Does processing a neighbor's agricultural products alongside my own destroy my Texas manufacturing-exemption for my processing equipment?

Subject

Original Producer — Machinery/Equipment Used In Processing/Packing/Marketing Products — Producer Raising 50% Of Products

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9408L1312D01

Plain-English Summary

Texas exempts machinery and equipment used to process, pack, or market agricultural products, but only for an "original producer" — a farmer or rancher processing products the producer itself raised, under Tex. Tax Code § 151.316(a)(8). This 1994 Comptroller letter describes a problem with how that exemption had been interpreted: a producer lost the entire exemption for its machinery and equipment if even a small share of what it processed had been purchased from someone else. The letter gives the example of a grower who raised 10,000 tons of grapes but processed 100 tons of a neighbor's purchased grapes alongside them — under the old reading, that producer lost the exemption altogether, even though 99% of the grapes were its own.

The Comptroller convened a task force to study the issue and, in this letter, announced its recommendation: replace the 100%-owned-product requirement with a 50% threshold. Under the new approach, an original producer could purchase agricultural products for processing, packing, or marketing without losing the machinery-and-equipment exemption, as long as the producer itself raised at least 50 percent of what was ultimately processed, packed, or marketed. A producer would still lose the exemption if it processed, packed, or marketed products belonging to others for a fee, or if 50 percent or more of the produce came from other producers.

The letter states that Comptroller staff were drafting a rule amendment to reflect this recommendation and invited comments. Note that the file also carries a later website "ALERT" noting that the statute was subsequently amended by H.B. 268 (82nd Legislature, 2011), effective January 1, 2012, which added a requirement that persons claiming this exemption obtain and provide an agricultural/timber registration number. That registration requirement is a separate, later legal development and was not part of this 1994 letter's holding.

What This Means For You

Farmers, ranchers, and agricultural processors

If you process, pack, or market your own agricultural products using machinery or equipment, buying or accepting some products from a neighbor or another grower does not automatically destroy your Sec. 151.316(a)(8) exemption under the policy described here — as long as your own production remains at least half of what goes through that machinery and equipment. If purchased or third-party product reaches 50 percent or more of the total, or if you're processing others' products for a fee, the exemption is lost.

Accountants and tax professionals

This letter documents a policy shift from a strict 100%-ownership test to a 50%-or-more test for "original producer" status under Sec. 151.316(a)(8). Because it dates to 1994 and describes a recommendation staff were still drafting into a rule, confirm the current text of the implementing rule and remember the later H.B. 268 (2012) registration-number requirement layered on top of this exemption.

Anyone relying on this letter

This is a STAR letter ruling, not a rule or statute. It can support detrimental reliance only for the taxpayer it was issued to, and STAR letters can become outdated even without a "superseded" marking. Confirm current law before relying on this 50% standard for your own situation.

Q&A

Q: Under the old interpretation, why did processing a neighbor's grapes cost a producer its entire exemption?
A: The exemption had been read to require that 100 percent of the products processed, packed, or marketed be produced by the machinery's owner. Any purchased or third-party product — even a small amount — meant the producer no longer qualified as an "original producer," so the whole exemption for the machinery and equipment was lost.

Q: What threshold did the Comptroller's task force recommend instead?
A: A 50 percent threshold. An "original producer" would be someone who produces at least 50 percent of the products ultimately processed, packed, or marketed, allowing that producer to also process or market purchased products without losing the machinery and equipment exemption.

Q: Does this letter mean I never lose the exemption if I buy some product from others?
A: No. Under the recommended standard, you'd still lose the exemption if you process, pack, or market other producers' products for a fee, or if 50 percent or more of the total product came from other producers rather than your own operation.

Citations

• Tex. Tax Code § 151.316(a)(8) (sales tax exemption for machinery and equipment used in processing, packing, or marketing agricultural products by an original producer)

Original ruling text

ALERT: This document may be affected by changes to the Tax Code which was amended by H.B. 268, 82nd Reg. Legislative Session, 2011. The amendment required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a registration number issued by the Comptroller, effective 01/01/2012.

August 10, 1994

Dear **:

A few months ago, it came to my attention that agricultural producers
were experiencing problems because of the way the exemption for machinery
and equipment used in processing. packing, or marketing agricultural
products has been interpreted. Therefore, I created a task force within
the department to examine this question.

Previously, the exemption in subsection (8) of Sec. 151.316, Tex. Tax
Code, has been interpreted to allow the exemption only if 100 percent of
the products processed, packed, or marketed had been produced by the owner
of the machinery and equipment. Consequently, an original producer could
raise 10,000 tons of grapes, but if the producer processed 100 tons of
grapes produced by and purchased from his neighbor, the exemption for the
machinery and equipment would be lost.

After reviewing the statute, my task force has recommended that the
subsection should be interpreted to allow an original producer to process
any agricultural products that the producer owns at the time they are
processed, packed, or marketed. They also recommended that for purposes
of this exemption, an original producer be defined as a person who produces
at least 50 percent of the products which are ultimately processed, packed,
or marketed, instead of 100 percent.

Under this recommendation, a producer could purchase agricultural products
for processing, packing, or marketing without losing the exemption for the
machinery and equipment so long as the producer raised at least 50 percent
of the products. The original producer would lose the machinery and
equipment exemption by processing, packing, or marketing agricultural
products belonging to others for a fee or if 50 percent of more of the
produce was purchased from other producers.

My staff is in the process of drafting an amendment to the agricultural
rule. I would appreciate any comments you might have concerning these
recommendations. Please address your comments to Glen Hunt, Director, Tax
Administration, at 111 East 17th Street, Austin, Texas 78774, or call him
at 1-800-531-5441, extension 5-0220. I hope you will find this new policy
is in keeping with my pledge to fairly and efficiently enforce the tax
laws of this state.

Sincerely,

JOHN SHARP
Comptroller of Public Accounts

NOTE: Previous Accession Number 9408526L