Texas Manufacturing Sales Tax Exemption: Qualifying Purchases and Claims

The Texas manufacturing sales tax exemption lets producers buy, lease, or rent qualifying equipment, materials, and utilities without paying the state’s 6.25% sales tax, as long as those items are used directly in producing tangible goods for sale.¹ The rules live in Section 151.318 of the Texas Tax Code, and the line between exempt and taxable purchases is narrower than most manufacturers assume.²

What Counts as Manufacturing

Section 151.318 covers the full production cycle, from the first stage of creating tangible personal property through completion of the finished product, provided the goal is sale of the end product.² Processing and fabricating count as well. The test is transformation: your operation must cause a physical or chemical change to the material, turning it into something meaningfully different.³

Industry label doesn’t decide it. Food processing, electronics assembly, metal fabrication, and chemical production all qualify because each changes the physical state of the input. Packaging, unpacking, or shelving goods without changing them does not meet the statutory definition and cannot support an exemption claim.³

Purchases That Qualify

Ingredients and Component Parts

Any tangible personal property that becomes an ingredient or component of the finished product is exempt. If the material physically ends up in what you sell, you don’t pay sales tax on it.²

Equipment That Directly Transforms the Product

Machinery and equipment used directly in the manufacturing process qualify when their use is necessary to the operation and directly causes a physical or chemical change to the product being made, or to an intermediate product that becomes part of the final good.² “Directly” is the operative word. Equipment one step removed from the actual transformation usually doesn’t qualify on its own.

Support and Power Equipment

The statute lists specific categories of equipment that power, supply, support, or control qualifying production machinery: pumps, compressors, cooling towers, generators, hydraulic units, computerized control units, heat exchangers, and steam production equipment along with its fuel.² Transformers and related electrical components that step voltage up or down for manufacturing equipment, or for electricity generated for sale, also fit here.

Pollution Control Equipment

Equipment used or consumed in a pollution control process that is necessary and essential to the manufacturing operation is exempt.² The Comptroller lists cooling towers, compressors, hydraulic units, and steam production equipment among the qualifying items.⁴

Consumable Production Materials

Lubricants, chemicals, chemical compounds, gases, and liquids consumed during the actual manufacturing process qualify when they are used or consumed during production.² A solvent that triggers a chemical reaction in your product, a welding gas, or a lubricant that keeps a production machine running during a manufacturing stage can all be purchased tax-free.

Purchases That Do Not Qualify

This is where most audit findings originate. The statute and the Comptroller specifically exclude several categories that manufacturers often assume are exempt because the purchases happen inside the plant:

Hand tools such as wrenches and screwdrivers, even when used on the production floor.²
Maintenance supplies and equipment used to keep production machinery running, rather than directly produce goods.
Research and development equipment used to develop new products.⁴
Janitorial supplies and equipment for general facility upkeep.
Office equipment and supplies used for administrative work.
Sales, distribution, and transportation equipment used after the product is finished.²

The general rule: the closer an item is to the actual physical transformation of your product, the more likely it qualifies. Anything used before the first stage of production or after the finished product is complete tends to fall outside the exemption.

Electricity and Natural Gas

Electricity and natural gas used to power exempt manufacturing equipment can be purchased tax-free, but claiming that benefit requires a predominant use study.⁴ The exemption is evaluated meter by meter: if more than half of the energy through a single meter during a billing period powers qualifying manufacturing activities, the entire amount on that meter is exempt. If not, the entire amount is taxable. There is no partial credit.

A qualified engineer or energy consultant typically conducts the study, comparing consumption by exempt production equipment against non-qualifying uses like office lighting, HVAC for administrative areas, or break rooms. For manufacturers that operate continuously, the study must cover twelve consecutive months.

One boundary matters here. Electricity and natural gas used in the preparation or storage of prepared food do not qualify, even when the activity otherwise resembles manufacturing.⁴

How to Claim the Exemption

To buy qualifying items tax-free, you give the seller a completed Texas Sales and Use Tax Exemption Certificate, Form 01-339, at the time of purchase.⁵ That certificate instructs the seller not to collect the 6.25% state sales tax or any local sales tax on the transaction. Blank copies of Form 01-339 are available as a free download from the Texas Comptroller’s website.⁶

The certificate needs your business name, address, and phone number; the seller’s name and address; a description of the item specific enough that a reviewer can tell it qualifies; the legal basis for the exemption (Section 151.318 of the Texas Tax Code); and a signature and date from an authorized representative.

The seller must accept the certificate in good faith and keep it on file. A seller with a properly completed certificate on record is not liable for the uncollected tax, even if the purchaser later turns out to have been wrong about the exemption.⁵ Practically, that means the exposure for a bad claim sits with you, not the vendor.

If You Already Paid Tax by Mistake

If you paid sales tax on a purchase that should have been exempt, the first step is to ask the seller for a refund of the tax paid in error. The seller can issue the refund directly or provide Form 00-985, Assignment of Right to Refund, which lets you file a claim with the Comptroller yourself.⁷

If you don’t hold a Texas sales tax permit, you must go through the seller first and cannot file directly with the Comptroller without the assignment form.⁸ Either path requires documentation showing what was purchased, the tax paid, and proof the item qualifies. The Comptroller may request invoices, exemption certificates, and other supporting records during verification.⁷

Refund claims are subject to a four-year statute of limitations counted from the date the tax was due and payable.⁸ Long-running overpayments on qualifying purchases can add up to a meaningful refund, but only the most recent four years are recoverable.

Penalties for Getting It Wrong

Texas treats improper use of exemption and resale certificates as a criminal offense. The severity scales with the amount of tax evaded:⁹

Under $20: Class C misdemeanor.
$20 to $199: Class B misdemeanor.
$200 to $749: Class A misdemeanor.
$750 to $19,999: third-degree felony.
$20,000 or more: second-degree felony.

Beyond the criminal tiers, the Comptroller can assess unpaid tax plus interest and penalties across the audit period. The bigger practical risk for most manufacturers is not fraud but sloppy paperwork or exemption claims on borderline items like maintenance equipment that doesn’t actually cause a physical change to the product.

Records That Defend the Exemption

Sellers must retain exemption certificates for at least four years to substantiate why sales tax wasn’t collected.⁹ Keep your own copies for the same period at minimum.

During a Texas sales tax audit, the Comptroller reviews exemption certificates for completeness, verifies that the purchased items actually qualify under Section 151.318, and may request invoices, purchase orders, and descriptions of how each item is used in production.⁷ The strongest defense is a complete file for every exempt purchase: a properly filled-out Form 01-339, the invoice, and a short internal note explaining the item’s role in your manufacturing process. That last piece is what separates companies that get through audits cleanly from those that don’t.

1
Texas Comptroller of Public Accounts. Sales and Use Tax
2
State of Texas. Texas Tax Code TAX 151.318 – Property Used in Manufacturing
3
Legal Information Institute. 34 Texas Administrative Code 3.300 – Manufacturing; Custom Manufacturing; Fabricating; Processing
4
Texas Comptroller of Public Accounts. Manufacturing Exemptions
5
Legal Information Institute. 34 Texas Administrative Code 3.287 – Exemption Certificates
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Texas Comptroller of Public Accounts. Texas Sales and Use Tax Forms
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Texas Comptroller of Public Accounts. Sales Tax Refunds
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Texas Comptroller of Public Accounts. Instructions for Completing an Assignment of Right to Refund Form 00-985
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Texas Comptroller of Public Accounts. Texas Sales and Use Tax Frequently Asked Questions