Can a manufacturer buy raw materials tax-free in Texas if the processed goods are sold to a foreign buyer rather than resold domestically?

Plain-English summary

A taxpayer asked the Comptroller about the sales tax treatment of horse pericardia (a biological raw material) sold to foreign firms for pharmaceutical processing. The taxpayer's letter apparently raised the question in terms of the export exemption, but the Comptroller explained that the export exemption wasn't even the relevant issue here.

Instead, the Comptroller pointed to the manufacturing exemption in Tax Code Section 151.318(a)(1), which lets manufacturers make tax-free purchases of raw materials that will be processed and resold. Critically, the letter states that the processing and the sale of the finished goods do not have to happen inside the United States — they can happen in a foreign country and the exemption still applies. The manufacturer buying the raw materials should give the seller an exemption certificate instead of paying tax at the time of purchase, and the Comptroller enclosed a certificate for the taxpayer's files.

The letter closes with the Comptroller's standard caveat that the opinion is based on the specific facts submitted, and that other, similar facts could produce a different result.

What this means for you

Manufacturers buying raw materials for processing

If you purchase raw materials in Texas that you will process into a different product and then sell — even if that finished product is sold to a buyer in another country — this letter indicates you may be able to buy those raw materials tax-free under the Section 151.318(a)(1) manufacturing exemption, without needing to separately qualify for an export exemption. You would give your supplier a resale/manufacturing exemption certificate instead of paying sales tax on the raw materials.

Sellers of raw materials to manufacturers

If a business customer tells you it is buying raw materials to process and resell, and presents a valid exemption certificate, this letter supports accepting that certificate in lieu of collecting tax, even if you know (or are told) that the finished product will ultimately be sold abroad.

Accountants and tax professionals

This letter is a useful reminder that the manufacturing exemption under Section 151.318(a)(1) is analyzed independently from the export exemption, and that the statute's "processed and resold" requirement is not limited to processing or resale occurring within the United States. Note that the letter is brief, fact-specific, and from 1994 — confirm the exemption's current scope and any subsequent regulatory guidance before relying on it for a present-day transaction.

Common questions

Q: Does a manufacturer need to rely on the export exemption to buy raw materials tax-free if the finished product will be sold overseas?
A: Not necessarily. This letter states it wasn't necessary to focus on the export exemption — the manufacturing exemption in Tax Code Section 151.318(a)(1) applied on its own.

Q: Does the manufacturing exemption require that the processing and resale happen in the United States?
A: No. The letter explicitly states "the processing and sale need not occur in this country" under Section 151.318(a)(1).

Q: What does the manufacturer need to give the seller of the raw materials to avoid paying tax?
A: An exemption certificate in lieu of tax, as described in the letter.

Q: Is this ruling still good law today?
A: This is a 1994 letter ruling addressed to a specific taxpayer's specific facts (horse pericardia sold to foreign pharmaceutical firms). STAR letters can generally only be relied upon by the original recipient, and the letter itself cautions that other, similar facts may yield different results, so you should confirm current Comptroller guidance before relying on this analysis.

Citations and references

• Tex. Tax Code § 151.318(a)(1) — manufacturing exemption for raw materials to be processed and resold.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9403L1294C02

Original ruling text

March 31, 1994

Dear *****:

Thank you for your recent letter regarding the tax treatment
of horse pericardia sold to foreign firms for pharmaceutical
processing. It is not necessary to focus on the export
exemption in this case.

Tax Code Section 151.318(a)(1) allows manufacturers to make
tax-free purchases of raw materials to be processed and
resold. The processing and sale need not occur in this
country. The manufacturer should give an exemption
certificate in lieu of tax. I am enclosing an exemption
certificate for your files.

This opinion is rendered based on the facts you submitted.
Other facts, though similar, may yield different results.

If you have questions or need more information, please call
or write. You may reach me by calling toll free, (800) 531-
5441 (ext.34680). My direct line number is (512) 463-4680.
The number for FAX transmissions is (512) 475-0900. You may
write to me in care of Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9403212L