Are repair, refurbishing, and rebuilding services performed in Texas on equipment owned by a company with both Texas and Mexican maquiladora operations subject to Texas sales tax?

Plain-English summary

A company warehouses, manufactures, and ships from a Texas location, and separately manufactures at maquiladora facilities in Mexico. It holds both a Maquiladora exemption certificate and a Texas exemption certificate. Its machinery and equipment — mostly manufacturing equipment — is used at both the Texas location and the Mexican maquiladoras, and the company periodically sends this equipment to vendors in Texas to be repaired, refurbished, or rebuilt (a combination of parts and labor).

The company asked the Comptroller to clarify taxability across several variables: manufacturing vs. non-manufacturing equipment, equipment used in Texas vs. at the maquiladoras, which exemption (maquiladora vs. Texas) applies, and whether parts and labor are treated differently given the equipment gets exported.

The Comptroller identified two separate, independently available exemptions:

1. Tax Code § 151.3111 exempts a repair service on property that would itself be exempt (because of its nature, its use, or a combination of the two) if that property were instead being sold, leased, or rented. Applying this, repair charges on qualified manufacturing equipment can be purchased exempt from sales tax regardless of where in the world the manufacturing actually happens — Texas or the Mexican maquiladoras alike.
2. Tax Code § 151.330(e) separately exempts services performed for use outside Texas. A purchaser buying repair services for equipment that will be used exclusively outside Texas can give the service provider an exemption certificate instead of paying sales tax — and this exemption applies equally to both manufacturing and non-manufacturing equipment, not just qualifying manufacturing gear.

The one taxable scenario: repair services performed on equipment that does not qualify for exemption under either provision and that is for use in Texas are subject to tax.

Note: § 151.156, the maquiladora exemption itself, is limited to sales of tangible personal property — it doesn't by itself reach repair services — but §§ 151.3111 and 151.330(e) fill that gap for the service charges at issue here.

What this means for you

Manufacturers with cross-border (U.S./Mexico maquiladora) operations

Repairs performed in Texas on your manufacturing equipment can be exempt from Texas sales tax two different ways: either because the equipment itself qualifies as exempt manufacturing property (regardless of whether it's used in Texas or at a Mexican maquiladora), or because the equipment will be used exclusively outside Texas (which covers non-manufacturing equipment too, via an exemption certificate). Only equipment that fails both tests and stays in Texas is taxable when repaired.

Accountants and tax professionals

This letter is a useful map of two independently sufficient repair-service exemptions — § 151.3111 (services on otherwise-exempt property) and § 151.330(e) (services for out-of-state use) — that can apply on top of, or instead of, the narrower maquiladora exemption in § 151.156, which by its own terms only covers sales of tangible personal property, not services.

Common questions

Q: Is a Texas repair on manufacturing equipment used at a Mexican maquiladora taxable?
A: No, per this letter, under Tax Code § 151.3111 — repairs on qualified manufacturing equipment are exempt regardless of where in the world the equipment is used.

Q: Does the same exemption cover non-manufacturing equipment?
A: Not under § 151.3111, but Tax Code § 151.330(e) separately exempts repair services on ANY equipment (manufacturing or not) that will be used exclusively outside Texas, via an exemption certificate given to the repair provider.

Q: When is a repair actually taxable under this letter?
A: When the equipment doesn't qualify for either exemption and is used in Texas.

Q: Does the maquiladora exemption certificate itself cover repair services?
A: No — per this letter, Tax Code § 151.156's maquiladora exemption is limited to sales of tangible personal property; it's §§ 151.3111 and 151.330(e) that provide the relevant service exemptions here.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.156 (maquiladora exemption — limited to tangible personal property, doesn't reach services)
• Tex. Tax Code § 151.3111 (repair services on otherwise-exempt property are exempt, regardless of where the property is used)
• Tex. Tax Code § 151.330(e) (services performed for use outside Texas are exempt, applies to manufacturing and non-manufacturing equipment alike)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9811990L

Original ruling text

November 9, 1998

Dear Ms. **:

Thank you for your recent letter which is restated in part with response below.

Facts:

COMPANY A warehouses, manufactures, and ships from their **, Texas
location. COMPANY A also manufactures at their maquiladoras in **,
Mexico. They have a Maquiladora exemption certificate and a Texas exemption
certificate.

COMPANY A owns machinery and equipment, some of which it uses in **
and the rest of which it uses in **. Most of it is manufacturing
equipment COMPANY A sends out machinery and equipment from ** and
** (to vendors in **) to be repaired, refurbished, or
rebuilt. These repair/refurbish/rebuilt services includes labor and parts.

Question:

Are these repair/refurbish/rebuilt services (which include parts and labor)
that are performed in **, subject to tax when the equipment is
being used by the Maquiladoras? What about equipment used in **?

Please clarify the issue as it applies to manufacturing vs. non-manufacturing
equipment; whether it is used in ** or **; whether the
maquiladora exemption or Texas exemption applies; and if there is a difference
between the taxability of parts and labor due to the exportation of the
machinery and equipment.

Response: The exemption for sales to Maquiladoras in Tax Code Section 151.156
is limited to tangible personal property. However, that is not the only
exemption that may apply. Tax Code Section 151.3111 states:

A service that is performed on tangible personal property that, if sold,
leased, or rented, at the time of the performance of the service, would be
exempted under this chapter because of the nature of the property, its use, or
a combination of its nature and use, is exempted from this chapter.

Accordingly, charges for services performed on qualified manufacturing
equipment may be purchased exempt from sales tax regardless of where in the
world the manufacturing is performed. I should further point out that under
Tax Code Section 151.330(e):

Services performed for use outside this state are exempt from the tax imposed
by Subchapter C of this chapter.

Under this provision, individuals purchasing services for exclusive use outside
Texas may give the service provider an exemption certificate in lieu of paying
sales tax. This would apply equally to manufacturing and non-manufacturing
equipment.

Repair services performed on equipment not qualified for exemption and that is
for use in Texas is subject tax.

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