If a company designs its products, buys the raw materials and packaging, and controls production, but has a third-party subcontractor actually assemble the goods, can the company still buy its packaging materials tax-free as a manufacturer?

Plain-English summary

A company asked the Comptroller about the tax treatment of packaging materials it buys, given that it subcontracts the actual physical production of its products to a separate third-party manufacturer (a "submanufacturer"). The company itself designs the products, buys the raw materials and the packaging, and controls the production process — its own employees just don't do the hands-on assembly work.

The Comptroller confirmed that this arrangement makes the company a manufacturer, not merely a repackager of goods someone else made. Because it is treated as the manufacturer, it may purchase wrapping and packaging materials for its products tax-free under Rule 3.300's wrapping/packaging exemption, even though a third party physically assembles the goods.

What this means for you

Companies that outsource physical production but retain design/material control

Contracting out the hands-on assembly work doesn't automatically turn you into a mere reseller or repackager for tax purposes. If you design the product, supply the raw materials and packaging, and control the production process, the Comptroller can treat you as the manufacturer — preserving your manufacturing-related exemptions, including on wrapping and packaging supplies.

Accountants structuring subcontract-manufacturing arrangements

Document who designs the product, who supplies materials, and who controls the process — those are the facts the Comptroller leaned on to find manufacturer status here. A client that just buys finished goods from a third party and repackages them, without that level of control, would likely be treated differently.

Common questions

Q: We outsource assembly to a subcontractor — are we still a "manufacturer" for Texas sales tax purposes?
A: If you design the product, buy the raw materials and packaging, and control the production process, yes — even though the subcontractor's employees do the physical assembly.

Q: Can we buy our packaging materials tax-free?
A: Yes, as a manufacturer you may purchase wrapping and packaging materials for your products tax-free under Rule 3.300, based on the facts described in this letter.

Q: Can I rely on this letter for my own subcontract-manufacturing arrangement?
A: No. This opinion is rendered based on the specific facts presented, and it may change on additional or different facts; it binds the Comptroller only as to the taxpayer it was issued to.

Citations and references

• 34 Tex. Admin. Code Rule 3.300 (manufacturing exemption; wrapping and packaging supplies)

Subject

Manufacturer — Subcontracts Part Of Manufacturing Process To Third Party (Submanufacturer) But Provides Material Related To That Part Of Manufacturing Process — Wrapping And Packaging Purchases By Manufacturer Are Exempt

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9712135L

Original ruling text

December 23, 1997

Dear **:

Thank you for your recent letter regarding the tax treatment of packaging
materials purchased by a firm that subcontracts the production of its products
to a third-party manufacturer.

You state that the client designs the products, purchases the raw materials and
packaging and controls the production process even though its employees do not
actually assemble the products. Accordingly, the client is considered to be a
manufacturer rather than simply a repackager of the manufactured goods and may
purchase the packaging materials tax free.

This opinion is rendered based on 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, ext. 3-4680. The direct line is
512/463-4680. You may also write to Tax Policy, Comptroller of Public
Accounts. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division