For a Texas tire retreader, how is sales tax applied differently to 'stock retreads' (tires/casings the retreader owns and holds for sale) versus 'customer property retreads' (casings the customer already owns), and when do machinery, electricity, and natural gas used in retreading qualify for a manufacturing exemption?

Plain-English summary

A Texas tire retreader wrote in to confirm its understanding of sales and use tax rules after reviewing Comptroller guidance (a "Tax Policy News" issue, a "Sales Tax Bulletin" on repairing motor vehicle components, and an earlier letter to a trade association). The Comptroller confirmed the taxpayer's summary and answered eight follow-up questions. The core distinction throughout is who owns the tire casing:

• Stock retreads — the retreader owns the casing (bought it, holds it in inventory) and sells the finished retread as a product. This is a sale of tangible personal property, taxable on the entire charge to the customer regardless of how materials and labor are broken out on the invoice. Because the retreader is manufacturing a product for sale, it qualifies as a manufacturer and can buy machinery, equipment, electricity, and natural gas used in that process tax-free under Tax Code 151.318(g), and can issue resale certificates to its own suppliers of parts and materials.

• Customer property retreads — the customer already owns the casing and sends it to the retreader to be retreaded. This is treated as a repair of tangible personal property. The full charge (material and labor) is taxable, unless the customer certifies that the retreaded tire will go back onto the original vehicle it came from (with records to support that). If it will instead go into the customer's own tire inventory for later use, the customer cannot make that certification, and the full charge (material and labor) is taxable.

The letter then works through eight scenario-specific questions:

1. When is it a "repair of a motor vehicle" instead of a repair of tangible personal property? Only when the retreader itself reinstalls the retreaded tire onto the customer's vehicle — not when the retreader hands the tire back to the customer to install later.
2. Does it have to go back on the same vehicle it came off of? No — for this "repair of a motor vehicle" classification, the retreader does not need to put the tire back on the identical vehicle it was removed from.
3. Does it matter if the retreader (rather than the customer) maintains the inventory pool of customer-owned casings? No — the answer is the same either way.
4. What if the retreader retreads the tire and mounts/balances it on the customer's rim, but the customer does the final installation onto the vehicle? That is still a repair of tangible personal property (not of a motor vehicle), because the retreader didn't do the vehicle installation itself.
5. Mixed-use equipment and utilities — if the same machinery retreads both stock and customer casings, the retreader must accrue and remit tax on the fair market rental value of the equipment for the time it's used on customer casings (assuming the equipment was bought tax-free on or after January 1, 1995). Electricity and natural gas are apportioned meter-by-meter based on predominant use: utility use for retreading customer casings is a taxable commercial use, while utility use for retreading the retreader's own casings is an exempt noncommercial use.
6. A retread-rubber manufacturer that also operates retread plants — if the rubber manufacturer and the retread plants are divisions of the same single legal entity (not separate corporations), the same rules from Question 5 apply to that entity's manufacturing equipment and utilities at its Texas plants.
7. Does manufacturing its own retread rubber change the tax treatment of a company's stock retread sales? No — stock retreads are still a sale of tangible personal property, taxable on the full price; if the company also installs the retread, its tax responsibility follows how the invoice is billed (lump-sum vs. separately stated charges).
8. Same question for customer property retreads — the taxability still depends on whether the retreader reinstalls the tire on the customer's vehicle, and if so, tax responsibility follows how the customer is billed, as discussed above.

A closing note in the letter states this ruling supersedes an earlier document with accession number 9603134L.

What this means for you

Tire retreaders/recappers

Track which casings you own (stock) versus which belong to your customers, since that ownership distinction — not the labor/materials split on your invoice — drives whether a sale is taxed as a sale of tangible personal property (stock, fully taxable, but you get manufacturer's exemptions on retreading equipment and utilities) or as a repair (customer-owned casings, taxable treatment depends on reinstallation and certification).

Retreaders handling customer-owned casings

If you want to limit tax to the material portion only, you need the customer's certification that the retreaded tire goes back onto the original vehicle it came from, plus records supporting that. If the tire instead goes into the customer's own inventory for later use, the certification isn't available and the full charge (material and labor) is taxable.

