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Lev
Lev, Tax Advisor
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Experience:  Taxes, Immigration, Labor Relations
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My company fabricates structural steel for commercial construction.

Resolved Question:

My company fabricates structural steel for commercial construction. We have a Direct Pay exemption. How do I determine if we owe direct pay tax, sales tax or use tax? - And what do I pay tax on.
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

Hi and welcome to Just Answer!

a) Qualified consumers may give a direct payment blanket exemption certificate in lieu of the taxes imposed by the Tax Code, Chapter 151, for taxable items which they purchase for their own use and which items will not be resold in any manner.

See more details here - http://info.sos.state.tx.us/pls/pub/readtac$ext.TacPage?sl=R&app=9&p_dir=&p_rloc=&p_tloc=&p_ploc=&pg=1&p_tac=&ti=34&pt=1&ch=3&rl=288
Thus the Direct Pay exemption certificate exempts the purchaser to pay sales tax to sellers in anticipation that the seller will pay corresponding use tax on their own.
For more information - see - publication 94-105, "Guidelines for Collecting Local Sales and Use Tax," - http://www.window.state.tx.us/taxinfo/taxpubs/tx94_105.pdf

For Manufacturing Exemptions - see this publication - http://www.window.state.tx.us/taxinfo/taxpubs/tx94_124.html

What is exempt?

The manufacturing exemption applies to machinery or equipment that causes a physical or chemical change in a product in order to make it saleable. The manufacturing process generally begins with the first activity that changes raw materials or ingredients and ends with the packaging of the tangible personal property as it will be sold.

Besides manufacturing equipment, services performed directly on a manufactured item prior to its distribution for sale and component parts for qualifying equipment, the following items also qualify for exemption:

  • items used in manufacturing if necessary and essential to pollution control;
  • lubricants, chemicals, gases and liquids used in manufacturing if necessary and essential to prevent the failure or deterioration of exempt manufacturing equipment;
  • gases used at a manufacturing plant to prevent contamination of raw material or product, or to prevent hazards during manufacturing or while loading or storing products and raw materials;
  • items that test products during the manufacturing process;
  • safety apparel and work clothing required by the manufacturing process, if not resold to employees;
  • items used in manufacturing if necessary and essential to comply with public health laws and rules;
  • items used in manufacturing if specifically installed to reduce water use and wastewater flow, reuse and recycle wastewater, or treat wastewater from other sources to replace the use of fresh water;
  • repairs to items that qualify for a manufacturing exemption;
  • transformers at an electric generating facility that increase the voltage of electricity generated for ultimate sale; the cable that carries the electricity from the generating equipment to the step-up transformers; and the switches, breakers, capacitor banks, regulators, relays, reclosers, fuses, interruptors, reactors, arrestors, resistors, insulators, instrument transformers and telemetry units that are related to the step-up transformers;
  • transformers that decrease the voltage of electricity generated for ultimate sale and the switches, breakers, capacitor banks, regulators, relays, reclosers, fuses, interruptors, reactors, arrestors, resistors, insulators, instrument transformers and telemetry units that are related to the step-down transformers;
  • chemicals, catalysts, and other materials used during the manufacturing process to produce a chemical or physical change, to remove impurities, or to make the product more marketable; and
  • semiconductor fabrication cleanrooms.

What is not exempt?

Non-qualifying machinery, equipment, supplies and labor
The following items do not qualify for the manufacturing exemption or refund:

  • intraplant transportation equipment such as conveyors, pipes, forklifts, hoists, cranes and hydraulic lifts;
  • maintenance and janitorial supplies and equipment;
  • machinery, equipment, materials and supplies used incidentally in manufacturing;
  • hand tools;
  • office equipment and supplies;
  • equipment and supplies used in sales and distribution activities;
  • taxable items not used in the actual manufacturing operation;
  • taxable items used in research and development of new products;
  • taxable items used for transportation;
  • machinery and equipment used to make items for the manufacturer's use rather than for sale;
  • electrical wiring, electrical switches and plumbing incorporated into realty;
  • machinery or equipment used to maintain or store the product;
  • tangible personal property used in the transmission or distribution of electricity; and
  • items rented or leased for less than one year.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22615
Experience: Taxes, Immigration, Labor Relations
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