Do dedicated telecom lines used to transmit news content to a printing plant qualify for Texas's manufacturing exemption?

Subject

Newspaper — Dedicated Lines Used To Transmit Negatives Containing News From Office To Printing Plant — Telecommunications Services Not Part Of Manufacturing Process

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9408696L

Plain-English Summary

A telephone company asked the Comptroller whether it could accept a manufacturing-exemption certificate from a major daily newspaper. The newspaper wanted to buy dedicated telecommunication lines tax-free, arguing the lines were used in manufacturing: they carried photo negatives containing news content from the newspaper's editorial office to its separate printing plant.

The Comptroller said no. The manufacturing exemption in Tex. Tax Code § 151.318(a)(3) only covers services performed directly on the product being manufactured (here, the newspaper itself) before it is distributed for sale, where the service makes the product more marketable. Transmitting negatives over dedicated phone lines helps the newspaper get produced, but the service is performed on the transmission of data, not on the newspaper as a physical product. Merely facilitating the manufacturing process is not the same as being performed directly on the product, so the telecommunications service is taxable.

The ruling adds a second, independent reason the exemption fails: even if the dedicated lines were treated as leased personal property (rather than a service), § 151.318(e) expressly excludes leased property from the manufacturing exemption. Either way, the newspaper could not use the exemption certificate for these lines.

What This Means For You

• Telephone and telecom companies: Don't automatically accept a manufacturing exemption certificate from a customer just because the customer is a manufacturer. The exemption turns on what the specific service or property is used for, not on the buyer's industry. If in doubt, you can request clarification from the Comptroller rather than accept a certificate that may not apply.
• Newspapers and other manufacturers: Support and infrastructure services — like transmitting content, data, or communications between facilities — generally do not qualify for the § 151.318(a)(3) manufacturing services exemption unless the service acts directly on the physical product itself. "Helpful to production" is not the legal test.
• Businesses that lease equipment for production: Leased personal property is excluded from the manufacturing exemption under § 151.318(e) regardless of how it's used, so leasing (versus buying) the same equipment can change the tax result.

Q&A

Q: Why didn't the newspaper's telecommunications service qualify for the manufacturing exemption?
A: Because § 151.318(a)(3) exempts only services performed directly on the product being manufactured. The dedicated lines transmitted negatives between locations; they didn't act on the newspaper itself, so the exemption didn't apply even though the service supported the manufacturing process.

Q: Would the answer change if the newspaper leased the lines instead of buying the service?
A: No. The ruling notes that if the dedicated lines were viewed as leased personal property, § 151.318(e) separately bars leased property from qualifying for the manufacturing exemption, so the result would be the same either way.

Q: Does "facilitating" manufacturing ever qualify for the exemption?
A: Not by itself. The Comptroller specifically stated that a service facilitating the manufacturing process does not make it exempt — the service must operate directly on the product being manufactured.

Citations

• Tex. Tax Code § 151.318(a)(3) — exempts services performed directly on the product being manufactured prior to its distribution for sale, for the purpose of making the product more marketable.
• Tex. Tax Code § 151.318(e) — excludes leased property from the manufacturing exemption.

Original ruling text

August 11, 1994

Dear ***:

Recently, you inquired about an exemption certificate you have received from a
major daily newspaper. Essentially, the newspaper was asking that you accept
the exemption certificate for dedicated telecommunication lines they use to
transmit negatives, containing the news, from the newspaper office to its
printing plant.

The newspaper was claiming the exemption under the manufacturing exemption
contained in Sec. 151.318, Tex. Tax Code.

TELEPHONE COMPANY is providing a taxable service. Subsection (a)(3) of the
exemption in exempting services reads as follows:

(3) services performed directly on the product being manufactured prior to its
distribution for sale and for the purpose of making the product more
marketable.

It is the opinion of this office that the telecommunication services are not
performed directly on the product being manufactured (the newspaper). The fact
that a service may facilitate the manufacturing process does not mean it is
exempt under the statute.

Were the dedicated lines to be view as leased personalty, the manufacturing
exemption would not apply because Subsection (e) of the exemption excludes
leased property.

I hope this satisfactorily answers your inquiry. Should you have any further
questions please feel free to contact me at 1-800-531-5441, extension 3-4004.

Sincerely,

Al Van Allen
Tax Administration Division