Retreaders with mixed equipment/utility use

If the same machinery, electricity, or natural gas is used for both stock and customer-owned casings, you can't claim a blanket exemption. You need to accrue tax on the equipment's fair market rental value for time spent on customer casings, and split utility exemptions meter-by-meter using a predominant use analysis (commercial/taxable use for customer casings, exempt use for your own stock casings).

Vertically integrated retread-rubber manufacturers

If your retread-rubber manufacturing and your retread plants are divisions of one legal entity, the same mixed-use accrual and utility-apportionment rules apply — operating multiple stages of production under one entity doesn't create a broader exemption.

Common questions

Q: Is retreading a tire I already own (stock casing) taxed differently than retreading a customer's own tire?
A: Yes. Retreading your own stock casing for sale is a taxable sale of tangible personal property (and you can buy retreading machinery, electricity, and gas tax-free as a manufacturer). Retreading a customer's own casing is a repair, taxed on the full charge unless the customer certifies it's going back onto the original vehicle.

Q: When does retreading count as a "repair of a motor vehicle" rather than a repair of tangible personal property?
A: Only when the retreader itself reinstalls the retreaded tire onto the customer's vehicle. It does not need to be the same vehicle the tire came off of.

Q: If I mount and balance a customer's retreaded tire on their rim but they install it themselves, is that a motor vehicle repair?
A: No — that's still treated as a repair of tangible personal property, because the retreader didn't perform the vehicle installation.

Q: How do I handle electricity and equipment used for both stock and customer casings?
A: Accrue tax on the fair market rental value of equipment for time used on customer casings, and apportion electricity/natural gas exemptions on a meter-by-meter predominant use basis.

Q: Can I rely on this letter for my own retreading business?
A: No. This opinion is based on the facts presented to the Comptroller, and different facts may yield a different result.

Citations and references

Statutes and rules:

• Tex. Tax Code 151.318(g) (exemption for machinery/equipment used by a person manufacturing or repairing tangible personal property for sale as tangible personal property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9603L1405A07

Original ruling text

March 15, 1996

Dear**:

Thank you for your letter of February 13, 1996, concerning your firm's Texas
sales and use tax responsibilities as a tire retreader.

You have reviewed the January 1996 edition of "Tax Policy News", the November
1995 Texas "Sales Tax Bulletin" on "Repairing Motor Vehicle Components," and
the November 10, 1995 letter to ** of the Texas Tire Dealers and
Retreaders Association. Your understanding of your tax responsibilities are
summarized below:

Stock Retreads Sales of "stock retreads" are considered
to be the repair of tangible personal property. As such, sales of "stock
retreads" are taxable at the total amount that is charged to the customer
(regardless of the material/parts or labor breakout on the invoice). The
retreader may give resale certificates to its suppliers for parts and materials
incorporated into the retreads. Retreaders who retread "stock casings" would be
considered manufacturers and thus qualify for sales tax exemption on purchases
of machinery and equipment, electricity, and natural gas.

Response: Sales of stock retreads are considered to be
a sale of tangible personal property. Stock casings belong to the retreader.
Texas Tax Code 151.318(g) exempts machinery and equipment used by person
manufacturing or repairing tangible personal property for sales as tangible
personal property.

Customer Property Retreads Sales of "customer property
casings" that are placed in inventory by the customer at their location can be
taxable on the material portion of the invoice only (and not the labor) if the
customer certifies to the retreader that the retreaded tire goes back on the
original vehicle that it came from (the customer also needs records to support
that fact, etc.). Retreaders who retread "customer property casings" would be
considered repairers and would not qualify for sales tax exemption on purchases
of machinery and equipment, electricity, and natural gas.

Response: The customer may not issue the certification if the retread tires
will be placed in the customer's tire inventory. The total charge (material
and labor) is taxable as the repair of tangible personal property.

Question 1: In the "customer property retread"
situation, will it be considered a repair of a motor vehicle if the retreader
reinstalls the retreaded tire onto one of the customers vehicles (rather than
giving the tire to the customer to place in their inventory to be put on a
vehicle at a later time like the question that was presented to the Comptroller
in recent correspondence on this issue)?

(You received tentative verbal confirmation from Hayden
Denham and Eddie Washington in Tax Policy that the answer to this question was
yes but you want to get the answer in writing.)

Answer: Yes. A repair of a motor vehicle occurs when
the retreader re-installs the retread on the customer's motor vehicle.

