1. (a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

   1. (1) Accessory--A machine fixture which causes the machinery to operate in a specialized way.
   2. (2) Custom manufacturing--Producing tangible personal property to the special order of the customer, e.g., tailor-made clothing, custom-made draperies or slip-covers, or furniture made-to-order. Custom manufacturers are manufacturers for the purpose of this section.
   3. (3) Display item--A manufactured item that is identical in size and function to other items held for sale which it represents and that is ultimately sold at retail. For example, manufacturer's apparel lines, furniture showroom pieces, light fixture displays.
   4. (4) Equipment--Any apparatus, work clothing, device, or simple machines used directly in production.
   5. (5) Fabrication--To make, build, create, produce, or assemble components of tangible personal property, or to make tangible personal property work in a new or different manner.
   6. (6) Hand tool--An instrument of manual operation, that is, an instrument to be used, managed, and powered by the hand, e.g., paint brush, trowel, hammer, screwdriver, files. Equipment which is being controlled or operated by the hand but is moved or powered by electricity, gas, steam, etc., is not a hand tool, e.g., electric drill, chain saw, jack hammer.
   7. (7) Machinery--All power-operated machines.
   8. (8) Manufacturer--A person engaged in manufacturing and includes processors, fabricators, and custom manufacturers.

   9. (9) Manufacturing--Every operation commencing with the first stage of production of tangible personal property and ending with the completion of tangible personal property. The first production stage means the first act of production and it shall not include those acts in preparation for production. For example, a lumber company cutting trees or a manufacturer gathering, arranging, or sorting raw materials or inventory is preparing for production. Manufacturing includes repairing or rebuilding tangible personal property owned by the manufacturer for the purpose of being sold but does not include the repair or rebuilding of property belonging to another. When production is completed, maintaining the life of tangible personal property or preventing its deterioration is not a part of the manufacturing process.

      1. (A) Completion of production means the article has all the physical properties, including packaging, if any, which it has when transferred by the manufacturer to another. For example, a manufacturer of raw rubber has completed production of a manufactured article when the raw rubber is ready to be transferred to a manufacturer of rubber goods.
      2. (B) Processing and fabrication are two activities which are performed during manufacturing. For example, the person who takes raw steel and makes pipe is engaged in fabrication. The workers who coat or thread the pipe are engaged in processing.
   10. (10) Processing--The physical application of the materials and labor necessary to modify or to change the characteristics of tangible personal property. The repair of tangible personal property, belonging to another, by restoring it to its original condition is not considered processing of that property. The mere packing, unpacking, or shelving of a product to be sold will not be considered to be processing of that property. Processing does not include remodeling.
   11. (11) Remodeling--To make tangible personal property belonging to another over again, in a similar but different way, or to change the style, shape, or form, without causing a loss of its identity, or without causing the property to work in a new or different manner.
   12. (12) Replacement part--Any repair part attached to the machinery, equipment, or accessory.
   13. (13) Sample--A scale model or representative piece of a manufactured product held for sale. For example, cloth swatches and wallpaper books.

   14. (14) Semiconductor fabrication cleanrooms and equipment--All tangible personal property, without regard to whether the property is affixed to or incorporated into realty, that is used in connection with the manufacturing, processing, or fabrication in a cleanroom environment of a semiconductor product, without regard to whether the property is actually contained in the cleanroom environment.

       1. (A) The term includes integrated systems, fixtures, and piping, moveable cleanroom partitions and cleanroom lighting, all property necessary or adapted to reduce contamination or to control airflow, temperature, humidity, chemical purity, or other environmental conditions or manufacturing tolerances, and production equipment and machinery.
       2. (B) Semiconductor fabrication cleanroom equipment is not "intraplant transportation equipment" nor is it used incidentally in a manufacturing, processing, or fabrication operation.
       3. (C) The term does not include the building or any permanent, nonremovable structural component part of the building, such as vibration-isolation platforms and vibration columns, that houses the cleanroom environment.
   15. (15) Useful life--The time it takes for an item used in the manufacturing process to be entirely consumed or without value beginning the date the item was purchased new.

2. (b) Manufacturer's responsibilities.

