Does building a manufacturing plant inside a federal Foreign Trade Zone let a company defer Texas sales and use tax on the equipment and materials it imports to build it?

Plain-English summary

A company received federal approval for a Foreign Trade Zone (FTZ) subzone at the Port of Corpus Christi, where it plans to build a polyethylene terephthalate (PET) and terephthalic acid (PTA) production plant. FTZs let goods moving in foreign commerce be stored without U.S. Customs duties/tariffs until they enter U.S. commerce for domestic consumption, and federal law (19 U.S.C. § 81o(e)) exempts goods held in an FTZ from state and local ad valorem (property value) taxation. Building the plant required importing a large amount of equipment and machinery, which would be stored at the construction site until installed. The company asked the Comptroller to confirm Texas sales and use tax on all that equipment (whether imported from abroad or purchased domestically and delivered to the zone) could be deferred until the FTZ status was later relinquished.

The Comptroller declined the request entirely. Two independent reasons:

1. The equipment isn't in the "stream of commerce." The FTZ ad valorem exemption is meant for goods being stored, sold, exhibited, assembled, or otherwise processed for eventual sale or export — not goods a company imports for its own permanent use in constructing a plant. Since this equipment was headed straight into the plant (not onward into commerce), the cases and prior guidance the taxpayer cited (which involved genuinely FTZ-in-transit merchandise) didn't apply, and neither did the 1886 U.S. Supreme Court case Coe v. Errol the taxpayer invoked by analogy to foreign-shipment law.

2. Texas use tax isn't an ad valorem tax anyway. Even setting aside the stream-of-commerce point, 19 U.S.C. § 81o(e) only exempts FTZ goods from ad valorem taxes (property-value based). Texas sales and use tax is an excise tax — imposed on an act or the enjoyment of a privilege, not on the value of property held. The Comptroller relied on the Ninth Circuit's United States v. 4,432 Mastercases of Cigarettes decision, which held a state cigarette use tax on FTZ-stored goods was a permissible excise tax, not a prohibited ad valorem tax. Because Texas use tax is likewise an excise tax, the FTZ ad valorem exemption simply doesn't reach it.

The result: use tax is due on the equipment and goods delivered into the FTZ subzone for the company's own use, and it must be reported and remitted with the return covering the period in which the goods are first stored, used, or consumed in Texas — not deferred until the zone status is later given up.

What this means for you

Manufacturers building plants inside a Foreign Trade Zone

Don't assume FTZ status shelters your construction-phase equipment purchases from Texas sales/use tax. The FTZ federal exemption is narrowly about ad valorem (property) taxes and about goods still moving in commerce (for sale, export, or further processing) — equipment permanently incorporated into your own plant doesn't qualify on either count.

Companies with both FTZ storage/trading operations and FTZ construction projects

The taxability analysis can differ sharply between (a) inventory genuinely passing through your FTZ operation toward eventual sale/export (potentially covered by the ad valorem exemption, and possibly the subject of separate use-tax deferral analysis under different facts) and (b) capital equipment you're importing for your own permanent use in the zone (taxable, as this ruling shows). Don't conflate the two fact patterns.

Accountants and tax professionals

The core doctrinal takeaway is the excise-vs-ad-valorem distinction: Texas sales/use tax's excise character (a tax on the act of storage/use/consumption, not on property value) is precisely why FTZ ad valorem protections don't apply — a useful citation point (4,432 Mastercases, 448 F.3d 1168 (9th Cir. 2006)) for any FTZ-adjacent state tax question, not just this one.

Common questions

Q: Does the FTZ designation exempt any Texas taxes on goods in the zone?
A: It exempts FTZ goods from state and local ad valorem (property-value) taxation under federal law, but not from Texas's excise-based sales and use tax.

Q: When exactly does use tax become due on equipment delivered to an FTZ for a company's own construction use?
A: When the goods are first stored, used, or otherwise consumed in Texas — which, per this ruling, is triggered by delivery into the zone for the company's own permanent use, not deferred until the FTZ status is relinquished.

Q: Would the answer differ if the equipment were destined for resale or export rather than the taxpayer's own plant?
A: The Comptroller distinguished the authorities the taxpayer cited on exactly this basis — those involved goods continuing on in the stream of commerce (for sale or export), a materially different fact pattern from goods permanently incorporated into the taxpayer's own facility.