Question 2: If the answer to Question #1 is yes, does the retreader have
to reinstall the retreaded tire on the same vehicle of the customer that it
came off of to be considered the repair of a motor vehicle (like has to be
proven by the customer to exempt the labor from tax when we retread tires
for them to place in their inventory to be put on a vehicle at a later time)?

(You received tentative verbal confirmation from Hayden
Denham and Eddie Washington in Tax Policy that the answer to this question was
no, but you want to get the answer in writing.)

Answer: No.

Question 3: If the answer to Question #1 is yes, would
the answer to Question be different if the retreader actually maintains the
inventory pool of customer property retreads (rather than the customer
maintaining the pool)?

(You received tentative verbal confirmation from Hayden
Denham and Eddie Washington in Tax Policy that the answer to this question was
no, but you want to get the answer in writing.)

Answer: No.

Question 4: In the "customer property retread"
situation, will it be considered a repair of a motor vehicle if the retreader
retreads the customers tire and mounts and balances the tires on one of the
customers tire rims (but does not reinstall the retreaded tire onto the
customers vehicle as the customer would do this on their own)?

Answer: No, this is the repair of tangible personal property.

Question 5: If the retreader has a retread plant in
Texas that retreads both "stock casings" and "customer property casings" with
the same equipment (i.e., the equipment is not dedicated to a certain type of
retread process), does the taxpayer determine a percentage of use of the
equipment for the "stock casings" and exempt that portion of machinery and
equipment, natural gas and electricity purchases?

Answer: Presuming the retreading machinery and
equipment were bought tax free on or after January 1, 1995, the retreader must
accrue and remit sales tax on the fair market rental value of the equipment for
the time the equipment is used to retread customers' casings.

The electricity and natural gas (utilities) will be
either totally exempt or taxable based on the predominant use on a meter by
meter basis. The retreader must determine how much of the utilities are used
during operations to retread customers' casing and the retreader's casings.
The utilities used to retread customers' casings are taxable commercial uses,
but exempt noncommercial uses when retreading the retreader's casings.

Question 6: Most retreaders in Texas do not manufacture
the retread rubber that is used to retread tires (both stock and customer
property retreads). Instead, they purchase it from retread rubber manufacturers
like COMPANY A and COMPANY B. COMPANY A manufactures retread rubber at plants
located in Texas and South Carolina and at other locations around the world.
COMPANY A also has three retread plants in Texas that retread both stock and
customer property retreads. Does the fact that COMPANY A manufactures its own
retread rubber and does not complete the retread manufacturing process until
the retread is completed (either a stock or customer property retread) allow it
to still be considered a manufacturer (and not a repairer) and thus be granted
sales tax exemptions for machinery and equipment natural gas, and electricity
at these plants?

Answer: If COMPANY A is a single legal entity (having the retread plants and
the retread rubber plants as divisions, rather than separate corporations),
the answer to Question 5 applies to the manufacturing machinery and equipment
and to the utilities at the Texas retread rubber plants.

Question 7: Assuming the same facts with respect to the
COMPANY A Texas retread plants in Question #2, would the sale of stock retreads
still be considered the repair of tangible personal property taking into
consideration the fact that COMPANY A might be considered to be selling the
customer "retread rubber" and "repair labor" separately since COMPANY A
actually manufactures the rubber itself?

Answer: Question 2 is about customer property retreads, not COMPANY A stock
retreads. The sale of COMPANY A stock retreads is the sale of tangible personal
property on which the total sales price (labor and materials) is taxable.
However, if COMPANY A installs the stock retread, COMPANY A's tax
responsibilities will be determined by the terms of the customer's billing
(lump-sum or separated).

Question 8: Assuming the same facts with respect to the
COMPANY A Texas retread plants in Question #2, would the taxation of customer
property retreads still be dependent on COMPANY A reinstalling the tire onto
the customers vehicle taking into consideration the fact that COMPANY A might
be considered to be selling the customer "retread rubber" and "repair labor"
separately since COMPANY A actually manufactures the rubber itself?

Answer: Yes. As long as the retread is installed on
the customer's vehicle, COMPANY A's tax responsibilities are determined by the
terms of the customer billings as discussed in the answer to Question 7.

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 9603134L