Can a Texas manufacturer buy wrapping and packaging equipment (and its repairs) tax-free, and does that exemption survive if the wrapping/packaging step is subcontracted out to another company?

Plain-English summary

A manufacturer asked about the tax treatment of repair services for three types of packaging equipment: a stretch wrapper (wraps plastic film around a pallet load), a strapper (applies plastic bands around boxes), and a shrink wrapper (applies heat-shrink film around individual products).

The Comptroller confirmed that a manufacturer may purchase all three units, tax-free, as part of completing the manufacturing process — manufacturing isn't finished until the product is packaged the way it will be sold. That tax-free treatment extends to repair parts and repair labor for the qualifying equipment, so long as the manufacturer gives the repair company a properly completed exemption certificate.

By contrast, non-manufacturers — persons who merely repack tangible personal property before sale, wholesalers, and retailers — owe tax on the purchase price of this same equipment and on its repair parts and labor, because they're not completing a manufacturing process by packaging.

The letter also flags an important wrinkle: manufacturers can subcontract the wrapping/packaging function itself. When they do, the subcontractor is treated as performing the last stage of manufacturing, so the subcontractor's own purchases of wrapping/packaging equipment and its repairs may also be bought tax-free.

What this means for you

Manufacturers

Stretch wrappers, strappers, shrink wrappers, and their repair parts/labor qualify for the manufacturing exemption under § 151.318(a)(2) because packaging the final product for sale is the last step of the manufacturing operation. Issue a proper exemption certificate to your equipment repair vendor to buy repair parts and labor tax-free too.

Manufacturers who outsource the packaging step

If you subcontract wrapping/packaging to a third party, the subcontractor steps into your shoes for this purpose — their equipment and repair purchases used to perform that final packaging stage can also be tax-free, because they're completing the manufacturing process on your behalf.

Wholesalers, retailers, and repackagers

This exemption does not apply to you. If you buy stretch wrappers, strappers, or shrink wrappers to repackage goods you didn't manufacture, you owe tax on the equipment and on its repair parts and labor.

Common questions

Q: Does packaging equipment count as "manufacturing" equipment?
A: Yes, when the manufacturer uses it to package tangible personal property it made, as the final step before the product is sold — because manufacturing isn't complete until the product is packaged for sale.

Q: What if I hire a subcontractor to do the wrapping and packaging for me?
A: The exemption still applies. The subcontractor is treated as performing the final stage of the manufacturing process, so their purchases of the wrapping/packaging equipment (and its repairs) used for your product can also be tax-free.

Q: Do wholesalers and retailers get this exemption for their own repackaging equipment?
A: No. Persons who repack goods before sale but did not manufacture them — including wholesalers and retailers — owe tax on the equipment purchase price and on repair parts and labor.

Q: Are repair parts and labor for the qualifying equipment also exempt?
A: Yes, under Tax Code § 151.3111(a), a repair service on property that would itself be exempt because of its nature or use is also exempt — but that exemption doesn't extend to repairs on improvements to real property.

Citations and references

Statutes:

• Tex. Tax Code § 151.318(a)(2) (manufacturing exemption)
• Tex. Tax Code § 151.3111(a) (exemption for repair services on exempt property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200012945L

Original ruling text

December 19, 2000

From: Lindey Osborne
To: XXXXXXXXXXX
Subject: Re: Reduction of Sales Tax Collection

Dear XXXXXXXXXXX:

Thank you for your recent email. You asked that we address the taxability of
your repair services to the following items.

1. Stretch wrapper - A unit that applies film to products on a pallet. For
   example, a pallet of fertilizer or boxes found at a retail location like HOME
   IMPROVEMENT STORE. The unit wraps plastic around the products and pallet to
   unitize the load.

2. Strapper - A unit that applies plastic bands around boxes or products. For
   example, OFFICE SUPPLY STORE copier paper has these plastic straps wrapped
   around the box.

3. Shrink wrapper - A unit that applies a temperature sensitive plastic film
   around the product. For example, a new video has this shrink wrap film wrapped
   around it. The shrink-wrap must be removed prior to use.

Response: A manufacturer may purchase the stretch wrapper, strapper, and
shrink wrapper tax-free for use as a part of the completion of the
manufacturing process. The manufacturing process is complete when the
manufacturer has packaged the tangible personal property produced as it will be
sold by the manufacturer. The manufacturer also may purchase repair parts and
repair labor for qualifying manufacturing machinery and equipment tax-free by
issuing a properly completed exemption certificate to the repairman.

Persons other than manufacturers, such as persons who repack tangible personal
property prior to sale, wholesalers, and retailers, owe tax on the purchase
price, the repair parts, and repair labor for wrapping and packaging equipment.
As we discussed, there is an exception to this statement. Manufacturers may
subcontract the wrapping and packaging function to a subcontractor. The
Comptroller has determined that a manufacturer who subcontracts with a person
for some portion of the manufacturing process is entitled to make tax-free
purchases of the qualifying taxable items used in providing the sub-contracted
portion of the manufacturing process. In this situation, the subcontractor is
performing the last stage of manufacturing by wrapping and packaging the
product as it will be sold. Therefore, the subcontractor's purchases of
wrapping and packaging equipment and repairs may be purchased tax-free.

The exemptions for the packaging equipment, repair parts and repair labor are
provided in the following sections of the Tax Code:

Section 151.318(a)(2) of the Texas Tax Code exempts tangible personal property
(and repair parts) used directly in or during the manufacturing of tangible
personal property for sale if the use 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 the product being manufactured,
processed, or fabricated for ultimate sale.

In addition, Section 151.3111(a) provides an exemption for a service performed
on tangible personal property if at the time of the performance of the service,
the equipment would be exempted because of the nature of the property, its use,
or a combination of its nature and use. The exemption for the repair,
remodeling or restoration under Section 151.3111 does not extend to repair
services performed on improvements to real property.

This opinion is based on the facts presented. Other facts, though similar, may
result in different answers.

I hope this information is helpful. I'll be glad to help you if you have
additional questions. My e-mail address is .
My direct line is 475-0037. The toll-free number is 1-800-531-5441, ext.
5-0037.

Sincerely,

Lindey Osborne
Tax Policy Division