State Sales & Use Tax Exemptions
Manufacturing Machinery & Equipment
Leased or purchased machinery, equipment, replacement parts, and accessories that have a useful life of more than six months, and that are used or consumed in the manufacturing, processing, fabricating, or repairing of tangible personal property for ultimate sale, are exempt from state and local sales and use tax. Texas businesses are exempt from paying state sales and use tax on labor for constructing new facilities. Texas businesses are exempt from paying state sales and use tax on the purchase of machinery exclusively used in processing, packing, or marketing agricultural products by the original producer at a location operated by the original producer.
Natural Gas & Electricity
Texas companies are exempt from paying state sales and use tax on electricity and natural gas used in manufacturing, processing, or fabricating tangible personal property. The company must complete a “predominant use study” that shows that at least 50% of the electricity or natural gas consumed by the business directly causes a physical change to a product.
Clean Rooms
Clean rooms used in the production of semi-conductor components are exempt from State Sales and Use Taxes as manufacturing equipment. That includes property affixed to or incorporated into realty, including integrated systems, fixtures, lighting, moveable partitions, piping and all property necessary or adapted to reduce contamination or to control airflow, temperature and humidity.
Tax-Exempt Industrial Revenue Bonds
Tax-Exempt Industrial Revenue Bonds are designed to provide tax-exempt financing to finance land and depreciable property for eligible industrial or manufacturing projects. The maximum bond amount is $10 million (which can include certain capital and administrative costs). These issues must receive a reservation under the State’s volume limitation (“volume cap”) managed by the Texas Bond Review Board.
Property Value Limitation and Tax Credit
Chapter 313, Texas Economic Development Act, was designed to encourage large-scale manufacturing, research and development, and renewable energy capital investment projects to the State of Texas. It requires companies to invest a specified amount of money to qualify for a tax credit and an eight-year limitation on the appraised value of a property for the maintenance and operations portion of the school district property tax. The local school district must elect to participate in order for the Company to recognize this benefit. The qualifying investment amount is determined on a sliding scale that begins at $100 million for large urban areas and $30 million for rural areas.
Ad Valorem / Property Tax Exemption For Pollution Control
This program was designed to offer companies an exemption from property taxation for pollution control. A facility must first receive a determination from the Texas Commission on Environment Quality (TCEQ) that property is for pollution control purposes. That positive use determination is then provided to the local appraisal district, which must accept the TCEQ’s decision and grant the property an exemption from property taxes. To be eligible for a positive use determination, the property must have been purchased, acquired, constructed, installed, replaced, or reconstructed after January 1, 1994 to meet or exceed federal, state, or local environmental laws, rules, or regulations.
Property Tax Rule 9.105
The Texas Comptroller of Public Accounts offers a refund of state taxes paid by companies owning certain abated property. A company who meets the following three conditions may apply for a refund:
- Paid property taxes to a school district on property that is located in a reinvestment zone.
- Is exempt in whole or in part from property tax imposed by a city of county under a tax abatement agreement.
- Is not a tax abatement agreement with a school district. The refund is equal to the amount of property taxes that would have been paid had the company entered into a school district abatement agreement with terms identical to the city or county abatement agreement, not to exceed the net state sales and use taxes and state franchise taxes paid or collected during that calendar year.
Capital Investment – Franchise Tax Credits for Economic Development
The Legislature created three franchise tax credits for economic development. Eligible corporations may take advantage of these credits for:
- certain research and development expenses and payments incurred,
- for qualified capital investments or expenditures made,
- or for certain new jobs created in Texas on or after January 1, 2000.
To take advantage of this credit a corporation must be a qualified business; pay an average-weekly wage that is at least 110 percent of the county-average weekly wage in the county where the job is located; offer a specified group health benefit plan to all full-time employees, for which the corporation pays at least 80 percent of the costs; and make a minimum $500,000 qualified capital investment (QCI).
- Qualified Capital Investment (QCI) – A qualified capital investment is tangible personal property first placed in service in a strategic investment area (SIAs). An SIA is a Texas county with above state-average unemployment and below state-average per-capita income. In addition, corporations primarily engaged in agricultural processing in a Texas county with a population of less than 50,000 may qualify for the jobs creation and capital investment credits. Terry county is in a qualifying SIA.
- Amount of Credit – The credit equals 7.5 percent of the qualified capital investment during the period upon which the tax is based. The credit must be taken in five equal installments over the five consecutive reports beginning with the report based upon the period during which the QCI was made.
- Limitations on Credit – The total credit for a report (including any credit carry forward) is limited to 50 percent of the tax due for the report before other applicable tax credits. A corporation eligible for a credit from an installment that exceeds the 50 percent limitation amount may carry forward the unused portion of the installment until used for up to 5 consecutive reports.
The sum of the three credits cannot exceed 100 percent of a corporation’s franchise tax liability, after any other applicable tax credits.
Permit Assistance
TCEQ and the Office of the Governor Economic Development & Tourism division have established a relationship to assist companies, which may experience unwarranted delays in their environmental permitting process for projects that could affect job creation or have a high economic impact.
In-State Tuition for Employees
The Economic Development and Diversification In-state Tuition incentive may be offered to qualified businesses that are in the decision-making process to relocate or expand their operations into Texas. The incentive allows employees and family members of the qualified businesses to pay in-state tuition fees if the individual files with a Texas institution of higher education. Without this incentive designation, a student must reside in Texas for a 12-month period to be entitled to pay the tuition fees of a Texas resident.
