go back into inventory for sale versus get used?

Plain-English summary

A tax professional followed up on behalf of a client — a medical specialized equipment manufacturer — that takes items out of its tax-free resale inventory and ships them outside Texas for use (no Texas sales or use tax due at that point, since the item left the state). The question: if the item is later brought back into Texas after more than a year outside the state, is any use tax due?

The Comptroller clarified two different rules apply depending on where the item originated:

• Rule 3.346(c)(5)'s one-year rule applies to items purchased outside Texas and then brought into the state — that's a different scenario from the one described.
• For items purchased or manufactured in Texas and taken from tax-free inventory for out-of-state use, the outcome turns on what happens when the item comes back, not on elapsed time:
  • Brought back and placed into inventory for sale → no Texas sales tax due.
  • Brought back and used → Texas sales tax IS due, on the original cost of the manufactured item's components (per Rule 3.285(e)(1), which covers items purchased for resale that end up used in Texas). Critically, there is no time limit on this liability — even after a year or more, tax is still owed if the item comes back and gets used rather than resold.

What this means for you

Manufacturers and businesses with tax-free resale inventory

The one-year rule you may have heard about (Rule 3.346(c)(5)) only protects items originally purchased outside Texas. If your inventory items were made or bought in Texas tax-free for resale and later diverted to out-of-state use, bringing them back doesn't get any easier with time — the only thing that matters is whether the item goes back into resale inventory (no tax) or gets used (tax due on the components' original cost), no matter how long it's been out of state.

Accountants and tax professionals advising manufacturers on inventory tax planning

Don't conflate the two rules — Rule 3.346(c)(5)'s one-year clock is specific to out-of-state purchases entering Texas, while Texas-origin tax-free inventory diverted to use anywhere (in state or out) triggers tax on the components' cost under Rule 3.285(e)(1), with no expiration on that liability.

Common questions

Q: If my Texas-made inventory item is used out of state for over a year, is it safe from Texas tax when it comes back?
A: Not automatically. If it comes back to Texas and gets used (rather than placed back into resale inventory), Texas sales tax is due on the original cost of its components — there's no time limit that extinguishes this liability.

Q: Does the one-year rule in Rule 3.346(c)(5) protect Texas-manufactured inventory items?
A: No — that one-year rule applies specifically to items purchased outside Texas and brought into the state, not to items made or purchased in Texas that were diverted to out-of-state use.

Q: What if the item comes back to Texas and just goes back into resale inventory?
A: No Texas sales tax is due in that case.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.346(c)(5) (Use Tax — one-year rule for items purchased outside Texas)
• 34 Tex. Admin. Code Rule 3.285(e)(1) (items purchased for resale and used in Texas)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200007474L

Original ruling text

July 7, 2000

Dear **:

Thank you for your follow-up letter regarding your client and Texas sales tax.

Your question is regarding items taken out of tax-free inventory by your
client. You stated that your client, a medical specialized equipment
manufacturer, takes items out of their tax-free inventory for use. Those items
are shipped outside Texas, so no sales or use tax is due. You asked if any use
tax is due if the items are returned to Texas after more than one year outside
the state.

The Administrative Rule to which you referred, 3.346(c)(5) "Use Tax" applies to
items purchased outside Texas and brought into the state after one year.

For items purchased or manufactured in Texas and taken from tax-free inventory
for use outside Texas, if the item is brought back into Texas and placed back
into inventory for sale, no Texas sales tax is due. If the item is brought
back into Texas and used, Texas sales tax is due on the original cost of the
components of the manufactured item. See Rule 3.285(e)(1) regarding items
purchased for resale and used in Texas. There is no time limit on the sales
tax due on the use of an item taken from tax-free inventory and used in a
divergent manner.

This opinion is based on the facts presented. Additional or different facts
may yield different results.

You may call me toll free 1-800-531-5441, extension 5-9787, if you have any
questions or need more information. The direct line is 512/305-9787. You may
also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Philip Knisely
Tax Policy Division