Q: Can another company relying on an FTZ subzone use this ruling?
A: No. This is a private letter ruling binding only on the Comptroller as to this taxpayer and these facts, and cannot be relied upon by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (imposition of sales tax)
• Tex. Tax Code § 151.101(a) (imposition of use tax)
• Tex. Tax Code § 151.010 (taxable item definition)
• 34 Tex. Admin. Code Rule 3.346(b)(4) (use tax reporting when goods are first stored/used/consumed)
• 19 U.S.C. § 81o(e) (FTZ ad valorem tax exemption)
• 34 Tex. Admin. Code Rule 3.1 (Private Letter Rulings and General Information Letters)
• 34 Tex. Admin. Code Rule 3.10 (Taxpayer Bill of Rights; detrimental reliance)

Prior authority discussed:

• STAR Document 9108T1133F03 (Aug. 27, 1991) (use tax due on TPP delivered to a Texas FTZ for use in Texas)
• Comptroller's Decision Nos. 22,929 (1989), 42,157 (2004), 45,110 (2005) (burden on claimant to clearly show an exemption applies)
• Bullock v. National Bancshares Corp., 584 S.W.2d 268, 271-72 (Tex. 1979) (exemptions strictly construed against claimant)
• Comptroller's Decision No. 45,357 (2006) and STAR Document Nos. 8109L0369B09, 8303L0488E11, 8905L0936D06, 9108T1133F03 (distinguished; involved goods continuing in stream of commerce)
• Coe v. Errol, 116 U.S. 517 (1886) (distinguished; inapplicable once goods reach their destination)
• United States v. 4,432 Mastercases of Cigarettes, 448 F.3d 1168 (9th Cir. 2006) (excise tax vs. ad valorem tax distinction under 19 U.S.C. § 81o(e))

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201602741L

Original ruling text

February 24, 2016

Re: Private Letter Ruling No. 151340821

**, TP ****

Dear Mr. *****:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters [ENDNOTE: (1)], in response to your request dated April 15, 2015. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance relating to the application of Texas sales and use tax to tangible personal property within a foreign trade zone.

Relevant Facts:

The Foreign Trade Zones Board of the U.S. Department of Commerce issued an order approving a foreign trade zone (FTZ) subzone within the Port of Corpus Christi for the sole use of *****(Taxpayer).

FTZs are areas within the boundaries of the United States or its territories where tangible personal property moving in foreign commerce may be temporarily stored without the imposition of U.S. custom duties. In general, formal U.S. Customs and Border Protection (CBP) procedures and payments of duties or tariffs of foreign merchandise entering a FTZ are not required unless and until merchandise enters CBP territory for domestic consumption [ENDNOTE: (2)].

In addition to creating the exemption from CBP procedures, duties, and tariffs, the FTZ designation creates an exemption from state and local ad valorem taxation for tangible personal property imported into the FTZ from outside the United States and held in the FTZ "for the purpose of storage, sale, exhibition, repackaging, assembly, distribution, sorting, grading, cleaning, mixing, display, manufacturing, or processing, and tangible personal property produced in the United States and held in a zone for exportation, either in its original form or as altered by any of the above processes.” 19 USC 81o(e). There is no correspondingexemption from ad valorem taxation of real property improvements.

Within the FTZ subzone, Taxpayer will construct and operate a polyethylene terephthalate (PET) and terephthalic acid (PTA) production plant. The construction of the plant requires Taxpayer to import a significant amount of equipment, machinery, and other tangible goods (collectively, the goods), which will be stored at the construction site until incorporated into the plant.

Once the construction of the plant is complete, Taxpayer will import some raw materials and will export some finished products. The order establishing the Taxpayer’s FTZ specifically states:

Production under FTZ procedures could exempt [Taxpayer] from customs duty payments on the foreign status components used in export production. On its domestic sales, [Taxpayer] would be able to choose the duty rates during customs entry procedures that apply to polyethylene terephthalate (PET) and terephthalic acid (PTA) (duty rate 6.5%) for the foreign status inputs noted below. Customs duties also could possibly be deferred or reduced on foreign status production equipment.

Requested Rulings:

Tangible personal property imported and delivered into a foreign trade zone is subject to Texas sales and use tax deferment until such time as the zone is relinquished.

Tangible personal property purchased in the United States and delivered to a foreign trade zone is subject to sales and use tax deferment until such time as the zone is relinquished.

Ruling & Analysis:

Texas sales tax applies to the sale of each taxable item [ENDNOTE: (3)] in Texas pursuant to Section 151.051. Sales tax is paid to a permitted seller at the time of purchase.

Texas use tax is “imposed on the storage, use, or other consumption in this state of a taxable item purchased from a retailer outside of Texas for storage, use, or other consumption” in Texas pursuant to Section 151.101(a). Use tax must be reported and remitted to the comptroller with the return covering the period in which the taxable items are first stored, used, or otherwise consumed in Texas pursuant to Rule 3.346(b)(4).

Taxpayer seeks to defer Texas sales and use taxes on the goods it intends to incorporate into the manufacturing plant it is building in the FTZ subzone.

The fact that goods are stored in an FTZ prior to use by the purchaser in Texas does not change the applicability of use tax [ENDNOTE: (4)] unless there is an exemption providing for same. Multiple Comptroller Decisions state the burden is on the taxpayer to clearly show it comes within the statutory exemption claimed [ENDNOTE: (5)].

