Can a wholesaler that buys a custom mold under a written agreement claim the 50% manufacturing sales tax reduction on that mold?

Subject

Molds/Dies/Patterns/Tooling — Sold To Customer Under Written Agreement — Customer Not Engaged In Manufacturing — Cannot Claim Mfg Tax Refund

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9401L1288B10

Plain-English Summary

The Comptroller addressed whether a customer could claim the 50% state sales tax reduction on a special mold it bought from the letter-writer under a separate written agreement. The mold itself qualified for the reduction on its own terms: it had a useful life of more than six months when new, which met the threshold for the phased-in exemption for manufacturing machinery, equipment, accessories, and replacement parts.

But qualifying equipment alone was not enough — the reduction under Tex. Tax Code § 151.318(g) is available only to a person who is "engaged in manufacturing, processing, fabricating...tangible personal property for ultimate sale." In this case, the customer was a wholesaler of auto parts. The Comptroller found that this customer does not manufacture tangible personal property for sale as tangible personal property, so it could not claim the 50% reduction on the mold, regardless of the mold's own qualifying characteristics.

The ruling carries an important ALERT notice at the top: Section 151.318 was later amended to allow a full 100% exemption on manufacturing machinery and equipment (excluding hand tools), without regard to useful life, effective January 1, 1995 — after this letter was issued.

What This Means For You

If you sell molds, dies, patterns, or tooling to a customer under a written agreement: Whether your customer can claim a sales tax reduction on that equipment depends on what your customer does with it — not just on the equipment's own useful life or classification. A customer that resells or distributes goods (like a wholesaler) but does not itself manufacture, process, or fabricate tangible personal property for ultimate sale does not qualify for the manufacturing exemption/reduction, even on equipment that would otherwise meet the useful-life threshold.

If you are a wholesaler or distributor buying custom equipment: Do not assume that buying manufacturing-type equipment (molds, dies, tooling) automatically entitles you to a sales tax exemption or reduction. The exemption is tied to whether you are engaged in manufacturing, processing, or fabricating tangible personal property for ultimate sale — not merely to the nature of the equipment purchased.

If you are relying on this ruling today: Note the ALERT at the top of the letter — Section 151.318 was amended effective January 1, 1995, to provide a full 100% exemption (rather than a 50% reduction) on qualifying manufacturing machinery and equipment (excluding hand tools), without respect to useful life. Confirm current law and your own facts with a Texas tax professional before relying on this 1994 letter.

Q&A

Q: Can a wholesaler claim the manufacturing sales tax reduction on a mold it purchased?
A: Not based on this ruling. Even though the mold had a useful life of more than six months and otherwise qualified as manufacturing equipment, the customer here was a wholesaler of auto parts that does not itself manufacture tangible personal property for ultimate sale, so it could not claim the 50% reduction under Tex. Tax Code § 151.318(g).

Q: What does it take to qualify for the reduction under Tex. Tax Code § 151.318(g)?
A: The statute, as quoted in the ruling, requires that the purchaser be a person "engaged in manufacturing, processing, fabricating...tangible personal property for ultimate sale," buying accessories with a useful life in excess of six months that are used during the actual manufacturing of tangible personal property for ultimate sale.

Q: Does this ruling still reflect current Texas law?
A: Not entirely. The letter itself flags that Section 151.318 was amended to allow a 100% exemption on manufacturing machinery and equipment (excluding hand tools), without respect to useful life, effective January 1, 1995 — after this January 1994 letter was issued. The underlying principle that the purchaser must be engaged in manufacturing for the exemption to apply may still be relevant, but the 50%/useful-life mechanics described in this letter were superseded.

Citations

• Tex. Tax Code § 151.318(g) (defining eligibility for the manufacturing sales tax reduction: a person engaged in manufacturing, processing, or fabricating tangible personal property for ultimate sale)

Original ruling text

ALERT: Section 151.318 was amended to allow 100% exemption on manufacturing machinery and equipment (excluding hand tools) without respect to useful life effective 1-1-95.

January 11, 1994

Dear *****:

Thank you for your letter of December 27, 1993, concerning the ability

of a customer to claim the 50% reduction in the state sales tax on a

special mold bought from you under a separate written agreement.

The mold has a useful life when new of more than six months and qualifies

for the phased-in exemption for manufacturing machinery, equipment,

accessories and replacement parts.

This particular customer is a wholesaler of auto parts.

Texas Tax Code Section 151.318(g) states: "Each person engaged in

manufacturing, processing, fabricating...tangible personal property for

ultimate sale is entitled to a... reduction in the amount of tax...for the

purchase of...accessories with a useful life in excess of six months...if

used...during the actual manufacturing...of tangible personal property for

ultimate sale..." (Emphasis added.)

The customer does not manufacture tangible personal property for sale

as tangible per-sonal property; thus, the customer may not claim the 50%

reduction in the sales tax on the mold.

This opinion is based on the facts presented. If there are additional

or different facts, the opinion may change.

You may call toll free 1-800-531-5441, extension 3-4683 if you have

any questions or need more information. You may write to Tax Administration

Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington

Tax Administration Division

NOTE: Previous Accession Number 9401088L