Does a cottonseed delinting operation qualify for the Texas manufacturing exemption, and can it accept resale/exemption certificates for the bags, fungicide, and insecticide it charges producers for?

Plain-English summary

A cottonseed delinting business (described in the letter as "a 10% custom oriented business") wrote to the Comptroller asking about the manufacturing machinery and equipment exemption as applied to its operation. The company's process, as described in the letter: cotton gins catch the cottonseed and it is trucked to the company's plant, where it is unloaded and stored until the company acid-delints it. HCL gas is used to delint the seed, and NH3 gas neutralizes the leftover acid. The seed then passes over cleaners and a gravity table, which separates good seed from light seed (the light seed is used for cow feed or spread on soil as organic material). The good seed goes to a seed treater, where it is treated with a fungicide and sometimes an insecticide, then bagged in 50-lb. bags and stored until the producer picks it up or has it trucked back for planting. The company charges the producer for delinting, bags, fungicide treatment and/or insecticide, storage, and insurance coverage.

The Comptroller responded that machinery and equipment used directly in processing the seeds qualifies for the manufacturing exemption. The company may issue a resale or exemption certificate in lieu of paying tax on the bags, fungicide, and insecticide it purchases (since it resells/passes those items through to the producer as part of its charges), and referred the company to the Comptroller's enclosed publication on manufacturing exemptions. The letter also notes that the cotton farmer (the producer) may in turn give the delinting company an exemption certificate for the charge to process the seed.

What this means for you

Cottonseed processors and similar agricultural processors

If you operate machinery and equipment used directly in processing agricultural products like cottonseed (here, delinting via acid treatment, cleaning/gravity separation, and seed treatment), that machinery and equipment can qualify for Texas's manufacturing exemption. This letter also confirms that items you purchase and pass through to your customer as part of a taxable processing charge — here, bags, fungicide, and insecticide — can be bought using a resale certificate rather than paying tax on them yourself.

Businesses billing producers for processing, materials, and treatment charges

If your invoice to a customer bundles a processing charge together with materials you apply (bags, fungicide, insecticide) and services like storage and insurance, this letter shows the Comptroller distinguishing between the exempt manufacturing equipment used to perform the work and the resale-certificate treatment of the materials that get passed through to the customer.

Farmers and other producers who hire out processing

If you are the producer having your goods processed (here, cottonseed delinted), this letter notes you may give the processor an exemption certificate for the charge to process the seed, rather than paying tax on that processing charge.

Common questions

Q: Does the delinting machinery and equipment qualify for a Texas tax exemption?
A: Yes. The Comptroller stated that machinery and equipment used directly in the processing of the seeds will qualify for the manufacturing exemption.

Q: Can the company avoid paying tax on the bags, fungicide, and insecticide it buys?
A: Yes. The letter says the company may issue a resale or an exemption certificate in lieu of tax on the bags, fungicide, and insecticide.

Q: Does the cotton farmer (producer) owe tax on the processing charge?
A: The letter states the cotton farmer may give the delinting company an exemption certificate for the charge to process the seed.

Q: Can other taxpayers rely on this letter?
A: This is a fact-specific letter ruling, and the letter itself notes the opinion is based on the facts submitted — other facts, though similar, may yield different results. STAR letters generally may be relied on as the basis of a detrimental reliance claim only by the taxpayer to whom they were issued.

Citations and references

No specific statutes or administrative rules are cited in the text of this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9502L1337D14

Original ruling text

February 2, 1995

Dear *:

Thank you for your letter dated January 30, 1995, regarding the exemption
provided for certain machinery and equipment used in manufacturing. Tom Soto
informed me about the information discussed during your telephone conversation
and your questions. He asked that I respond to your inquiry.

*** is a 10% custom oriented business. The cottonseed is
caught at the cotton gin by the producer on his truck or vehicle or on a truck
for hire and brought to your plant at ****, Texas. The seed is unloaded
and stored in your buildings until you are ready to acid delint the seed. HCL
gas is used in the process of delinting and NH3 gas is used for neutralization
of the acid left on the seed. The seed then passes over cleaners and gravity
table, which separates the good seed from the light seed. The light seeds are
then used for cow feed or spread upon the soil as an organic material.

The good seed goes to the seed treater where they are treated with a fungicide
and sometimes with an insecticide. They are bagged in 50 lb. bags and stored
until the producer wants to pick them up or hires a trucker to deliver them
back to the producer for planting purposes.

You charge the producer for delinting, bags, fungicide treatment and/or
insecticide, storage, and insurance coverage.

Response: Machinery and equipment used directly in the processing of the seeds
will qualify for the exemption. You may issue a resale or an exemption
certificate in lieu of tax on the bags, fungicide, and insecticide. See the
enclosed publication on manufacturing exemptions.

The cotton farmer may give you an exemption certificate for the charge to
process the seed.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0330. The direct line is
512/475-0330. You may also write to Tax Administration, Comptroller of Public
Accounts.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9502965L