Did copy machines and supplies used to reproduce customer documents qualify for Texas manufacturing exemptions?

Plain-English summary

The business picked up attorneys' files, reproduced the documents, and returned the copies. The Comptroller treated the copying business as a manufacturer.

Under the historical phase-in rule, a copier used directly to make copies sold to customers was qualifying machinery if its useful life exceeded six months and it was purchased from January 1, 1990 through September 30, 1991. The letter described a 25% refund and different claim periods depending on whether tax was paid in 1990 or 1991.

A financing lease qualified because it was treated as a purchase. An operating lease did not qualify because the phase-in statute referred to purchases and did not extend to rentals or operating leases.

Ink, paper, and toner used during copying and printing could be purchased tax-free. Developer was not part of the finished product, but it was directly consumed and necessary and essential to processing, so it also qualified. The business could give suppliers exemption certificates for those inputs.

STAR adds that Section 151.318 was amended effective January 1, 1995 to provide a 100% exemption for manufacturing machinery and equipment other than hand tools without regard to useful life.

STAR lists the official issued date as December 1, 1991, while the visible letter is dated December 19, 1991. This page keeps STAR's date in metadata and preserves the document date below.

What this means for you

The purchase and refund dates in this letter are historical, but the ruling shows the distinction between direct-use production equipment, financing and operating leases, component materials, and supplies consumed in manufacturing.

Common questions

Was the copy shop a manufacturer? Yes. Did financing leases qualify? Yes under the historical rule. Did operating leases qualify? No. Were paper, toner, ink, and developer exempt? Yes as described. Did STAR identify a later law change? Yes, a 100% machinery exemption effective in 1995.

Citations and references

• Texas Tax Code Section 151.318, as described in STAR's later alert
• 34 Tex. Admin. Code Rule 3.300(f)-(h)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9112L1146A01

Original ruling text

ALERT: Section 151.318 was amended to allow 100% exemption on manufacturing machinery and equipment (excluding hand tools) without respect to useful life effective 1-1-95.

COMPTROLLER OF PUBLIC ACCOUNTS

STATE OF TEXAS

AUSTIN, 78774

December 19, 1991

Dear **:

Thank you for your letter regarding the taxability of the

copy machines purchased for your copying business. I hope you will accept my

apology for the delay in answering your tax question.

You state that our company is in the business of reproducing

documents for attorneys. Your salespeople pick up the files to be duplicated,

duplicate them, and return them to the customer. Your company both purchases

and leases copy equipment from ** and others to perform this work.

As an operator of a copying business, you are considered to

be a manufacturer. As such, you will qualify for the manufacturers phase-in

exemption on copy equipment you buy that has a useful life in excess of six

months. Please refer to the enclosed Rule 3.300 subsections (f) through (h).

If a photocopier is purchased and used directly in making copies that are sold

to customers, then it is qualifying machinery. It must have been purchased on

or after January 1, 1990, and before October 1, 1991, to qualify. If you paid

the tax in 1990, you have until December 31, 1991, to claim a 25% tax refund.

If the tax was not paid until 1991, then you have between January 1 and

December 31, 1992, to claim a 25% tax refund (refund claim form enclosed).

Copiers leased under a financing lease would qualify for the

exemption because a financing lease is a purchase, according to the Tax Code.

A copier leased under an operating lease would not qualify for the exemption

because the statute that created the phased-in exemption expressly refers to

"the purchase" of qualifying machinery and equipment, with no accompanying

provision for rentals or operating leases.

As to copy machine supplies such as ink, paper, and toner,

these items used during the copying and printing process can be purchased tax

free. Tangible personal property purchased for use as an ingredient of or

component part of a product manufactured for ultimate sale at retail is exempt.

An item that is not a component part of the finished product would be the

developer. This item can still be purchased tax free because it is directly

consumed in the processing operation and is necessary and essential to the

processing. You may issue a properly completed exemption certificate to your

supplier in lieu of tax for all of these items.

This opinion is based on the facts provided. If there are

additional or different facts, the opinion could change.

If you have any questions, please don't hesitate to write the

Tax Administration Division or call one of our tax specialists toll free at

1-800-252-5555.

Sincerely,

Joan Hale

Tax Administration Division