The Texas Tax Code contains no statutory exemption for taxable items imported into a FTZ merely because the goods will be incorporated into real property located within the FTZ, and Taxpayer cites no statutory authority for the deferral of Texas sales and use taxes as requested. The authorities [ENDNOTE: (6)] cited by Taxpayer refer to those taxable items which are delivered into an FTZ for purposes of continuing on in the stream of commerce. The facts presented herein are different. The taxable items entering the FTZ are for Taxpayer’s own use in the construction of its manufacturing plant and are not intended to continue in the stream of commerce.

19 USC 81o(e) is the only federal statute regarding FTZs that address state and local taxation of goods in a FTZ. It provides “tangible personal property imported from outside the United States and held in a zone for the purpose of storage, sale, exhibition, repackaging, assembly, distribution, sorting, grading, cleaning, mixing, display, manufacturing, or processing, and tangible personal property produced in the United States and held in a zone for exportation, either in its original form or as altered by any of the above processes, shall be exempt from State and local ad valorem taxation.” (Emphasis Added).

The language set out in 19 USC 81o(e) providing a moratorium from customs laws, duties, or tariffs only applies to merchandise which is intended to be introduced or reintroduced into the stream of commerce. In this instance the goods are neither being prepared for sale after being imported nor continuing in the process of being exported for sale outside Texas; therefore, 19 USC 81, et seq. does not apply.

Taxpayer also asserts the shipment of goods to a FTZ should be treated similar to a shipment to a foreign country pursuant to Coe v. Errol [ENDNOTE: (7)]. This case addressed the point in time when goods ceased being governed by domestic law and become protected by federal law. This consideration is inapplicable to the goods at issue because the goods are no longer in the stream of commerce but have reached their destination.

Texas sales and use taxes are excise [ENDNOTE: (8)] taxes and not ad valorem [ENDNOTE: (9)] taxes. United States v. 4,432 Mastercases of Cigarettes, 448 F.3d 1168 (9th Cir. 2006) directly addressed, among other issues, whether a use tax is an ad valorem tax expressly prohibited by 19 USC 81o(e). In 4,432 Mastercases, U.S. Customs seized cigarettes located in an FTZ due to their alleged counterfeit nature and for failure to demonstrate payment of the California cigarette tax.

The Ninth Circuit stated an excise tax is one “imposed on the performance of an act . . . or the enjoyment of a privilege.” Id. at 1185. An excise tax is not an ad valorem tax and does not violate 19 USC 81o(e). The tax, which was imposed on the storage of cigarettes held for future sale, was permissible as it was not a prohibited ad valorem tax.

The Comptroller declines to issue the rulings requested by Taxpayer as there is no statutory authority for the deferral of Texas sales and use tax. Use tax is due on taxable items delivered to Taxpayer in the FTZ which will be incorporated into the manufacturing facility (i.e., stored, used, or otherwise consumed within Texas). As stated previously, use tax must be reported and remitted with the return covering the period in which the taxable items are first stored, used, or otherwise consumed in Texas pursuant to Rule 3.346(b)(4).

Additional information relating to Texas use tax is available in Rule 3.346. Sales and use tax rules are available on the left-hand side of the page under the Resources heading of our website at http://comptroller.texas.gov/taxinfo/sales/.

If you have questions about this response, please email us through our website at: https://www.comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling #151340821.

Regards,

Tax Policy Division – Indirect Taxes

State Comptroller of Public Accounts

ENDNOTES:

1. Unless otherwise indicated, all references herein to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.

2. See About Foreign-Trade Zones at http://www.cbp.gov/border-security/ports-entry/cargo-security/cargo-control/foreign-trade-zones/about.

3. Taxable items are defined in Texas Tax Code Section 151.010 as tangible personal property and taxable services.

4. See STAR Document 9108T1133F03 (holding use tax due when tangible personal property is delivered to a foreign trade zone in Texas for use in Texas).

5. See, e.g., Comptroller’s Decision Nos. 22,929 (1989), 42,157(2004), and 45,110 (2005), all citing Bullock v. National Bancshares Corp., 584 S.W.2d 268, 271-72 (Tex. 1979) (holding an “exemption cannot be raised by implication, but must affirmatively appear, and all doubts are resolved in favor of the taxing

authority and against the claimant. Simply stated, the burden of proof is on the claimant to clearly show that it comes within the statutory exemption. . .”).

6. Comptroller Decision No. 45,357 (2006) and STAR Document Nos. 8109L0369B09 (Sept. 18, 1981);8303L0488E11 (Mar. 1, 1989); 8905L0936D06 (May 24, 1989);

and 9108T1133F03 (Aug. 27, 1991).

7. 116 U.S. 517(1886).

8. An excise tax is one based on the performance of an act, the engaging in an occupation, or the enjoyment of a privilege. Black’s Law Dictionary 563 (6th edition 1990).

9. An ad valorem tax is a tax imposed on the value of property. Black’s Law Dictionary 51 (6th edition 1990).