Overview
Typically, a manufacturer is a business that purchases raw materials, processes those materials causing a physical or chemical change to them, ultimately selling the finished goods to third parties. However, as a recent administrative hearing decision in Texas confirmed, some non-traditional manufacturers may yet qualify for the manufacturing exemption from sales tax.
Facts
Taxpayer is a pipe threader. It purchased threading equipment designed to make grooves in new plain-ended oilfield casings, claiming the manufacturing exemption on its purchases of the equipment. The casings were owned by third party distributors who would then sell the pipe to businesses involved in oilfield exploration.
Tax Division’s Argument
Tax Division (division) contended taxpayer was ineligible for the manufacturing exemption as it did not own the casings. In addition, division disputed taxpayer’s claim that manufacturing was performed, alternatively asserting that the casings were only remodeled.
Decision
Administrative Law Judge (ALJ) announced determination for taxpayer. In its decision, ALJ noted division’s error in its assertion that taxpayer was required to own the property it performed services on in order for exemption to apply. ALJ clarified that manufacturing exemptions can be claimed by a person who either sells the product being processed or who sells the processing itself. While the product being manufactured must be for ultimate sale, the statute does not specify any ownership requirements for the manufactured property.
Further, the statute stipulates that remodeling of tangible personal property occurs without causing the property to operate in a new or different manner. In the instant case, “Threading of oilfield casing causes it to operate in a new or different manner, as the casing could not be attached to other pieces and installed downhole without being threaded.” Thus, division’s claim that taxpayer was only providing remodeling services was misguided.
Ramifications
Taxpayers that may provide services in the field of manufacturing – without actually owning the property being processed – may yet qualify for exemption.
As an example, Clarus had a client that was assessed a $70,000 sales tax liability. However, as a sub manufacturer who performed third party services for the manufacturer who owned the property, we successfully argued taxpayer’s eligibility for the manufacturing exemption. Taxpayer was eventually granted a sales tax refund on its purchases of approximately $200,000.
Please contact Clarus Partners if you have any questions about these or any other sales tax related matters.
By Steve Hanebutt, CPA
Dallas Office 972-422-4530