   1. (1) Collection of tax. Persons engaged in the business of fabricating, manufacturing, processing, or custom manufacturing must collect sales tax on the total sales price of the manufactured item or take an exemption certificate in lieu of the tax. The sales price includes, but is not limited to, the cost of materials, labor or service costs, and all expenses connected with production. Persons fabricating, custom manufacturing, or processing tangible personal property which is furnished either directly or indirectly by the customer must collect tax on such fabricating, custom manufacturing, or processing charge. Manufacturers shall pay or accrue sales or use tax on all items used in the manufacturing process which do not qualify for exemption from tax. A manufacturer who purchases tangible personal property tax free by means of an exemption certificate or resale certificate and subsequently uses the item for a nonexempt purpose must remit the tax to the comptroller based on the purchase price of the item. Reference should be made to §3.285 of this title (relating to Resale Certificate; Sales for Resale), §3.287 of this title (relating to Exemption Certificates), and §3.346 of this title (relating to Use Tax).
   2. (2) Installed items. Generally, the charge for labor to install an item sold is taxable when the item sold is taxable. Persons who manufacture and install items which become improvements to residential realty or are incorporated into new real property structures are contractors and are subject to the provisions of §3.291 of this title (relating to Contractors). Example: cabinetmakers or drapery makers who also affix the draperies or cabinets as a part of a new-construction contract. See also §3.347 of this title (relating to Improvements to Realty). Persons who manufacture and install items as a part of a repair contract are subject to the provisions of §3.292 of this title (relating to Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property). Example: fabricating a propeller shaft for a customer as a part of an outboard motor repair. Persons who manufacture and install items which do not become improvements to realty or which are not part of a repair must collect sales tax on the total charge. Example: a retailer who makes and installs draperies for a home owner.

   3. (3) Molds, dies, patterns. The purchase by the manufacturer of molds, dies, patterns, jigs, tooling, photo engraving, and other manufacturing aids, and their raw materials or component parts will be presumed to have been purchased for use as machinery, equipment, or accessories necessary or essential to the manufacturing process and are therefore presumed to be taxable at the time of purchase. Only if such aids have a useful life when new of six months or less is their purchase exempt.

      1. (A) Written agreement--sale. A separate charge by the manufacturer for the aid will be considered a sale of the aid to the customer only if there is a written agreement between parties clearly making the customer the owner of the aid. As owner of the aid, the customer will owe tax on the amount charged by the manufacturer unless the aid has a useful life when new of six months or less and the product produced is resold by the customer.
      2. (B) No written agreement--no sale. When there is no written agreement between the manufacturer and the customer and the manufacturer separates the charge for the aid from the charge for the items produced by means of the aid, a sale will not be considered to have occurred. The combined charges constitute the selling price of the manufactured item. (Charge for aid plus charge for items produced equals selling price of items.) The total charge shall be taxable or nontaxable depending on the taxability of the items produced. Only if the aids have a useful life when new of six months or less is their purchase by the manufacturer exempt.
   4. (4) Samples. Since the sole use of such samples is to demonstrate not the sample but the other items which it represents, the purchase of the raw materials used to make the sample is subject to the sales or use tax, regardless of the fact that the sample itself may be ultimately sold.

3. (c) Nonexempt manufacturing items. Certain items are specifically subject to tax:

   1. (1) taxable items used by a manufacturer, processor, or fabricator in any activities other than the actual manufacturing, processing, fabricating operation, or repair of tangible personal property held for sale by the manufacturer such as machinery, equipment, and supplies used in selling or distributing, research and development, or in transportation activities;
   2. (2) machinery, equipment, replacement parts, and accessories rented or leased for a term of less than one year;
   3. (3) items which are merely useful or incidental to the operation, such as office machines, office supplies, intraplant transportation equipment, cleaning supplies, lubricants, and other items which are used to maintain equipment that is incidental to the manufacturing process are taxable; and
   4. (4) hand tools.

4. (d) Exempt manufacturing items.

   1. (1) Gas and electricity. Gas and electricity when used directly in manufacturing are exempt. See §3.295 of this title (relating to Natural Gas and Electricity).
   2. (2) Component parts. Tangible personal property purchased for use as an ingredient of or component part of a product manufactured for ultimate sale at retail is exempt.

