What counts as exempt 'machinery and equipment' for a Texas enterprise project, and how do the related sales tax refunds work?

Subject

Manufacturer — Located In Enterprise Projects — May Claim Exemption On Qualifying Machinery And Equipment In Addition To Applicable Refunds

Plain-English summary

A company that qualified as a Texas "enterprise project" asked the Comptroller eight questions about how the sales tax refund for enterprise zone purchases works. The Comptroller answered each one:

1. What counts as "machinery and equipment"? Everything depreciable that's purchased for use in the zone by the enterprise project -- manufacturing machinery and equipment, furniture and fixtures, and office/other equipment not used in manufacturing. It also includes tangible personal property leased or rented under operating or financing leases. The refund does not apply to the building itself (buildings generally aren't taxed), but it does apply to tax paid on materials used to build or refurbish the structure.
2. Repair/replacement parts? The refund does not extend to taxable services other than real property repair and remodeling, but parts used in repairs do qualify.
3. Lump-sum construction contracts? If a new-construction contract is lump-sum, the enterprise project refund is lost, because the materials were consumed by the contractor rather than sold to the project. For real property repair or remodeling before September 1, 1995, the contractor could break out materials versus labor charges to get a refund on the materials; for such work on or after September 1, 1995, the refund covers both labor and materials with no breakout required.
4. How are the per-job refund amounts calculated? A project may allocate the new permanent jobs it created across the five-year designation period however it likes, but no more than 125 jobs may be claimed in any single year of designation. Refunds stay conditional on maintaining the minimum job level, and one or two refund claims may be filed per state fiscal year.
5. What if the company later relocates outside the zone? If the company loses its enterprise project designation because it physically relocates the facility outside the designated zone, it could have to return previously refunded tax, because the refunds are conditional and tied to items used within the zone.
6. Can items also exempt under another provision (like Section 151.318) still count toward the 151.429 refund cap? No. If an exemption is claimed under Section 151.318 or another provision, no refund can also be claimed under Section 151.429 -- a refund is only available where tax was actually paid.
7. Is the "90 day" period calendar days or working days? Working days.
8. Does a company that qualified as an enterprise project on December 21, 1992 get the benefit of refund provisions added by the legislature in 1993 or 1995? Yes.

The letter closes with the Comptroller's standard caveat that the opinion is based on the facts presented and that different facts could lead to a different answer.

What this means for you

Manufacturers operating as Texas enterprise projects

Nearly all of your depreciable property purchased for use in the zone -- production equipment, furniture, office equipment, and even leased/rented property -- can qualify as exempt "machinery and equipment" under Section 151.429(a). The building structure itself is excluded, but materials used to build or refurbish it are covered. Track your job creation carefully: no more than 125 new permanent jobs can be claimed in any single year of your five-year designation, and refunds remain conditional on maintaining minimum staffing.

Contractors working on enterprise-zone projects

How you structure a construction or remodeling contract matters. A lump-sum new-construction contract causes the project to lose its refund on materials, because the contractor -- not the project -- is treated as having consumed them. For real property repair or remodeling on or after September 1, 1995, the refund covers labor and materials together with no need to itemize; for such work before that date, a breakout of materials versus labor was required to recover the material tax.

Accountants and tax professionals advising enterprise-project clients

Watch the interaction between Section 151.429 refunds and other exemptions such as Section 151.318: a project can't double-dip -- if tax is exempted under another provision, no 151.429 refund is available on that same item, since a refund presupposes tax was actually paid. Also flag the relocation risk: physically moving a qualifying facility outside the designated enterprise zone can trigger repayment of previously granted refunds.

Common questions

Q: Does "machinery and equipment" under Section 151.429(a) include office furniture and equipment that isn't used in manufacturing?
A: Yes. The ruling states it includes "office and other machinery and equipment not used in the manufacturing process," in addition to manufacturing machinery and furniture and fixtures.

Q: Does the exemption cover leased or rented equipment?
A: Yes -- "tangible personal property leased or rented under operating and/or financing leases" is included.

Q: Does the refund apply to the building itself?
A: No. The letter says the refund does not apply to a building "because buildings are generally not taxed," but it does apply to tax paid on materials used to build or refurbish the structure.

Q: What happens if a lump-sum contract is used for new construction on the enterprise-zone property?
A: The enterprise project refund is lost, because the materials were consumed by the contractor and not sold to the project -- only tax paid on items purchased directly by the project qualifies.

Q: How many new jobs can a project count toward its refund in a single year?
A: No more than 125 jobs may be claimed in any one year of designation, though the jobs created can be allocated across the five-year designation period in various ways.

Q: If the company relocates outside the enterprise zone, does it have to repay refunds already received?
A: Potentially yes. The letter states that loss of designation due to physically relocating the facility could require the company to return previously refunded tax, since the refunds apply only to items used within the zone.

Q: Can a project claim both an exemption under Section 151.318 and a refund under Section 151.429 on the same item?
A: No. If an exemption is claimed under Section 151.318 or another provision, no refund may also be claimed under Section 151.429.

