When used refinery equipment bought in Texas is dismantled, inspected, refurbished, and shipped out of the country over several months, does the export exemption still apply, and are the dismantling/inspection/refurbishing services themselves taxable?

Plain-English summary

A buyer was arranging to purchase used refinery equipment from a Texas company on behalf of a South American client. Because it can take months to dismantle, inspect, refurbish, and ship a refinery, the deal raised several questions about Texas's export exemption. The Comptroller's answers: the purchase price is exempt from state sales tax (with local tax refundable once proof of export is furnished under Rule 3.323), and the well-known "30 days" rule in Rule 3.323(c)(3) -- which presumes goods still in Texas after 30 days are being stored, forfeiting the export exemption -- is only a presumption. It can be beaten with records showing that any delay past 30 days is genuinely for the time needed to arrange shipment, not for storage or other use. The 30-day clock starts on the "date of purchase," meaning when title or possession transfers for consideration -- here, when the client takes title after the second payment (not when packing/shipping actually finishes). Third-party inspection services (x-ray, ultrasonic testing) and third-party dismantling/packing/shipping are nontaxable services and don't count as a taxable "use" of the property, so they don't threaten the export exemption. Refurbishing, sandblasting, and painting are different: those are taxable repair/remodeling services under Rule 3.292, and having them performed on the equipment after the client takes title is itself a taxable use of the property in Texas -- which causes the export exemption on the ORIGINAL purchase to be lost entirely. The Comptroller even suggested a workaround: restructure the deal so the client doesn't take title to the refurbished equipment until it's actually ready to export, and flagged two additional exemptions worth checking (Rule 3.316(d) for the sale of a business segment, and Rule 3.300(f) for manufacturing equipment).

What this means for you

Exporters buying used equipment in Texas

The export exemption survives a longer-than-30-day gap between purchase and shipment as long as you keep records showing the delay is about arranging logistics, not storing or using the goods. But don't have refurbishing, sandblasting, painting, or similar repair-type work done on the equipment after you take title -- that use in Texas forfeits the exemption on the whole purchase, even though inspection and dismantling/packing/shipping services don't.

Businesses structuring multi-step export deals

Consider timing title transfer to occur only after any refurbishing work is done and the property is ready to ship -- the letter explicitly notes this restructuring avoids the use-based forfeiture problem.

Accountants and tax professionals

Two separate tax issues run through this letter: (1) whether the ORIGINAL purchase keeps its export exemption (turns on whether a taxable "use" like refurbishing happens after title transfer), and (2) whether the SERVICES performed along the way (inspection, dismantling, refurbishing) are themselves taxable. Inspection and dismantling/packing/shipping are nontaxable services; refurbishing/sandblasting/painting are taxable services under Rule 3.292.

Common questions

Q: Does keeping equipment in Texas more than 30 days before export always forfeit the export exemption?
A: No, per this letter -- the 30-day rule in Rule 3.323(c)(3) is only a presumption, and it can be overcome with records showing the delay is for arranging shipment, not storage or use.

Q: What counts as the "date of purchase" for the 30-day clock?
A: Per this letter, the date title or possession transfers for consideration between buyer and seller.

Q: Are third-party inspection, dismantling, packing, and shipping services taxable?
A: No, per this letter -- and performing them doesn't count as a taxable use of the property that would forfeit the export exemption.

Q: Is refurbishing, sandblasting, or painting the equipment taxable?
A: Yes, per this letter -- these are taxable repair/remodeling services under Rule 3.292, and doing this work after title transfers also causes the buyer to lose the export exemption on the original purchase.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.323 (export exemption; proof of export, refund procedure, 30-day storage presumption)
• 34 Tex. Admin. Code Rule 3.292 (taxable repair/restoration/maintenance/remodeling services)
• 34 Tex. Admin. Code Rule 3.316(d) (exempt sale of a business or identifiable segment)
• 34 Tex. Admin. Code Rule 3.300(f) (manufacturing/fabricating/processing equipment exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9705901L

Original ruling text

May 13, 1997

Dear **:

Thank you for your letter concerning a project involving the purchase and
shipment of used refinery equipment to another country. Nina Roberts forwarded
your faxed letter to me for a response.

This is how the project is presently structured:

• A client of yours wishes to construct a refinery in South America. To
  reduce costs, they have decided to utilize used equipment where possible. With
  that in mind, you are negotiating, on their behalf, to buy from a Texas LLC a
  crude unit and associated equipment.