   3. (3) Necessary and essential materials.

      1. (A) Materials that are necessary or essential to the operation of machinery or equipment used in the actual manufacturing process are exempt. All materials which are directly used or consumed in any phase of the actual manufacturing, processing, or fabricating operation are exempt if they are necessary or essential to the operation. For example, lubricants consumed in the operation of machinery or equipment used in the actual manufacturing process, explosives used to blast granite or other material from the earth for further processing and sale, ice used during processing or manufacturing that is necessary and essential to the process, any material which is used or consumed in a process to remove impurities, to achieve quality control, to cause a physical or chemical change in a product, or otherwise make the product more marketable are exempt. Materials used to test the quality of the product after the manufacturing process is complete are not exempt.
      2. (B) Materials, other than machinery or equipment, used in manufacturing to satisfy or comply with requirements of law or regulations for public health or pollution control purposes are exempt.
      3. (C) Labor charges for repair, maintenance, remodeling, or restoration services to pollution control equipment or machinery required by law or regulation and other tangible personal property that is exempt under this section are exempt.
      4. (D) Gases used on the premises of a manufacturing plant to prevent contamination of raw material or product, or to prevent a fire, explosion, or other hazardous or environmentally damaging situation at any stage in the manufacturing process or in loading or storage of the product or raw material on premises are exempt.
   4. (4) Services. Services performed directly on the product being manufactured when these services are performed prior to its distribution for sale and are for the purpose of making the product more marketable.
   5. (5) Wrapping, packing, and packaging supplies. Wrapping, packing, and packaging supplies used to further the sale of a product are exempt. See §3.314 of this title (relating to Wrapping, Packing, Packaging Supplies, Containers, Labels, Tags, and Export Packers).
   6. (6) Display item. Both the purchase of such an item and the raw materials used to make such an item are exempt from the sales and use tax, so long as the item is used only to demonstrate itself and the same or similar items prior to its sale to an ultimate consumer. The item may not be used for any purpose other than demonstration or display. Any other use by the manufacturer is taxable as a divergent use.

   7. (7) Useful life of six months or less.

      1. (A) Machinery, equipment, accessories, and replacement parts which are entirely consumed or without value within six months from the date the items were purchased new are exempt.
      2. (B) Work clothing such as safety goggles, gloves, and similar work clothing having a useful life when new of six months or less which are necessary and essential to the manufacturing process when purchased by the manufacturer and not resold to the employee are exempt. Work clothing is exempt only if the manufacturing operation would not be possible without its use.
5. (e) Rented or leased taxable items. The exemptions provided in this section do not apply to any taxable item rented or leased before October 1, 1995, under an operating lease to a person engaged in manufacturing. Taxable items used in a manner exempted under this section and leased on or after October 1, 1995, for a term exceeding one year qualify for exemption.

6. (f) Useful life of more than six months.

   1. (1) State tax paid on qualifying machinery, equipment, replacement parts, and accessories with a useful life exceeding six months qualified for a partial refund by the comptroller if the items were purchased by a manufacturer and the tax was paid after December 31, 1989. A reduction in the amount of tax due applies at the time of purchase to items purchased on or after October 1, 1993. Purchases on or after January 1, 1995, are exempt. The date that title or possession transfers from the retailer to the manufacturer is the purchase date. Items purchased out of state will be considered purchased on the date they are brought into this state.

   2. (2) Manufacturing machinery, equipment, replacement parts, and accessories purchased by a manufacturer qualify for a refund, a reduction in the amount of tax paid, or for exemption:

      1. (A) if it will be used in the actual manufacturing, processing, fabrication, or repair of tangible personal property to be sold, and the use of the item is necessary and essential to the manufacturing, processing, fabrication, or repair operation or a pollution control process resulting from the operation; and
      2. (B) is not purchased under a lump-sum contract to improve real property or under a lump-sum real property repair or remodeling contract.
   3. (3) Qualifying items purchased in 1990 and from January 1, 1991, through September 30, 1991, and on which tax is paid qualify for a refund of 25% of the state tax paid. The refund may be claimed only during the calendar year after the tax is paid.

