EXTAX^®
Controlling and Recapturing Sales and Use Tax Overpayments

TEXAS SALES & USE TAX LABOR PARTIALLY EXEMPT DURING PHASE-IN PERIOD

A recent decision, Comptroller’s Decision No. 36,971, offers an expansion of the
manufacturing exemption for any taxpayers that still have the period of 10/1/93-12/31/94
(the manufacturing exemption phase-in period) open under audit waivers.  While ruling against a refund for other reasons, the Administrative Law Judge agreed with the taxpayer that labor to repair or install manufacturing machinery and equipment during the manufacturing phase-in period should also be proportionately exempt.  The state’s position has been that such labor is fully taxable until 1/1/95, at which time manufacturing machinery and equipment became 100% exempt.

At issue was whether Sec. 151.3111(a) (partially) exempted services performed on manufacturing equipment subject to a “reduction of tax” under Sec. 151.318(g) and (h).  Previously, this issue was lost under Comptroller’s Decision No. 35,861, which has now been overruled.  The prior case failed due to the Tax Division’s successful argument that “for the year 1994 no manufacturing equipment is exempt from tax.  Manufacturing equipment, however, does, under Section 151.318(h)(5), qualify for reduction of the tax imposed.  Therefore, no labor installation or repair, is exempt under 151.3111(a).”  The prior Administrative Law Judge accepted this distinction between “exemption” and “reduction of tax.”

However, the current argument succeeded by pointing out that Comptroller’s Rule 3.300(f)(4)(A) and (B) interprets the phrase “reduction of tax” as being the same as a partial exemption, which the Administrative Law Judge held to be a reasonable interpretation.  Therefore, since Sec. 151.3111(a) states that “a service performed on tangible personal property that, if sold, leased, or rented, at the time of the performance of the service, would be exempted under this chapter because of the nature of the property, its use, or a combination of its nature and use, is exempted from this chapter,” and since the Administrative Law Judge has agreed that manufacturing equipment is (partially) “exempt” during this period, then such labor is also (partially) exempt.

The decision is technically worded and by “agreeing” with the Comptroller’s Rule and denying a refund (for other reasons), a quick reading may give the impression that all of the taxpayer’s arguments were rejected.  A careful reading, however, shows that a significant (although belated) opportunity has been given to Texas manufacturers.  Other conditions apply, of course, such as that the repair cannot be a lump sum repair of real property, but separated repair contracts and most installations will qualify.

IPT/May-June1999