Were bags supplied to third parties tax-exempt packaging when used for cement the company made versus cement it bought from other manufacturers?

Plain-English summary

The company manufactured and sold cement products and supplied bags to unrelated facilities that packaged the cement. Bags used for products the company itself manufactured qualified for exemption, even though a third party performed the physical packaging.

In other cases, the company supplied bags to other manufacturers, bought their already manufactured cement, and resold it as its own. The company owed sales tax on bags used in those transactions.

What this means for you

Outsourcing the packaging step did not defeat exemption for the company's own manufactured product. The result changed when the company was a purchaser and reseller of another manufacturer's finished product.

Common questions

Were bags for the company's own cement exempt? Yes. Did third-party packaging matter? No. Were bags for cement made by another manufacturer exempt to the reseller? No.

Citations and references

• The letter does not identify a numbered statute or administrative rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9110L1137C03

Original ruling text

October 28, 1991

Dear **:

Thank you for your recent letter asking for a ruling on the taxability
of wrapping and packaging supplies used by a person who both packages
products the person manufactured as well as products already
manufactured by others.

Facts: Corporation "X" is engaged in manufacturing and sale of provided
various cement products in Texas. X contracts with unrelated third
parties to package the products. The third party packaging facilities
use bags purchased and supplied by X in packaging X's products. In
certain situations, instead of manufacturing the products itself, X
purchases the products from other manufacturers. Here again, such
manufacturers package the products in bags purchased by X. In both
cases, X may also purchase pallets for the cement products.

Question: When X purchases bags to be provided to unrelated third
parties who are engaged in packaging products for X, does X owe tax on
the bags?

Response: When X purchases bags to be used to package a product
manufactured by X, the purchase of the bags qualifies for exemption
from tax. The fact that a third party does the actual packaging does
not make the bags taxable to X.

Question: When X purchases bags to be provided to other manufacturers
whose products X then purchases and sells as its own, does X owe tax
on the bags?

Response: X owes sales tax on those bags purchased by X and provided
to other manufacturers whose products X purchases and sells as its own.

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, you may call me
toll free at 1-800-252-5555, extension 3-4633. The regular number is
512/463-4633.

Sincerely,

Wanda Hutcheson
Tax Administration Division