Is the labor to repair and maintain manufacturing machinery and equipment, like owned printing presses or leased photocopy machines, exempt from Texas sales and use tax?

Plain-English summary

A taxpayer who owns printing presses (used to produce the product the taxpayer sells) and also leases photocopy machines asked whether maintenance agreements on the owned presses, and on the leased photocopy machines, were exempt from Texas tax. The presses were maintained under contract by an outside company that specializes in that service.

The Comptroller's Tax Administration Division explained that the manufacturing equipment exemption was phased in, and the taxability of repair/maintenance labor tracks the taxability of the underlying equipment:

• Effective January 1, 1995, the phased-in exemption on manufacturing equipment became fully effective. From that date, maintenance of qualified manufacturing equipment could also be purchased tax free. The letter confirms that printing presses owned by a professional printer would qualify.
• Rented equipment, or equipment leased under an operating lease, was specifically excluded from the exemption. So labor to maintain that kind of equipment (such as the taxpayer's leased photocopy machines) remained taxable.
• Effective October 1, 1995, the exemption would extend to manufacturing equipment leased for a fixed term of at least a year. Once that happened, maintenance on that qualified leased equipment could also be purchased tax free.

The Comptroller noted the opinion was based on the facts submitted and that other, even similar, facts could yield different results.

What this means for you

Businesses that own manufacturing equipment (e.g., printing presses)

If your equipment qualifies for the manufacturing exemption, maintenance and repair labor on that equipment can also be purchased tax free, effective January 1, 1995.

Businesses that lease or rent manufacturing-type equipment

Whether maintenance on leased or rented equipment is taxable depends on the type and length of the lease. Equipment that is rented or under an operating lease did not qualify for the exemption as of this letter, so maintenance labor on it remained taxable. Equipment leased for a fixed term of at least a year would qualify starting October 1, 1995 — and maintenance on that equipment would become exempt at that point too.

Accountants and tax professionals

When advising clients on manufacturing equipment maintenance contracts, confirm (1) whether the underlying equipment itself qualifies for the manufacturing exemption, and (2) whether it is owned, rented, under an operating lease, or under a fixed-term lease of a year or more, since the applicable effective date for exemption differs by ownership/lease structure.

Common questions

Q: Is labor to maintain owned manufacturing equipment, like printing presses, exempt from Texas sales tax?
A: Yes, as of January 1, 1995, if the equipment itself qualifies for the manufacturing exemption — the letter confirms owned printing presses used by a professional printer would qualify.

Q: What about maintenance on leased photocopy machines or other rented equipment?
A: As of this letter, rented equipment and equipment under an operating lease were specifically excluded from the manufacturing exemption, so maintenance labor on that equipment remained taxable.

Q: Does that change for longer-term leases?
A: Yes. Effective October 1, 1995, manufacturing equipment leased for a fixed term of at least a year would qualify for the exemption, and maintenance on that equipment could then be purchased tax free as well.

Citations and references

No statutes, rules, or cases were cited by name in this letter; it discusses effective dates for the phased-in manufacturing equipment exemption.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9507L1361B13

Original ruling text

July 17, 1995

Dear ****:

Thank you for your recent letter which is restated in part
with response below.

We own our own printing presses and these must be maintained to work
properly. We currently have the presses maintained by a company that
specializes in this service. My question is, are we exempt from taxes
on the cost of maintenance agreements on our owned presses and or on
leased photocopy machines also. The product that these presses and
photocopy machines produce is what we sell.

Response: Effective January 1, 1995, the phased-in exemption on
manufacturing equipment became fully effective. As of that date, the
maintenance of qualified manufacturing equipment may also be purchased
tax free. Printing presses owned by a professional printer would qualify.
Rented equipment, or equipment leased under an operating lease, is
specifically excluded from the exemption, so, labor to maintain this
equipment remains taxable.

Effective October 1, 1995, manufacturing equipment leased for a fixed
term of at least a year will qualify for the exemption. Accordingly,
maintenance on qualified equipment may also be purchased tax free at
that time.

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

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct
line is 512/463-4680. You may also write to Tax Administration,
Comptroller of Public Accounts.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9507392L