If a manufacturer is located outside a taxing city's limits but inside a taxing county, does it owe city use tax based on the vendor's location?

Subject

Local Use Tax Accrual By A Manufacturer Outside City Limits But Inside A Taxing County

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1282E07

Plain-English Summary

A manufacturer located outside the limits of a taxing city, but inside a taxing county, asked the Comptroller whether it was responsible for accruing city use tax based on the location of its vendors. The taxpayer explained that it makes both taxable and nontaxable purchases from each vendor, issues a resale or exemption certificate to those vendors, and accrues use tax on the taxable items it buys from them. As described, the taxpayer currently accrues state use tax, city use tax based on the vendor's location, and county use tax.

The Comptroller's response does not give a single yes/no answer — it explains that the manufacturer's obligation depends on whether the resale or exemption certificates it issued were valid at the time of purchase, and if so, how the purchased items were actually used afterward.

First possibility: The manufacturer may lawfully issue a resale or exemption certificate in lieu of tax on items that become component parts of the tangible personal property being manufactured for sale, and also on certain items that qualify for the manufacturing exemptions described in Rule 3.300. If the purchase genuinely qualifies for exemption and is used in an exempt manner, the manufacturer is not required to accrue tax on that purchase. However, if the manufacturer later makes a "divergent use" of an item bought under a valid resale or exemption certificate — meaning it uses the item in a way that doesn't qualify for the exemption — the manufacturer must then accrue tax, as described in Rule 3.377, sections (a)(1) and (b)(4).

Second possibility: If the manufacturer issued a resale or exemption certificate in lieu of tax on an item that did not actually qualify for the exemption at the time of purchase, the manufacturer must accrue tax on the original purchase price, based on the location of the seller — per Rule 3.377, sections (a)(3) and (b)(5).

The letter closes by noting that this opinion is based on the facts presented, and that different or additional facts could change the outcome.

What This Means For You

If you're a manufacturer located outside a taxing city's limits: Simply being physically located outside city limits does not, by itself, resolve whether you owe city use tax on a given purchase. What matters is (1) whether the item purchased under your resale/exemption certificate actually qualified for the manufacturing exemption under Rule 3.300 at the time of purchase, and (2) whether you later used that item in a way consistent with the exemption or diverted it to a taxable use.

If your certificate was valid and the item is used as intended: According to this letter, no tax needs to be accrued on that purchase.

If you later use an exempt-purchased item for a taxable (divergent) purpose: The letter states you must accrue tax under Rule 3.377(a)(1) and (b)(4) once that divergent use occurs.

If the certificate shouldn't have been issued in the first place (the item never qualified): The letter states tax must be accrued on the original purchase price, sourced to the location of the seller/vendor, under Rule 3.377(a)(3) and (b)(5) — meaning the city use tax questioned in the letter can, in that scenario, be based on the vendor's location.

Bottom line: Before assuming that being "outside the city limits" gets you out of accruing city use tax, review each purchase against Rule 3.300's manufacturing exemption criteria and confirm whether the item's actual use matches what the resale/exemption certificate claimed.

Q&A

Q: Does being located outside a taxing city's limits automatically exempt a manufacturer from city use tax on vendor purchases?
A: No. The letter gives two possible answers depending on the facts, rather than a single rule based purely on location.

Q: When can a manufacturer issue a resale or exemption certificate to a vendor?
A: Per the letter, on items that become component parts of the tangible personal property being manufactured for sale, and on certain items that qualify for the manufacturing exemptions in Rule 3.300.

Q: If a manufacturer properly used an exempt purchase but later puts it to a different, taxable use, what happens?
A: The letter states the manufacturer must then accrue tax according to Rule 3.377, sections (a)(1) and (b)(4), because of the divergent use.

Q: What if the manufacturer issued a certificate on an item that never actually qualified for the exemption?
A: Per the letter, the manufacturer must accrue tax on the original purchase price based upon the location of the seller, per Rule 3.377, sections (a)(3) and (b)(5).

Q: Is this letter's conclusion guaranteed to apply to any manufacturer in a similar position?
A: No — the letter explicitly states the opinion is based upon the facts presented, and that different or additional facts may change the opinion.

Original ruling text

October 18, 1993

Dear **:

Thank you for your letter questioning the correct accrual of city
sales and use tax by a manufacturer located outside a taxing city. You
provided the following information.

Taxpayer is a manufacturer located outside the city limits and inside
a taxing county. Taxpayer makes taxable and nontaxable purchases from
each vendor and has therefore issued a resale or exemption certificate
to these vendors. taxpayer accrues use tax on the taxable items
purchased from these vendors. Currently, the taxpayer accrues state
use tax, city use tax based upon the location of the vendor, and
county use tax.

QUESTION: Since the taxpayer is located outside the city limits, are
they responsible for accruing the city use tax based upon the location
of the vendor?

RESPONSE: You stated that the manufacturer issues resale or exemption
certificates to the suppliers in lieu of tax. The manufacturer may
issue these certificates in lieu of tax on items that become component
parts of the tangible personal property being manufactured for sale.
Also, the manufacturer qualifies to issue exemption certificates in
lieu of tax on certain items that qualify for the manufacturing
exemptions set out in the enclosed copy of Rule 3.300 regarding
manufacturers.

There are two possible answers to this question. First, the
manufacturer is not required to accrue taxes on purchases qualifying
for exemption that are used in an exempt manner. However, if the
manufacturer makes a divergent use of the item purchased under a valid
resale or exemption certificate, then the manufacturer must accrue the
tax according to the enclosed Rule 3.377. Please see sections (a)(1)
and (b)(4).

The second response is based upon the possibility that the
manufacturer is issuing a resale or exemption certificate in lieu of
tax on something that does not qualify for the exemption at the time
of purchase. In this case, the manufacturer must accrue tax on the
original purchase price based upon the location of the seller. Please
see sections (a)(3) and (b)(5) of the rule.

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

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 9402031L.3 and/or 9402031L