Texas Tax Code 151.318: Manufacturing Exemption Scope and Claims

The Texas manufacturing sales tax exemption, set out in Tax Code Section 151.318, lets producers buy qualifying equipment, ingredients, consumables, and utilities without paying the state’s 6.25% sales and use tax, as long as each purchase is tied to the actual physical or chemical transformation of goods for sale.¹ The exemption is claimed at the register with a completed exemption certificate, and the taxpayer carries the burden of proving each item qualifies if the Comptroller audits later.

What Actually Qualifies as Manufacturing

Manufacturing under Section 151.318 means operations that physically or chemically change tangible personal property into a different product for sale.¹ The administrative code splits this into three overlapping activities: fabrication (making a new item from raw materials), processing (treating materials to alter their physical or chemical properties), and repair or rebuilding of property the manufacturer owns for resale. A shop turning raw steel into pipe is fabricating; threading or coating that pipe is processing. Both qualify. Custom production to a customer’s order is treated the same as standard manufacturing.²

Two conditions catch people out. The end product must be produced for sale to someone else; goods you make for your own internal use are not covered. And a real physical or chemical change has to occur. Storing, packaging, or bolting together finished parts without meaningfully changing them falls outside the statute.¹

Equipment, Materials, and Consumables Covered

Section 151.318(a) sets out the categories. Two of them apply to almost every production facility.

Ingredients and components. Any tangible personal property that becomes part of the finished product is exempt. Raw steel that becomes a bracket, chemicals that become paint, fabric that becomes upholstery. If it is physically incorporated into what you sell, it qualifies.¹

Direct-use production equipment. Machinery and supplies that directly cause the physical or chemical change are exempt when their use is necessary and essential to the operation. A CNC lathe cutting metal, an industrial oven curing coatings, a mold shaping plastic.¹

Lubricants, chemicals, gases, and other consumables used during production are exempt, as are services performed directly on the product before distribution to make it more marketable.¹ Office supplies, janitorial equipment, and general warehouse tools do not qualify because they never touch or transform the product.

Support Equipment and Pollution Control

Section 151.318(a)(4) extends the exemption past the production line to the infrastructure powering and controlling it. Pumps, compressors, generators, cooling towers, heat exchangers, transformers, computerized control units, and electronic control room equipment qualify when they power, supply, or control machinery that itself qualifies for the direct-use exemption.¹ This is where a lot of overlooked savings sit; manufacturers routinely pay tax on transformers and hydraulic units without realizing they feed exempt equipment.

Pollution control gets its own category under Section 151.318(a)(5): property used or consumed during manufacturing that is necessary and essential to a pollution control process is exempt, whether or not environmental law requires it.¹ Scrubbers, filtration systems, and emissions monitoring equipment fit here.

Natural Gas and Electricity

Natural gas and electricity used to power exempt manufacturing equipment are exempt from sales and use tax.³ The complication is that most plants run production and non-production loads through overlapping electrical systems. Texas resolves this with a predominant-use rule: gas or electricity through a single meter during a regular billing period is either entirely exempt or entirely taxable, based on whether manufacturing use predominates.⁴

A facility running production around the clock must establish predominant use over twelve consecutive months of operation.⁴ The standard way to document this is a predominant-use study performed by an engineer, cataloging every piece of equipment on each meter, estimating hourly consumption and operating hours, and calculating the manufacturing share. Fees vary. Some firms charge a flat rate; others take a percentage of tax savings identified.

The all-or-nothing structure means metering choices matter. A meter that feeds mostly office space plus a few production tools is fully taxable. A meter feeding the production floor with a small break room on the same circuit qualifies entirely. Reworking how loads are metered can convert a taxable bill into an exempt one.

How to Claim the Exemption at Purchase

To buy qualifying property tax-free, present the vendor with a completed Texas Sales and Use Tax Exemption Certification, which is the back side of Form 01-339 on the Comptroller’s website. No taxpayer identification number is required. The form says so, and the administrative code confirms there is no provision in Chapter 151 for an exemption number to be issued or used with it.⁵⁶

A valid certificate has to include five things:

Purchaser’s name and address
Description of the item being purchased
Reason the purchase is exempt, such as property used in manufacturing tangible personal property for sale
Purchaser’s signature and the date
Seller’s name and address

Every field must be legible and complete. Give the certificate to the vendor at or before the transaction. Once the seller accepts it in good faith, they can leave sales tax off the invoice. Good faith means the certificate is complete, received on time, and the seller has no reason to think the purchase is actually taxable.⁶

Records You Have to Keep

Both buyer and seller must keep exemption certificates and corresponding invoices for at least four years from the date the record was created. For a blanket certificate covering ongoing purchases, the four-year clock starts after the last sale covered by that certificate.⁷ If a Comptroller audit or administrative hearing is pending, keep the records until it is resolved, even after the four-year window closes.

This is where manufacturers get into the most avoidable trouble. A missing certificate during an audit means the seller loses the good-faith defense and owes the uncollected tax. A buyer who cannot prove a purchase qualified gets assessed for back taxes plus interest and penalties.

Getting Back Sales Tax You Already Paid

If you paid sales tax on qualifying purchases, you can file a written refund claim with the Comptroller. The claim must detail each reason and ground it is based on. It has to be filed before the applicable limitation period expires or within six months after a deficiency determination becomes final, whichever comes later. Miss the window and the right to recover the overpayment is gone.

This comes up often. A manufacturer buys equipment, pays tax at the register because no one had a certificate ready, and only realizes months or years later that the purchase qualified. A predominant-use study on utility bills can also surface years of overpaid electricity and gas tax recoverable through the same refund mechanism. The sooner you review past purchases, the more of the window you still have.

Burden of Proof, Audits, and Penalties

Section 151.318(r) puts the burden on the taxpayer to prove that each purchase qualifies and that no statutory exclusion applies.¹ The Comptroller does not assume anything is exempt during an audit. You need documentation showing what you bought, why it qualifies, and how it is used in production.

The common audit failures involve dual-use equipment and vague certificates. A forklift that moves raw materials to the line and also loads finished goods onto delivery trucks serves both exempt and non-exempt functions. A certificate saying “manufacturing equipment” without describing what was actually purchased invites scrutiny. The strongest position pairs a detailed exemption certificate with internal records mapping each piece of equipment to its role in production. Building that trail at the time of purchase is far easier than reconstructing it four years later.

Unpaid tax carries a tiered penalty. The initial penalty is 5% of tax due. If the tax stays unpaid more than 30 days past its due date, another 5% attaches, for 10% total. Where the Comptroller finds fraud or intent to evade, the penalty is 50%, and the same 50% applies to altering, destroying, or concealing records to affect an audit. Interest runs on top from the original due date. The fraud penalty is not theoretical: the Comptroller watches for manufacturers who issue blanket certificates and then use the tax-free equipment for non-qualifying purposes. If your production floor doubles as a warehouse for goods you did not make, every shared piece of equipment is a potential audit issue.

1
State of Texas. Texas Tax Code Section 151-318 – Property Used in Manufacturing
2
Legal Information Institute. 34 Tex Admin Code 3-300 – Manufacturing; Custom Manufacturing; Fabricating; Processing
3
Legal Information Institute. 34 Tex Admin Code 3-295 – Natural Gas and Electricity
4
Texas Comptroller of Public Accounts. STAR Document 8511H0688D10
5
Texas Comptroller of Public Accounts. Texas Sales and Use Tax Resale Certificate and Exemption Certification
6
Legal Information Institute. 34 Tex Admin Code 3-287 – Exemption Certificates
7
Legal Information Institute. 34 Tex Admin Code 3-281 – Records Required