Can an out-of-state buyer of used Texas manufacturing equipment issue a Texas manufacturing exemption certificate, even though the equipment will be shipped out of state and used at a California plant instead of in Texas?

Plain-English summary

A Texas seller was selling pieces of its Texas-based manufacturing equipment to a California corporation that operates manufacturing facilities in California. Under the proposed contract, title and possession of the equipment would pass to the California buyer in Texas, and the buyer would then arrange to ship the equipment immediately to California.

The requester's own research found no requirement, in the Tax Code or administrative rules, that equipment purchased under the manufacturing exemption (Tax Code § 151.318(a)) actually be used in Texas to qualify — the statute exempts tangible personal property that is directly used or consumed in manufacturing tangible personal property for ultimate sale, without geographic limitation on where that use occurs.

The Comptroller agreed with the requester's own analysis: because the equipment plainly qualifies under § 151.318(a)'s substantive requirements (necessary/essential to the manufacturing operation, causing a chemical or physical change to the manufactured product), and there is no requirement that the use occur in Texas, the California buyer may issue a Texas manufacturing exemption certificate to the Texas seller instead of paying Texas sales tax, even though title/possession transfer happens in Texas and the equipment leaves the state right after.

What this means for you

Sellers of used manufacturing equipment

An out-of-state buyer taking title/possession of manufacturing equipment in Texas can still issue a valid Texas manufacturing exemption certificate, provided the equipment otherwise qualifies as manufacturing equipment under § 151.318(a) — you don't need to confirm the buyer will use it in Texas.

Out-of-state manufacturers buying used Texas equipment

You can rely on the manufacturing exemption for equipment picked up in Texas even if you'll ship and use it exclusively at an out-of-state plant, as long as the equipment meets the substantive "necessary or essential" and "direct chemical or physical change" tests in § 151.318(a).

Accountants and tax professionals

This letter is a useful example of the Comptroller's practice of directly confirming a requester's own legal analysis when it's correct, rather than restating the reasoning independently — worth citing for the narrow point that § 151.318(a)'s exemption has no in-Texas-use requirement.

Common questions

Q: Does manufacturing equipment have to be used in Texas to qualify for the exemption?
A: No. Neither the Tax Code nor the administrative rules require that equipment purchased under the § 151.318(a) manufacturing exemption be used in Texas.

Q: Does it matter that title and possession pass to the buyer in Texas before shipment out of state?
A: Not for the exemption certificate's validity here — the equipment qualifying as exempt manufacturing equipment, not the location where it will ultimately be used, is what matters.

Q: Can any out-of-state buyer rely on this exact answer?
A: Not directly. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own equipment and transaction facts with a tax professional.

Citations and references

Statutes:

• Tex. Tax Code § 151.318(a) (manufacturing exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200012949L

Original ruling text

December 19, 2000

From: Gilbert Zamora

To: "**"

Subject: Request for Opinion Letter

Dear **:

Thank you for your e-mail inquiry requesting written confirmation on the
following fact situation and conclusion. Your Facts: Our client is selling
various pieces of their Texas based manufacturing equipment. The buyer is a
California corporation with manufacturing facilities in California. According
to the proposed purchase contract, title and possession of the equipment will
pass to the buyer in Texas. The buyer will arrange for the immediate
transportation of the equipment to California.

Your Issue: Can the California buyer issue a Texas Manufacturing Exemption
Certificate to our client?

Your Discussion: Texas Tax Code Section 151.318(a) states "tangible personal
property that is directly used or consumed in the actual manufacturing,
processing, or fabrication of tangible personal property for ultimate sale is
also exempt (1) if it is necessary or essential to such operation and (2)
effective October 1, 1997, if its use or consumption directly makes or causes a
chemical or physical change to the product being manufactured, processed, or
fabricated for ultimate sale or to an intermediate or preliminary product that
will become an ingredient or component part of the product being manufactured,
processed, or fabricated for ultimate sale.

Based upon the definition above, the equipment being sold clearly qualifies for
the exemption, if there is no requirement that the equipment must be used in
Texas. Based upon our preliminary research, we have been unable to find any
requirement, in the code or administrative rules, that the equipment must be
used in Texas in order to qualify for the manufacturing exemption.

Your Conclusion: In accordance with Texas Tax Code Section 151.318(a), our
client may accept a manufacturing exemption certificate in lieu of charging
Texas sales tax.

Response: I concur with your conclusion.

A complete set of rules, along with the text of the Tax Code, and a wealth of
other information are available through our website at
through the "Texas Taxes" window.

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, You may e-mail our tax help section at .
You may also 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.

Gilbert Zamora

Tax Policy Division