Citations and references

Statutes cited in the letter:

• Section 151.429(a) (definition of "machinery and equipment" for enterprise project refunds)
• Section 151.318 (a separate sales/use tax exemption provision referenced in Question 6)
• Sec. 151.429 (the enterprise project refund provision generally)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1435A14

Original ruling text

September 16, 1996

Dear *****:

This is in response to your letter dated August 5,
1996, concerning enterprise projects. I have restated your questions followed
by my response.

Question 1: Does "machinery and equipment" as used
in Section 151.429(a) include all depreciable property located in the
enterprise zone including machinery and equipment used to manufacture the
product; furniture and fixtures; office and other machinery and equipment not
used in the manufacturing process; and the building in which the manufacturing
equipment is located? Does machinery and equipment also include tangible
personal property leased or rented under either operating or financing leases?

Response: Yes, "machinery and equipment" include all
depreciable property purchased for use in the enterprise zone by the enterprise
project, including machinery and equipment used to manufacture the product,
furniture and fixtures, office and other machinery and equipment not used in
the manufacturing process. The refund does not apply to a building because
buildings are generally not taxed; however, it does apply to tax paid on
materials used to build or refurbish the structure. The exemption includes
tangible personal property leased or rented under operating and/or financing
leases.

Question 2: Can refunds also be obtained for tax
paid on repair or replacement parts used to repair any type of depreciable
property (e.g., office equipment, forklifts, etc.)?

Response: The refund provision does not apply to
taxable services other than real property repair and remodeling; however, parts
used in the repairs would qualify.

Question 3: If only materials incorporated into realty
located in an enterprise project qualify for a refund, can the client obtain
from its contractors the amount of materials (and sales tax paid thereon)
incorporated into either a lump-sum remodeling contract or lump-sum new
construction contract and obtain a refund of sales tax paid by either the
contractors or directly by the client on the materials?

Response: No. if the contract for new construction is
lump-sum, the enterprise project refund is lost. The materials were consumed
by the contractor and not sold to the project. Only tax paid on items
purchased by the project qualify for refund. However, if the work is real
property repair or remodeling and the work occurred before September 1, 1995,
the contractor may provide a breakout of the charges for materials and labor
and a refund of the tax on the materials can be obtained. If the taxable
repair or remodeling work occurred on of after September 1, 1995, the refund
provision applies to both labor and materials and no separation of charges is
required.

Question 4: For purposes of calculating the amount
of refunds the client is entitled to, does it compute on a yearly basis the
number of new permanent jobs that it has created times $2,000 to determine the
amount of refund it can claim for each year it has remained an eligible
enterprise project, or can it take the number of new permanent jobs it has
created since it qualified as an enterprise project through the earlier of the
end of the five-year period for which it qualifies as an enterprise project or
the date on which its designation as an enterprise project is revoked, times
$2,000 and file a refund claim on this basis?

Response: I'm not sure that I understand this question.
However, a project may allocate the number of jobs it created over the 5 year
period of designation so that it may take full advantage of all the jobs
created. No more than 125 jobs may be claimed in any one year of designation.
For example, if in the second year of designation 500 new jobs are created, 125
jobs may be allocated to each of the first four years or the last four or in
any other manner so long as no more than 125 jobs are claimed in any one year.
The refunds are conditional upon the minimum level being maintained. One or
two refund claims may be made made during a state fiscal year.

Question 5: The client could possibly relocate its
plant and some or all of its employees to another facility in Texas in 1997.
This new facility would not be within a designated enterprise zone, therefore,
the company would lose its designation as an enterprise project. Would this
relocation create a requirement for the client to return to the State any of
the sales tax refunds it has obtained for qualifying purchases made during the
time it was a qualified enterprise project?

Response: Yes. Loss of designation due to physically
relocating the facility could result in the client having to return previously
refunded tax monies to the state because refunds are conditional. The refunds
apply to items purchased for use in the zone. If the items are removed from
the zone for use elsewhere, the refund would be revoked.

Question 6: If a purchase qualifies for refund
under Section 151.429 and is also exempt under another section of the sales/use
tax law such as 151.318, must such items be counted against the maximum amount
allowed to be taken as a refund under Section 151.429?

Response: No, if an exemption is claimed under 151.318 or other provisions,
no refund may be claimed under Sec. 151.429. A refund may only be claimed if
tax was actually paid to the state.

Question 7: Does the 90 day period mean 90 working days or 90 calendar days?

Response: Working days.

Question 8: The client qualified as an enterprise project on December 21, 1992.
Does the client qualify for any of the new refund provisions enacted by the
legislature in 1993 or 1995?

Response: Yes.

This opinion is based on the facts presented. Different facts though similar,
may result in different answers.

If you have any questions or need more information, you may call me toll free
at 1-800-531-5441, extension 3-4675. The direct line is 512/463-3465. You may
also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Tom Soto
Tax Policy Division

NOTE: Previous Accession Number 9609653L