A sawmill sells railroad ties to railroad companies and also manufactures lumber generally. Are the railroad ties exempt from sales tax, and separately, do lubricants used in the sawmill's manufacturing machinery qualify for the manufacturing exemption?

Plain-English summary

A tax preparer asked about two separate issues affecting a client who owns a sawmill: the taxability of railroad ties the sawmill sells, and whether lubricants used in its manufacturing machinery qualify for exemption.

Railroad ties: Tax Code Sec. 151.331 exempts rolling stock, locomotives, and the fuel and supplies essential to operating locomotives and trains. A railroad company buying ties for that purpose can give the sawmill an exemption certificate. Separately, if a reseller (rather than the end-using railroad) buys the ties, that reseller gives the sawmill a resale certificate instead. Either way, the sawmill must keep the completed certificates on file to document the exempt sales.

Lubricants and manufacturing machinery: A sawmill that sells lumber is a manufacturing operation, so the client can claim the standard Sec. 151.318 manufacturing exemption for machinery and equipment that directly causes a physical or chemical change to the product (like power saw equipment), pollution control equipment addressing manufacturing-related pollution, and supporting equipment (compressors, computerized control units) that powers/supplies/supports/controls the exempt manufacturing equipment. The 1999 House Bill 3211 clarified that this exemption also reaches other necessary and essential manufacturing-process items, specifically calling out lubricants used in exempt manufacturing machinery and equipment, and required safety work clothing (like safety goggles legally required during manufacturing). Some items stay outside the exemption regardless: hand tools, and equipment used in nonmanufacturing activities like office work, product storage, or transportation.

What this means for you

Sawmills and lumber manufacturers

Both your qualifying railroad-tie sales (with proper certificates from the buyer) and lubricants used in your exempt manufacturing machinery can be handled tax-free — but hand tools, office equipment, storage, and transportation equipment remain taxable regardless of your manufacturer status.

Railroad companies and tie resellers

A railroad company buying ties for its own rolling-stock/locomotive use should give an exemption certificate; a company reselling the ties should give a resale certificate instead — the correct certificate depends on which role the buyer plays.

Accountants and tax professionals

A compact two-topic letter useful for both the narrow Sec. 151.331 rolling-stock/locomotive-supplies exemption and H.B. 3211's 1999 clarification extending the general Sec. 151.318 manufacturing exemption to lubricants and required safety clothing — while confirming hand tools and nonmanufacturing-use equipment stay excluded either way.

Common questions

Q: Are railroad ties sold to a railroad company exempt from Texas sales tax?
A: Yes, under Sec. 151.331, with a proper exemption certificate from the railroad company (or a resale certificate if sold to a reseller).

Q: Are lubricants used in a sawmill's manufacturing equipment exempt?
A: Yes, under Sec. 151.318 as clarified by House Bill 3211 in 1999.

Q: Does the manufacturing exemption cover hand tools or office supplies at a sawmill?
A: No — hand tools and items used in nonmanufacturing activities (office supplies, storage, transportation) are specifically excluded.

Q: Can I rely on this letter for my own sawmill or manufacturing operation?
A: No. It's based on the specific facts submitted and can be relied on only by the taxpayer to whom it was issued; other facts, even if similar, may produce a different result.

Citations and references

Statutes and rules:

• Texas Tax Code Section 151.331 (exemption for rolling stock, locomotives, and fuel/supplies essential to their operation)
• Texas Tax Code Section 151.318 (manufacturing exemption, including lubricants and required work clothing added by H.B. 3211)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9907541L

Original ruling text

July 13, 1999

Dear Ms. **:

Thank you for your letter concerning your client who owns a saw mill.

Texas Tax Code Section 151.331 exempts rolling stock, locomotives, and fuel and
supplies essential to the operation of locomotives and trains. A railroad
company may give your client an exemption certificate to purchase the railroad
ties tax free under this provision in the sales tax law. A resale certificate
is given to your client by vendors who purchase the railroad ties for resale.
Your client must keep the completed certificates in his records to document any
exempt sales.

A sawmill that sells lumber is a manufacturing operation. Your client may
claim exemption for certain manufacturing items exempted by Tax Code Section
151.318. Examples of items that are exempt include machinery and equipment
directly used in the manufacturing process to make or cause physical or
chemical changes to the product (e.g., power saw equipment), pollution control
equipment used to control pollution resulting from the manufacturing operation,
and equipment, such as compressors and computerized control units, used to
power, supply, support, or control the exempt manufacturing equipment discussed
above. Recent legislation, House Bill 3211, provides a clarification of other
necessary and essential items used during the manufacturing process that
qualify for exemption. Examples of these items include lubricants used in
exempt manufacturing machinery and equipment and work clothing, such as safety
goggles specifically required by law for use during the manufacturing process.
Some items are specifically excluded from the manufacturing exemption such as
hand tools and items used in nonmanufacturing activities (e.g., office
supplies, storage of the product, and transportation). House Bill 3211 is
available on-line at if you have access to the
Internet.

This opinion is 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. 5-0030. The direct line is
512-475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division