Does re-processing a customer's plastic pellets — melting them down in a twin screw extruder, blending in a hardener, flame retardant, or other material, and re-pelletizing — qualify for Texas's manufacturing exemption?

Plain-English summary

A company asked the Comptroller whether processing plastic resins in the form of plastic pellets for various plastic manufacturers qualifies for the manufacturing exemption. In this operation, plastic pellets shipped in by a customer are run through a twin screw extruder, which melts the pellets down, blends in a hardener, flame retardant, or other material, and then re-pelletizes the mixture into new pellets. The Comptroller noted that since the pellets are shipped to the company from its customer, the pellets are presumed to be owned by the customer, not the company doing the processing.

The Comptroller ruled that this qualifies for the manufacturing exemption under Tex. Tax Code § 151.318(a), which covers tangible personal property that becomes an ingredient or component part of tangible personal property manufactured, processed, or fabricated for ultimate sale. By melting the pellets, adding the hardener, flame retardant, or other material, and making new pellets, the company is "processing" within the meaning of that statute.

What this means for you

Plastics processors and toll manufacturers

If you take a customer's raw material (here, plastic pellets) and physically transform it — melting it down, blending in additives, and re-forming it into a new product — that transformation can count as "processing" for purposes of Texas's manufacturing exemption, even if you don't own the material and are working on a customer's behalf.

Businesses relying on the manufacturing exemption

This letter is a reminder that the exemption in § 151.318(a) turns on whether the item becomes an ingredient or component part of property that is manufactured, processed, or fabricated for ultimate sale — not on who owns the raw material during the process.

Accountants and tax professionals

This ruling is fact-specific: it applies to the described extrusion/re-pelletizing process for a customer's owned material. As the letter itself states, additional or different facts could change the outcome, so confirm your client's actual process and material-ownership facts match before relying on this reasoning.

Common questions

Q: Does re-melting and re-pelletizing a customer's plastic pellets qualify for Texas's manufacturing exemption?
A: Yes, according to this letter — melting the pellets, adding a hardener, flame retardant, or other material, and re-pelletizing them is "processing" that qualifies under Tex. Tax Code § 151.318(a).

Q: Does it matter that the company doesn't own the plastic pellets being processed?
A: The Comptroller noted the pellets are presumably owned by the customer who shipped them in, but still found the activity qualified as processing under the exemption.

Q: What equipment is used in the process described in this letter?
A: A twin screw extruder, which melts the pellets, blends in a hardener, flame retardant, or other material, and then re-pelletizes the mixture.

Q: Can other businesses rely on this letter for their own plastics processing?
A: No. The letter states its opinion is based on the facts presented, and if there are additional or different facts, the opinion may change. Only the taxpayer who received the letter can rely on it for detrimental-reliance purposes.

Q: What statute does this ruling rely on?
A: Tex. Tax Code § 151.318(a), covering tangible personal property that becomes an ingredient or component part of tangible personal property manufactured, processed, or fabricated for ultimate sale.

Citations and references

• Tex. Tax Code § 151.318(a) (manufacturing exemption — ingredient or component part of manufactured, processed, or fabricated 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/9605L1414A03

Original ruling text

May 28, 1996

Dear ****:

In your letter, you asked if the processing of plastic resins in the form of
plastic pellets for various plastic manufacturers qualifies for the manufacturing
exemption. The pellets are sent through a twin screw extruder, which melts down
the plastic pellets, blends a hardener, flame retardant, or other material and
then re-pelletizes it. Since the plastic pellets are shipped to your client from
its customer, I presume the plastic pellets are owned by the customer.

Texas Tax Code 151.318 (a) states " . . . . tangible personal property that will
become an ingredient or component part of tangible personal property manufactured,
processed, or fabricated for ultimate sale . . . ."

Your client by melting the pellets, adding the hardener, flame retardant, or
other material and making new pellets is processing and qualifies for the
manufacturing exemption.

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

You may call me toll free at 1-800-531-5441 extension 50892. The direct line
is 512/475-0892. You may also write to Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

John J. Fitzgibbons, CPA
Tax Policy

NOTE: Previous Accession Number 9605289L