Is a dockside grain processing terminal project exempt from Texas sales and use tax?

Subject

Automated Bulk Processing Terminal And Dockside Grain Processing Construction Project

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9307L1247F14

Plain-English Summary

A company wrote to the Comptroller about the sales and use tax treatment of its planned automated bulk processing terminal — described as a state-of-the-art dockside grain processing project. The taxpayer was concerned that Texas sales and use tax would apply to the project and make it impossible to obtain the additional financing needed to build it. After discussing the project's various elements with staff, the Comptroller determined that part of the materials would be exempt but others would not.

For the extension of the dock and the warehouse that will become the property of the ports (referred to in the letter as "the **"), the materials and supplies used in that construction are exempt under Sec. 151.311, Tex. Tax Code, after October 1, 1993.

For the bulk processing terminal itself, the letter notes that Texas sales tax law contains a 100 percent exemption for sales of manufacturing and processing equipment purchased after January 1, 1995. Because the grain and rice will be fumigated and mixed as part of the sacking process, and because the sacking and unitizing/palletizing equipment was not expected to be purchased until the first or second quarter of 1995, the Comptroller ruled that materials used in constructing that equipment will be exempt from sales tax. The letter also advises the taxpayer to have the construction contract separate the cost of materials from all other costs to take advantage of the exemption, and suggests the contract provide that title to the property not transfer until the full exemption is available.

Finally, the letter addresses the equipment used to move the grain and rice: (1) to the sacking equipment, (2) between the sacking equipment and the unitizing/palletizing equipment, and (3) from the unitizing/palletizing equipment to the ships or other storage areas. The Comptroller ruled that this equipment is taxable as intraplant transportation equipment, even though the taxpayer viewed the entire bulk processing terminal as a single unit that would not be built without all of its parts. The letter explains that Texas law specifically excludes intraplant transportation equipment from the manufacturing exemption (citing Sec. 151.318(c)(2), Tex. Tax Code), and that granting an exemption here would require refunding "hundreds of millions of dollars" to other companies making similar arguments. Because the Legislature specifically excluded intraplant transportation equipment from the exemption, the Comptroller concluded tax will be owed on materials used in building these items.

What This Means For You

Dock and warehouse construction materials can be exempt. Materials and supplies used to build a dock extension and warehouse that become the property of a port are exempt under Sec. 151.311, Tex. Tax Code — but only after October 1, 1993, according to this letter.

Timing matters for the manufacturing exemption. The 100 percent exemption for manufacturing and processing equipment applies to equipment purchased after January 1, 1995. Because the taxpayer's sacking and unitizing/palletizing equipment purchases were expected in the first or second quarter of 1995, the materials used to construct that equipment qualified as exempt. If your equipment purchase falls before the exemption's effective date, the timing could change the outcome.

Structure your contract to preserve the exemption. The letter specifically recommends separating the cost of materials from all other contract costs, and providing that title to the property not transfer until the full exemption is available — both practical steps to make sure the exemption can actually be claimed.

Intraplant transportation equipment is taxable, even if it's part of an integrated system. Equipment that moves product between processing steps — here, from the sacking equipment to the unitizing/palletizing equipment, and on to the ships or storage areas — is taxable under Sec. 151.318(c)(2), Tex. Tax Code, as intraplant transportation equipment. This is true even where the taxpayer views the whole processing terminal as a single, inseparable unit; Texas law specifically excludes this category of equipment from the manufacturing exemption.

Q&A

Q: Is the dock extension and warehouse construction exempt from Texas sales and use tax?
A: Yes, according to the letter, the materials and supplies used in constructing the dock extension and warehouse that will become the property of the ports are exempt under Sec. 151.311, Tex. Tax Code, after October 1, 1993.

Q: Is the bulk processing terminal's sacking and unitizing/palletizing equipment exempt?
A: The materials used in constructing that equipment are exempt from sales tax, because the sales tax law provides a 100 percent exemption for manufacturing and processing equipment purchased after January 1, 1995, and the taxpayer's purchase of the sacking and unitizing/palletizing equipment was not expected to be completed until the first or second quarter of 1995.

Q: What must the taxpayer do to take advantage of the materials exemption?
A: The letter says the contract must separate the cost of materials from all other costs, and suggests the contract provide that title to the property not transfer until the full exemption is available.

Q: Is the equipment that moves grain and rice through the terminal taxable?
A: Yes. The letter states that the equipment used to move the grain and rice to the sacking equipment, between the sacking equipment and the unitizing/palletizing equipment, and from the unitizing/palletizing equipment to the ships or other storage areas is taxable as intraplant transportation equipment.

Q: Why is the intraplant transportation equipment taxable if it's part of the same overall project?
A: The letter explains that although the taxpayer views the entire bulk processing terminal as a single unit, Texas law is very specific in excluding intraplant transportation equipment from the manufacturing exemption (citing Sec. 151.318(c)(2), Tex. Tax Code), so tax is owed on materials used in building these items.

Q: Who can taxpayers contact with further questions about this ruling?
A: The letter directs further questions to Mike Doyle, Director of Tax Administration, toll-free at 1-800-531-5441, extension 3-4783.

Original ruling text

July 1, 1993

Dear **:

Thank you for your letter concerning the sales and use tax on
** proposed automated bulk processing terminal. I understand from
my staff that this will be a state-of-the-art dockside grain processing
project. You are concerned that the Texas sales and use tax will apply to the
project and make it impossible for you to obtain the additional necessary
financing. After discussing the various elements of the project with my staff,
I have determined that part of the materials will be exempt but others will
not.

Regarding the extension of the dock and the warehouse that
will become the property of the **, the materials and supplies used in
this construction will be exempt under Sec. 151.311, Tex. Tax Code, after
October 1, 1993. Concerning the bulk processing terminal, the sales tax law
contains an exemption of 100 percent for sales of manufacturing and processing
equipment purchased after January 1, 1995. The grain and rice will be
fumigated and mixed as part of the sacking process. I understand the purchase
of the sacking and unitizing/palletizing equipment will not be completed until
the first or second quarter of 1995. Therefore, the materials used in
constructing this equipment will be exempt from sales tax.

The contract must separate the cost of materials from all
other costs so you can take advantage of this exemption. I would also suggest
that the contract provide that the title to the property not transfer until the
full exemption is available.

Finally, the equipment used to move the grain and rice to the
sacking equipment, between the sacking equipment and the unitizing/palletizing
equipment, and from the unitizing/palletizing equipment to the ships or other
storage areas is taxable as intraplant transportation equipment. I realize you
consider the entire bulk processing terminal a unit be cause you would not
build one without the other. However, Texas law is very specific in excluding
intraplant transportation equipment from the manufacturing exemption. If I
were to find you were entitled to an exemption for this equipment, I would
have to refund hundreds of millions of dollars to other companies which would
make similar arquments. Because the Legislature specifically excluded
intraplant transportation equipment from the exemption, I have no choice but to
conclude tax will be owed on materials used in building these items. A copy of
Sec. 151.318(c)(2), Tex. Tax Code, is enclosed.

Again, I appreciate your inquiry concerning your company's
possible tax liabilities. If you have any further questions, please call Mike
Doyle, Director of Tax Administration, toll-free at 1-800-531-5441, extension
3-4783.

Sincerely,

John Sharp
Comptroller of Public Accounts

NOTE: Previous Accession Number 9308027L.2 and/or 9308027L