Does a company that sorts, processes, and mails customer mail (rather than manufacturing a product) qualify for Texas's manufacturing exemption on its equipment and supplies?

Plain-English summary

A mailing services company asked the Comptroller's office whether its equipment, equipment repair and replacement parts, and packaging materials qualified for the manufacturing exemption under Rule 3.300. The company's services ranged from sorting mail and applying metered postage to printing items to be mailed, with the end result being mail delivered to the post office on the customer's behalf.

One of the company's locations handled a specific process: mail already metered for bulk-rate mailing was fed through a sorting machine that read the mailing address and printed a bar-code label for the correct zip code (required by the postal service to use the bulk rate), then sorted the mail by zip code and boxed it for delivery to the post office. The location also received unmetered mail, which was automatically weighed and metered. The company used equipment, equipment repair and replacement parts, ink for the bar-code labels, postage, and packaging materials in these processes.

The Comptroller responded that the essence of the client's business is mail handling or mail processing — a nontaxable service — and that the client is not a manufacturer, processor, or fabricator of tangible personal property for sale. As a result, the client does not qualify for the Rule 3.300 exemptions and must pay tax on all machinery, equipment, and supplies (including the ink used for bar-code labels) used to perform the service.

What this means for you

Mailing and mail-processing businesses

If your business sorts, meters, weighs, or bar-codes mail for customers and then delivers it to the post office, the Comptroller treats that as a nontaxable service rather than manufacturing — even though the process involves machinery and consumable supplies like ink. That means you cannot claim the Rule 3.300 manufacturing exemption on the equipment, repair parts, or packaging materials you use, and you owe sales/use tax on those purchases.

Accountants and tax professionals

This letter draws a line between "processing" tangible personal property for sale (which can qualify for the manufacturing exemption) and providing a mail-handling service where no new item of tangible personal property is being produced for sale to the customer. Because the output here is simply mail delivered to the post office — not a manufactured product — the exemption doesn't apply, regardless of how automated or equipment-intensive the process is.

Common questions

Q: Does sorting, metering, and bar-coding mail count as "manufacturing" or "processing" under Rule 3.300?
A: No. The Comptroller determined this is mail handling/mail processing, a nontaxable service, not manufacturing, processing, or fabrication of tangible personal property for sale.

Q: Can a mailing services company buy its sorting equipment and repair parts tax-free?
A: No. Because the company doesn't qualify as a manufacturer, processor, or fabricator under Rule 3.300, it must pay tax on its machinery, equipment, equipment repair and replacement parts, and packaging materials.

Q: Is the ink used to print bar-code labels on envelopes taxable?
A: Yes. The letter specifically states the client must pay tax on supplies, including the ink used to apply the bar-code labels, since the underlying activity is a nontaxable service rather than manufacturing.

Citations and references

No specific statutes or administrative rules are cited in the text of this letter (Rule 3.300 is referenced by name but not quoted).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9409L1327D04

Original ruling text

September 27, 1994

Dear *****:

Thank you for your letter requesting an opinion with respect to Rule
3.300 - Manufacturing; Custom Manufacturing; Fabricating; Processing.

YOUR FACTS

Your client provides various mailing services ranging from sorting of
mail and applying metered postage to actual printing of items to be mailed
for the customer. The end result of the majority of services provided is
mail which is delivered to the post office for the customer.

Our client has one location which provides a different type of service.
This location receives mail which is already metered for bulk rate mailing.
The envelopes are automatically fed through a sorting machine which computer
reads the mailing address and then prints a bar code label on the envelope
for the correct zip code. This is required by the postal service in order to
utilize the bulk mail rate. The envelopes are then sorted by the machine by
zip code. The mail is then boxed for delivery to the post office. Unmetered
mail is also received at this location. This mail is automatically weighed
and metered postage is automatically applied.

In addition to equipment repair and replacement parts for the sorting
equipment there are supplies consumed in the processes performed such as ink
for the bar code labels and postage. Packaging materials are also purchased
for this location.

QUESTIONS

Would the purchase of equipment, equipment repair and replacement parts and
packaging materials for the location described above qualify for the exemptions
provided in Rule 3.300?

Would the purchase of ink to apply bar code labels and postage qualify for
exemption?

RESPONSE: The essence of your client's service is mail handling or mail
processing, a non-taxable service. Your client is not considered a manufacturer,
processor or fabricator of tangible personal property for sale. Therefore, your
client is not eligible for the exemptions provided under Rule 3.300 and must pay
tax on all machinery, equipment and supplies (i.e., ink) used to perform this
service.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line is
512/463-4502. You may also write to Tax Administration, Comptroller of Public
Accounts.

Sincerely,

Gilbert Zamora
Tax Administration Division

NOTE: Previous Accession Number 9409769L