United States

Texas: Taxpayer Entitled to Manufacturing Exemption for Packaging Supplies

Sep 25, 2017
From KPMG TaxWatch

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A Texas Administrative Law Judge (ALJ) recently addressed whether a taxpayer qualified as a manufacturer so that it was entitled to an exemption for wrapping and packaging supplies. The taxpayer designed, produced, marketed, and distributed luxury decorative items including tableware, table décor, and picture frames, primarily as a wholesaler for high-end department stores. All of the products were manufactured overseas to the taxpayer’s exacting specifications and were subject to approval and frequent inspection by the taxpayer’s personnel. The taxpayer procured and provided the overseas manufacturers with raw gold; decals for plates, bowls and mugs; fragrances for candles; key locks, tassels, and fabric for decorative boxes; natural stones for utensils; and Swarovski crystals for certain decorative pieces. After the overseas manufacturing was completed, the products were shipped to the taxpayer’s Texas facility where they were inspected and finalized. Importantly for purposes of the ruling, the products were packaged in item-specific branded packing materials that were customized for each product and were commercially recognizable as representing the taxpayer’s brand. Under Texas law, the manufacturing sales and use tax exemption extends to wrapping and packing supplies purchased by manufacturers for use in the final stage of manufacturing tangible personal property. The exemption does not extend to purchases of packaging supplies used to repack tangible personal property prior to sale. The issue was whether the taxpayer was a manufacturer so that it was entitled to the exemption for the packaging supplies, or whether it was simply repacking the already-manufactured products for final shipment to the retailers.

The ALJ determined that the taxpayer qualified as a manufacturer, despite the fact that a portion of the manufacturing process was performed by the overseas entities. Notably, the taxpayer retained significant control over the manufacturing process at all times and frequently visited the manufacturing locations. Furthermore, the activities occurring at the taxpayer’s Texas facility—including the inspection, final assembly, repairs, enhancements, and replacement of damaged or missing parts prior to placement in customized packaging—constituted manufacturing. As such, the taxpayer was entitled to the sales and use tax exemption for its wrapping and packaging supplies. Please contact David Davis at 214-840-6791 with questions on this determination.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.