   4. (4) Manufacturing machinery and equipment purchased from October 1, 1991, through September 30, 1993, do not qualify for sales tax refunds or tax reductions.

      1. (A) Fifty percent of the sales price of qualifying items purchased from October 1, 1993, through December 31, 1993, is exempted from the state sales and use tax.
      2. (B) Seventy-five percent of the sales price of qualifying items purchased during 1994 is exempted from the state sales and use tax.
      3. (C) Qualifying items purchased on or after January 1, 1995, are exempt.

   5. (5) Except for equipment listed in subparagraphs (A)-(C) of this paragraph, semiconductor fabrication cleanroom equipment qualifies for exemption as provided under paragraph (4) of this subsection. Equipment listed in subparagraphs (A)-(C) of this paragraph, is exempt if purchased on or after October 1, 1995:

      1. (A) tangible personal property that moves the product or other materials necessary and essential to the process including piping used to move gas, liquids, deionized water and hazardous waste material; silicon wafer moving, handling and tracking systems;
      2. (B) electrical supply and control equipment such as switches, wiring and monitoring equipment incorporated into the realty; and
      3. (C) partition panels that are not incorporated into realty.

7. (g) Method of obtaining the refund.

   1. (1) A refund under subsection (f) of this section must be claimed only during the calendar year following the year in which the tax was paid. Claims for refund must be on the form provided by the comptroller for that purpose. No other form may be used and credit may not be taken on a return.
   2. (2) The claimant will be required to list invoice numbers, voucher numbers, or other code numbers referring to source documents, item description, date of purchase, invoice date, date tax was paid, or the report period tax was paid directly to the comptroller, or any other information requested by the comptroller. All records and documentation supporting the claim must be retained by the claimant for inspection by the comptroller.
   3. (3) Amounts claimed and obtained on nonqualifying items may be recovered by the comptroller together with applicable penalty and interest from the date of the refund.

8. (h) Method of paying a reduced amount of tax.

   1. (1) The purchaser shall provide the retailer an exemption certificate for the appropriate percentage of the sales tax for qualifying items purchased on or after October 1, 1993.

      1. (A) A retailer who receives an exemption certificate for purchases in 1993 for 50% of the sales tax shall collect state sales tax on 50% of the sales price.
      2. (B) A retailer who receives an exemption certificate for purchases in 1994 for 75% of the sales price shall collect state sales tax on 25% of the sales price.
   2. (2) A purchaser who remits use tax on qualifying items purchased on or after October 1, 1993, shall deduct from the amount reported as the purchase price the appropriate percentage allowed as a reduction in the state tax.
9. (i) Tax refund or reduced amount. A person engaged in overhauling, retrofitting, or repairing jet turbine engines and their component parts is entitled to a refund, a reduction, or an exemption in the amount of sales and use tax for the purchase of qualifying items including aluminum oxide, nitric acid, and sodium cyanide used in electrochemical plating or a similar process that are used or consumed in the overhauling, retrofitting, or repairing of jet turbine engines or their component parts. The refund or reduced amount of tax is obtained in the same manner as is provided for manufacturers under subsections (g) and (h) of this section.
10. (j) Divergent use. Machinery and equipment purchased on or after January 1, 1995, and on which the full sales tax exemption is claimed is subject to tax on either the fair market rental value or on the full purchase price during any period of use for other than manufacturing purposes as provided for under §3.287 of this title (relating to Exemption Certificates). Machinery and equipment purchased between January 1, 1990, and December 31, 1994, and on which the reduced tax was paid must be used primarily or predominantly in the manufacturing process. No additional tax is due on a divergent use provided the divergent use is less than 50% of the overall use. Tax is due on the full purchase price if the use is primarily for a use not eligible for exemption.

Source Note:The provisions of this §3.300 adopted to be effective January 1, 1976; amended to be effective November 16, 1979, 4 TexReg 3985; amended to be effective December 3, 1984, 9 TexReg 5930; amended to be effective March 30, 1987, 12 TexReg 825; amended to be effective November 28, 1990, 15 TexReg 6600; amended to be effective February 5, 1992, 17 TexReg 473; amended to be effective April 3, 1996, 21 TexReg 2473; amended to be effective December 6, 1996, 21 TexReg 11501.