Did a wholesaler become a manufacturer by using leased equipment to affix legally required tax stamps to finished cigarette packages?

Plain-English summary

A wholesale grocery distributor leased case cutters, heat-transfer stampers, and a conveyor to place required cigarette-tax stamps on packages.

The distributor was not a manufacturer. Manufacturing ended when tangible personal property reached the physical and packaging condition in which it would be transferred; the cigarettes were complete before the distributor acquired them. Applying the stamp was neither processing nor manufacturing.

The letter also said taxable items rented or leased to a manufacturer were excluded from the phased-in exemption. An operating lease therefore would not qualify even if the distributor manufactured. A financing lease was treated as a sale for tax reporting and could qualify.

What this means for you

A legally required post-production step did not restart manufacturing. Lease form also independently affected the equipment exemption discussed in the letter.

Common questions

Was applying cigarette-tax stamps manufacturing? No.

Would operating-leased equipment qualify for the manufacturing exemption? No.

How did the letter treat financing leases? As sales that could qualify.

Citations and references

• No numbered statute or rule was cited in the letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9009L1046D09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

BOB BULLOCK
Comptroller September 28, 1990

Dear ** :

Thank you for your letter asking whether your client, a
wholesale grocery distributor, qualifies as a manufacturer
when using equipment to stamp cigarettes.

Your client is required by law to affix a stamp to each
package of cigarettes that he sells to show that the ciga-
rette tax was paid. To do this your client has leased
stamping equipment including case cutters, heat transfer
stamping equipment and an integrated conveyor system.

Your client does not qualify as a manufacturer. Under the
sales tax law definition, "manufacturing" begins "....with
the first stage in the production," and ends "... with the
completion of tangible personal property having the physi-
cal properties (including packaging, if any) that it has
when transferred to another." By the time your client ac-
quires the cigarettes, the manufacturing is complete. The
stamping does not constitute "processing or manufacturing."

The law also excludes from exemption any taxable item rent-
ed or leased to a person engaged in manufacturing. So, even
if your client were engaged in manufacturing, he would not
qualify for the phased-in exemption on any equipment rented
or leased under an operating lease. However, financing
leases are treated as sales, for tax reporting purposes,
those type lease would qualify.

This opinion is based on the facts presented. Other facts
though similar may produce a different result.

If you have other questions or need more information please
call or write. The toll-free number is 1-800-531-5441; my
extension is 3-4675. The regular number is (512)463-4675.

Tom Soto
Taxability,
Legal Services Division