Does a company that rebuilds customers' ink rollers for the printing industry owe Texas sales tax on materials and equipment, or can it claim a manufacturing exemption?

Plain-English summary

A company that manufactures and rebuilds ink rollers for the printing industry — but which primarily rebuilds rollers belonging to its customers — asked the Comptroller's office how to handle sales tax on materials, equipment, and which administrative rule governs its operations.

On materials: the company can buy the rubber and other materials used in rebuilding tax-free by giving its suppliers a resale certificate, but it must then charge its own customers sales tax on the total charge for rebuilding each roller.

On equipment: if a piece of machinery is used solely to rebuild customers' own rollers, the company owes full state sales tax on that equipment, with no reduction. But if the equipment is used to manufacture or re-manufacture rollers that the company then sells in the normal course of business, the company may issue an exemption certificate for 75% of the state tax otherwise due. Where equipment is used for both repair work and manufacturing, the company must be able to clearly document how much of the equipment's use is attributable to manufacturing, and can only claim the manufacturing exemption if the equipment is primarily used for manufacturing.

On which rule applies: because the company does both manufacturing and rebuilding, the Comptroller advised that it may rely on Rule 3.300 (the manufacturing exemption rule) for questions about its manufacturing operations. But since the company primarily works on rollers owned by its customers rather than rollers it owns and sells itself, the correct rule to rely on for most of its work is Rule 3.292, which covers repairs.

What this means for you

Repair and rebuilding businesses

If your business mostly repairs or rebuilds property that belongs to your customers, you generally cannot claim the manufacturing exemption on your equipment, even if you also do some manufacturing. You can still buy your repair materials tax-free with a resale certificate, but you must collect sales tax from your customer on the full charge for the repair or rebuilding job.

Businesses that both manufacture and repair

If your equipment is used for both manufacturing property you sell and repairing property your customers own, you need to keep clear records showing how much of that equipment's use is manufacturing versus repair. The 75% manufacturing exemption certificate is only available if the equipment is primarily used for manufacturing — and even then, it reduces the state tax due by 75%, it doesn't eliminate it entirely.

Accountants and tax professionals

This letter is a good illustration of the line the Comptroller draws between Rule 3.292 (repair of tangible personal property, generally taxable in full) and Rule 3.300 (manufacturing exemption, which allows a 75% reduction in state tax on qualifying production equipment). The controlling question is whose property is being worked on and sold — if the taxpayer primarily reworks property it does not own and will not sell, Rule 3.292 governs even if some manufacturing also occurs.

Common questions

Q: Can a company buy rebuilding materials tax-free?
A: Yes. The company may issue a resale certificate to its suppliers to buy materials like rubber tax-free, but it must then charge its own customer sales tax on the total charge to rebuild the item.

Q: Does equipment used to rebuild customers' property qualify for the manufacturing exemption?
A: No. If equipment is used solely to rebuild a customer's own property, full state sales tax is due on that equipment with no reduction.

Q: When can a company claim the 75% manufacturing exemption on equipment?
A: When the equipment is used to manufacture or re-manufacture items that the company itself sells in the normal course of business. If the equipment is used for both manufacturing and repair, the company must document the manufacturing portion and the equipment must be primarily used for manufacturing to qualify.

Q: Which Comptroller rule applies to a business that both manufactures and rebuilds customer property?
A: Rule 3.300 (manufacturing) applies to the manufacturing operations, but if the business primarily works on customers' own rollers rather than rollers it owns and sells, Rule 3.292 (repairs) is the correct rule to rely on.

Citations and references

Rules cited:

• 34 Tex. Admin. Code Rule 3.300 (manufacturing exemption)
• 34 Tex. Admin. Code Rule 3.292 (repair of tangible personal property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9410L1325E11

Original ruling text

October 25, 1994

Dear **:

Thank you for your letter of October 14, 1994. You question the tax
responsibilities of a company manufacturing and rebuilding ink rollers
for the printing industry.

As I understand it, the company manufactures and rebuilds ink rollers for
the printing industry. The company primarily re-builds their customer's
ink rollers.

Questions

(1) Are the materials (rubber) used in the rebuilding process tax exempt?

Response: Your client may purchase the materials tax free by issuing a
resale certificate to their suppliers. However, the company must charge
tax to their customer on the total charge to rebuild the roller.

(2) Does the Company have to pay full sales tax on new machinery used
in the rebuilding process or pay only 25% of regular state sales tax?

Response: If the equipment is used solely to rebuild a customer's
rollers, tax is due without any reduction. If the equipment is used to
manufacture or re-manufacture rollers that are sold in the normal course
of business, the client may issue an exemption certificate for 75% of the
state tax due. If the equipment is used for both repair and manufacturing,
the client must be able to clearly document the amount of work attributable
to manufacturing. The client may then take the manufacturing exemption if
the equipment is primarily used for manufacturing use.

(3) Because the company does manufacturing and rebuilding, should the
company rely on Rule 3.300 for tax questions?

Response: Your client may rely on Rule 3.300 for questions pertaining to
it's manufacturing operations. However, if your client primarily works on
customer's rollers, rather than rollers it owns and sells, the correct rule
to rely on is Rule 3.292 pertaining to repairs.

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

You may call me toll free at 1-800 531-5441, ext. 5-0037. The direct line is
512/475-0037. You also may write to Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Lindey Osborne
Tax Administration Division

NOTE: Previous Accession Number 9410757L