Is machinery and equipment that a grower buys to dry, sort, grade and pack its own fruit and vegetables exempt from Texas sales tax as agricultural processing equipment?

Plain-English summary

Company A asked the Comptroller's office whether sales tax applies to machinery and equipment it purchases to dry, sort, grade and pack fruit and vegetables that Company A itself grows.

The letter explains that Tax Code 151.316(a)(8) exempts machinery and equipment used to process, package or market agricultural products at a location operated by the original producer exclusively for processing, packaging or marketing that producer's own products. To qualify, the processor must (1) own all of the agricultural products processed by the machinery and equipment, and (2) be the original producer — the grower — of at least 50% of those products. The letter notes that machinery and equipment used to process products for a fee, or to process products owned by someone else at the time of processing, falls outside the exemption.

Applying those rules to Company A's facts — Company A was buying the machinery and equipment solely to process and package agricultural products that Company A itself grew — the Comptroller concluded the exemption under Section 151.316(a)(8) applied, and Company A could issue exemption certificates when purchasing this machinery and equipment.

What this means for you

Growers who also process and pack their own crops

If you grow fruit or vegetables and also buy machinery to dry, sort, grade or pack that same produce, this letter confirms that equipment can qualify for the Section 151.316(a)(8) sales tax exemption — as long as you own all the products being processed and you are the original producer (grower) of at least 50% of them.

Custom processors and contract packers

The letter is explicit that this exemption does not cover machinery used to process products for a fee, or to process products that belong to someone else at the time of processing. If you're processing another party's crops under a service arrangement rather than processing your own, this exemption would not apply to that equipment.

Accountants and tax professionals

The letter frames the exemption as a two-part test: (1) the processor must own all the agricultural products run through the equipment, and (2) the processor must have grown at least 50% of those products itself. The letter also confirms that a qualifying original producer may issue exemption certificates directly to sellers when purchasing the equipment, rather than paying tax and seeking a refund.

Common questions

Q: What kind of equipment did this letter address?
A: Machinery and equipment purchased by Company A to dry, sort, grade and pack fruit and vegetables that Company A grew.

Q: What are the requirements to qualify for the Section 151.316(a)(8) exemption?
A: The processor must own all of the agricultural products processed by the machinery and equipment, and must be the original producer (grower) of at least 50% of those products.

Q: Does this exemption cover equipment used to process someone else's crops for a fee?
A: No. The letter states that machinery and equipment used to process products for a fee is not within the scope of the exemption, nor is equipment used to process products owned by another person or entity at the time of processing.

Q: How does a qualifying producer buy the equipment tax-free?
A: The letter states Company A may issue exemption certificates when purchasing the machinery and equipment.

Citations and references

• Tax Code 151.316(a)(8)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9503L1343D04

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.

March 28, 1995

Dear **:

This letter is intended to follow up our recent phone conversation. As
I understand it, your question involves the taxability of machinery and
equipment purchased by Company A to dry, sort, grade and pack fruit and
vegetables grown by Company A.

Under 151.316(a)(8) of the Tax Code, there is a sales tax exemption for
machinery and equipment used to process, package or market agricultural
products at a location operated by the original producer exclusively for
processing, packaging or marketing the producer's own products. To
qualify for this exemption, the processor must own all agricultural
products processed by such machinery and equipment, and must be the
original producer (i.e., grower) of at least 50% of those products.

In other words, machinery and equipment used to process products for a
fee is not within the scope of the exemption, nor is machinery and
equipment used to process products owned by another person or entity at
the time of processing.

Based on these facts- Company A purchasing machinery and
equipment solely for use in processing and packaging agricultural
products grown by Company A -the sales tax exemption under
Section 151.316(a)(8) would apply. Company A may issue exemption
certificates when purchasing this machinery and equipment.

As noted, the analysis described above is based on the facts presented.
If there is a change in the applicable facts, the taxability result
could change. If I have misstated the facts, or if you have further
questions, please feel free to contact me. I can be reached toll free
at 1/800/531-5441, extension 5-0412, or at 512/475-0412.

Sincerely,

Ray Bonilla
General Counsel

NOTE: Previous Accession Number 9503036L