ABC CO. imports equipment from out-of-state vendors to its Austin facility, tests or modifies it (sometimes loading software), and then re-exports it within 30 days to a foreign subsidiary — does that testing or modification count as a taxable 'use' in Texas that defeats the export exemption?

Plain-English summary

This letter is a corrected response (the Comptroller's earlier February 10, 1993 letter on the same facts was wrong and withdrawn) covering four related situations for a company referred to as "ABC CO.":

• Situation 1: ABC CO. buys equipment from out-of-state vendors for use at a foreign subsidiary. The equipment ships to ABC CO.'s Austin, Texas location, where it is unpacked, inspected, and tested for good working order, then re-packed and shipped offshore within 30 days. The Comptroller ruled this testing is a taxable "use" in Texas, so the purchase is taxable to ABC CO.
• Situation 2: Same facts, but the equipment is also modified to different specifications for its foreign use, and/or software is loaded onto it, before export within 30 days. Same result — testing and modification is a taxable "use," and the purchase is taxable to ABC CO.
• Situation 3: Same facts as Situation 1, except the equipment ships from within Texas (not out of state) to ABC CO.'s Austin location. Same result again — the in-Texas testing before export is still a taxable "use."
• Situation 4: ABC CO. buys equipment tax-free under a resale certificate to resell to its own wholly-owned U.S. sales subsidiary, EFG Co., which in turn resells to various foreign subsidiaries (mostly ABC CO. affiliates). While equipment sits with ABC CO. or EFG Co., it gets no functional use — only testing to confirm good working condition. The Comptroller addressed three questions here:
  • ABC CO. may buy the equipment tax-free with a valid Texas resale certificate if title passes to EFG Co. within the U.S. (or its territories/possessions).
  • EFG Co. may likewise buy from ABC CO. tax-free with its own resale certificate if title to the equipment passes to the foreign subsidiaries within the U.S.
  • If instead title passes to the foreign subsidiaries in Texas, EFG Co. is making a Texas sale and must hold a Texas sales and use tax permit, and must document export under Rule 3.323(c). And even where the sale-for-resale exemption doesn't apply, the separate export exemption can still be lost if ABC CO. or EFG Co. tests and/or modifies the equipment in Texas before it's exported.

What this means for you

Importers and exporters who test or configure goods in Texas before shipping abroad

Simply routing equipment through a Texas facility to unpack, inspect, and confirm it works before sending it overseas is enough to count as a taxable "use" in Texas under this ruling — it doesn't matter that the stay is temporary (here, within 30 days) or that the equipment is headed straight to a foreign subsidiary. Loading software or making configuration changes for the destination country makes the same conclusion even clearer. If you want the goods to genuinely qualify for the export exemption, avoid testing, modifying, or otherwise functionally using them while they're in Texas.

Businesses using resale certificates for intercompany international sales chains

A domestic resale-then-export chain (parent buys → resells to a U.S. sales subsidiary → subsidiary resells to foreign affiliates) can still work tax-free at each step under the sale-for-resale exemption, but only if title to the goods actually passes within the United States (or its territories/possessions) at each transfer. If title instead passes to the foreign buyer while the goods are physically in Texas, the U.S. subsidiary is treated as making a Texas sale and needs its own Texas sales and use tax permit, plus export documentation. And regardless of how the resale-certificate chain is structured, any testing or modification performed in Texas before the goods leave the country can independently forfeit the export exemption.

Accountants and tax professionals

The letter treats "use" broadly — mere quality-control testing (not just active operational use) is enough to trigger it, and this holds across three different fact patterns (out-of-state origin, in-Texas origin, and testing-plus-modification/software). It separately confirms that the sale-for-resale exemption and the export exemption are analyzed independently: satisfying one doesn't cure a failure of the other. This is a superseded, taxpayer-specific 1993 letter, so verify current Comptroller policy (including current export-exemption rules) before relying on the reasoning today.

Common questions

Q: Does testing equipment in Texas before exporting it count as a taxable use, even if it only stays a short time?
A: Yes. In Situations 1 and 3, ABC CO. imported (or received in-state) equipment, unpacked and tested it in Austin, then re-exported it within 30 days. The Comptroller ruled that testing alone — regardless of the short turnaround — is a "use" in Texas, making the purchase taxable.

Q: Does it matter if the equipment is also modified or has software installed before export?
A: No, the result is the same. In Situation 2, ABC CO. tested and modified the equipment (including installing software) to match the foreign location's specifications before exporting within 30 days. The Comptroller again found this a taxable "use" in Texas.

Q: Can ABC CO. and its subsidiary EFG Co. buy and resell the equipment tax-free using resale certificates?
A: Yes, if title passes within the United States (or its territories/possessions) at each step. ABC CO. can issue a resale certificate to its vendors if title to EFG Co. passes domestically, and EFG Co. can issue its own resale certificate to ABC CO. if title to the foreign subsidiaries passes domestically.

Q: What if title to the equipment passes to the foreign subsidiary while it's still in Texas?
A: Then the sale-for-resale exemption doesn't apply to that transfer, and EFG Co. is making a Texas sale — EFG Co. must hold a Texas sales and use tax permit and must document the export under Rule 3.323(c). Separately, the export exemption itself is still lost if ABC CO. or EFG Co. tests and/or modifies the equipment in Texas before it's exported.