• As the deal is currently structured, your client takes title to the
  equipment after two payments have been made. Title will be given subject to the
  Texas company's registered security interest.

• Once the first major payment is made, the client can begin to dismantle and
  pack equipment in preparation for shipping.

• Dismantling, packing and shipping contracts will be subcontracted to local
  companies who do such work. The construction schedule for this activity will
  be three months.

• During dismantling, equipment will be inspected to determine corrosion and
  other hidden problems that visual inspection may not reveal.

• Based on this inspection, some of the equipment may be refurbished in Texas
  prior to shipping.

• Finally, in preparation for shipping, equipment may be sandblasted and
  painted to protect it during ocean freight. The equipment will be packed and
  shipped. This may include internal bracing.

• As soon as possible, the equipment will be moved to a port in Texas and
  shipped to South America.

Questions:

1. The purchase price of the equipment is subject to 6.25% sales tax which
   must be paid by the buyer. Once proof of export is provided to the seller, the
   seller shall refund to the buyer the sales tax paid.

Response: In addition to the 6.25% state sales tax, local sales tax (i.e.,
city, county, special purpose district, and/or transit authority sales tax) may
also be due on the transaction. Rule 3.323(c) addresses the proof of export
that a seller requires before a refund of state and applicable local taxes is
possible to the buyer. Subsection (e) of that rule explains the refund
procedure.

2. As you indicated, you cannot physically dismantle, pack and ship a refinery
   within thirty (30) days. The time limit mentioned in the last part of Section
   3.323(c)(3), might therefore be a problem. Your question in this regard is
   what constitutes the "date of purchase"? Your client's last payment will be
   made when the equipment is finally dismantled and packed and ready for
   shipment. If that were the effective date for the thirty day period, it
   wouldn't be a problem. At that time, the equipment will most likely be in the
   hands of a freight forwarder.

Response: The thirty days discussed in Rule 3.323(c)(3) is a presumption that
the property is being stored in Texas. This presumption can be overcome if the
buyer has records showing that any delay in exporting the property is related
to the sufficient time necessary to arrange for shipment of the property rather
than storage or other use of the property prior to export.

The "date of purchase" is the date when either title to or possession of
tangible personal property is transferred for consideration between a buyer and
a seller. Therefore, the date of purchase is when the client takes title to
the property after the second payment is made. As you know, if the client took
title to the property when it is transferred to the freight forwarder, the
export exemption is less problematical.

3. Does the work of inspection (non-destructive examinations such as x-ray,
   ultrasonic testing, etc.) attract sales tax?

Response: The inspection of tangible personal property is a nontaxable
service. Therefore, the persons doing x-ray examinations and ultrasonic
testing are not going to collect sales tax from your client for inspection
services. The inspection by the third party is not considered a use of the
property in Texas by your client and does not cause a loss of the export
exemption.

4. Does the work of dismantling, packing and shipping attract sales tax?

Response: The dismantling, packing and shipping charges are not taxable to the
buyer if billed by a third party that is not the seller. The dismantling,
packing and shipping by the third party is not considered a use of the property
in Texas by your client and does not cause a loss of the export
exemption. The thirty day presumption of storage can be overcome if the client
has records showing that any delay in exporting the property is related to the
sufficient time necessary to arrange for shipment of the property rather than
storage or other use of the property prior to export.

5. Does the work of refurbishing attract sales tax?

Response: The repair, restoration, maintenance or remodeling of tangible
personal property is a taxable service. The total price (materials, labor,
etc.) charged for the refurbishing by the third party is taxable. A copy of
Rule 3.292 concerning this taxable service is enclosed. The refurbishing of
the property by the third party after the client has taken title to the
property is a use of that property in Texas and causes the loss of the export
exemption on the original purchase of the refinery.

6. Does sandblasting and painting attract sales tax?

Response: See the response to question five above.

Of course, your client could choose to restructure the transactions in such a
way that the client does not actually purchase the refurbished refinery
equipment until the property is ready to be exported. I will be happy to
discuss the export exemption in regards to any restructuring of the
transactions that your client may be considering.

Although not part of the facts or questions presented in your letter, please be
aware that there are other exemptions in the Texas Tax Code besides the export
exemption that might help your client. Please review subsection (d) of
enclosed Rule 3.316 regarding the exempt sale of a business or an identifiable
segment of a business. See subsection (f) of enclosed Rule 3.300 concerning
the exemption of machinery and equipment used in manufacturing, fabricating, or
processing tangible personal property to be sold. If you have questions about
these exemptions, please feel free to call or write me.

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. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Policy Division