Could a customer's letter document a Texas sales-tax exemption for valves intended for offshore use or export?

Plain-English summary

The seller asked whether a customer's letter could support an exemption for valves. The Comptroller said the customer had to identify the specific subsection of Section 151.324.

For Section 151.324(a), a letter could be sufficient if it also described the property, because the valves were tangible personal property claimed for offshore use outside Texas territorial limits in mineral exploration or production.

The same letter would not establish the Section 151.324(b) exemption. That subsection addressed drilling equipment built exclusively for use outside Texas, while valves and similar items were component parts rather than drilling equipment themselves.

A protective certificate also had to contain the purchaser's name, address, signature, issue date, item description, and detailed exemption basis; the purchase had to qualify, and the seller had to accept it in good faith. Export claims instead fell under Section 151.307(b) and Rule 3.323.

What this means for you

A generic statement that a purchase is exempt was not enough. The buyer needed to identify and factually support the correct exemption, and the seller remained exposed if it neither collected tax nor obtained a valid certificate.

Common questions

Could a customer letter support the offshore-use exemption? Yes, if it identified Section 151.324(a), described the property, and met the other certificate requirements.

Were valves treated as drilling equipment under subsection (b)? No. The letter treated them as component parts.

What did a valid certificate need to contain? The purchaser's name, address, signature, date, item description, and a detailed explanation of the claimed exemption.

What if the customer claimed export instead? The Comptroller directed the seller to Section 151.307(b) and Rule 3.323(c) and (g).

Citations and references

• Tex. Tax Code § 151.324(a) — property used offshore outside Texas territorial limits for mineral exploration or production.
• Tex. Tax Code § 151.324(b) — drilling equipment built for exclusive use outside Texas.
• Comptroller Rule 3.332 — the letter says this rule addressed both Section 151.324 exemptions.
• Tex. Tax Code § 151.307(b) and Comptroller Rule 3.323(c), (g) — export exemption and documentation.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8707L0840C03

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

July 3, 1987

Dear ***:

Thank you for your recent letter regarding proper documentation of your
sales
to customers claiming exemption under Section 151.324 of the Texas
Limited
Sales, Excise, and Use Tax Act.

First of all, Section 151.324 is a broad-based exemption, and the
customer
would need to be more specific as to subsection (a) or (b). If the
claimed
exemption is subsection (a) in a letter like the one you enclosed with
your
letter to us, then the letter would be sufficient documentation for
exemption
if it also contained a description of the property to be purchased. This
is
because the valve is tangible personal property and would be claimed as
being
for use offshore, outside territorial limits of the state for minerals
exploration or production.

If, however, the customer claims exemption under Section 151.324(b), this
letter would not be sufficient. This is because this subsection deals
with
drilling equipment built for exclusive use outside the state of Texas.
Valves (and other similar items) do not qualify as "drilling equipment"
but
are, rather, component parts of drilling equipment (if indeed that is how
they are to be used). Section 151.324 (a) and (b) are addressed in Rule
3.332, enclosed.

In order for a seller to be protected by an exemption certificate (or a
letter clarifying an exemption), the certificate must be valid and
accepted
in good faith. To be valid, it must contain the purchaser's name,
address,
signature, the date issued, description of the item being purchased, and
a
detailed description of the exemption being claimed by the purchaser. In
addition, the purchase must qualify for the exemption claimed. To claim
good
faith acceptance, the seller must be familiar with the types of
exemptions
which are available for the items he sells. If the seller neither
collects
the sales tax nor requires the customer to provide a valid certificate,
the
seller will be held liable for the tax due on the sale.

If your customer wishes to claim exemption based on exportation of the
valves, this would come under Section 151.307(b). The export exemption
and
documentation requirements of this section of the law are addressed in
Rule
3.323(c) and (g), enclosed. This rule also includes an example of a
Licensed
Custom Broker's Export Certification.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,
F. Wayne McDonald
Tax Assistance Section
Tax Administration Division