Citations and references

No statutes or Comptroller rules are cited by section number in the surviving text of this letter beyond references to "enclosed Rule 3.285(a)" (sales for resale) and "enclosed Rule 3.323(c)" (Imports and Exports), which were attachments to the original letter rather than quoted provisions.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9303666L

Original ruling text

March 29, 1993

Dear *:

I apologize for my error, but my letter of February 10th concerning questions
about equipment purchased for export which is inspected and tested prior to
export is incorrect. Please disregard that letter. This is my corrected
response to your letter of January 26th.

SITUATION I:

***, Inc. (ABC CO.) purchases from various companies located
outside of Texas equipment which is needed for production purposes at an ABC
CO. foreign subsidiary. The equipment is shipped from the vendor's location
outside Texas to ABC CO.'s location in Austin, Texas where the equipment is
unpacked, inspected and tested to ensure that it has been received in good
working condition, and that it is not defective. The equipment is then
repacked and shipped offshore within 30 days of receipt by ABC CO. in Texas.

QUESTION:

Does the testing of the equipment in Texas by ABC CO. prior to export to a
foreign country constitute a use prior to export by the purchaser?

RESPONSE:

The testing of the equipment in Texas by ABC CO. prior to export is a "use" in
Texas. The purchase of the equipment is taxable to ABC CO..

SITUATION 2:

The factual pattern is the same as Situation 1 above except that, in addition
to testing the equipment to ensure it is in good working condition, the
equipment needs to be modified to operate with different specifications for its
intended use at the foreign location and/or software is incorporated into
equipment prior to its export. The equipment is not used for production nor
for research or development purposes. Once the equipment has been so modified,
it is re-packaged and exported within 30 days of receipt by ABC CO. in Texas.

QUESTION:

Does the testing and modification of the equipment in Texas by ABC CO. prior to
export to a foreign country constitute a use prior to export by the purchaser?

RESPONSE:

The testing and modification of the equipment in Texas by ABC CO. prior to
export is a "use" in Texas. The purchase of the equipment is taxable to ABC
CO..

SITUATION 3:

The factual pattern is the same as in Situation 1 except that, the equipment is
shipped from within the State of Texas to ABC CO.'s location in Austin, Texas.

QUESTION:

Does the testing of the equipment in Texas by ABC CO. prior to export to a
foreign country constitute a use prior to export by the purchaser?

RESPONSE:

The testing of the equipment in Texas by ABC CO. prior to export is a "use" in
Texas. The purchase of the equipment is taxable to ABC CO..

SITUATION 4:

ABC CO. purchases equipment under proper Texas resale certificates for the
purpose of reselling it to ABC CO.'s wholly-owned U.S. foreign sales
subsidiary, EFG Co. (EFG Co.). EFG Co. is a U.S. corporation set up by ABC CO.
to make international sales.

The equipment will be purchased by ABC CO. in Austin, Texas. Upon arrival, it
will be inspected to ensure that it is in good working condition. Some of the
equipment may be modified prior to resale to EFG CO. as described under
Situation 2. In turn, EFG CO. will resell the equipment to various foreign
subsidiaries, most of which are wholly-owned subsidiaries of ABC CO.. ABC CO.
will purchase equipment from both within and without Texas. While the
equipment is in the possession of ABC CO. or EFG CO., no functional use of the
equipment will be made, i.e., it will not be used in any fashion except to test
it to ensure that it is in good working condition.

QUESTIONS:

Can ABC CO. purchase the equipment resold to EFG CO. tax-free as a sale for
resale exemption? Can EFG CO. purchase the equipment from ABC CO. tax-free as
a sale for resale exemption? Does EFG CO. need a Texas sales and use tax
permit?

RESPONSE:

Please review enclosed Rule 3.285(a) concerning sales for resale. A sale for
resale is a sale of a taxable item to any purchaser who is purchasing the item
for the sole purpose of reselling, leasing, or renting it within the
geographical limits of the United States of America, its territories and
possessions, in the normal course of business.

ABC CO. may issue valid and properly completed Texas resale certificates in
lieu of tax to both Texas and out-of-state equipment vendors if title to the
equipment passes to EFG CO. in the United States, its territories and
possessions. In turn, EFG CO. may issue a valid and properly completed Texas
resale certificate to ABC CO. if title to the equipment passes to the foreign
subsidiaries in the United States, its territories and possessions.

EFG CO. must obtain a Texas sales and use tax permit if title to the equipment
passes to the foreign subsidiaries in Texas because EFG CO. would be making
Texas sales. EFG CO. must have proof of export as required in enclosed Rule
3.323(c) Imports and Exports in order to document that sales to foreign
subsidiaries are exports.

If title to the equipment does not pass in the United States, its territories
and possessions, the sale for resale exemption will not apply to the
transaction. The export exemption may still apply, but the export exemption is
lost if the purchaser tests and/or modifies the equipment in Texas prior to
export.

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

Sincerely,

David Somerville
Tax Administration Division