Texas Manufacturing Sales Tax Exemption Checklist

0%

0 of 32 items complete

11 critical items still open - these are the highest-risk gaps.

Download checklist:

Registration and eligibility

Active Texas sales and use tax permit held by the legal entity that makes the purchaseCRITICALOperations described in writing: what raw materials enter, what process changes them, what product leavesCRITICALConfirmed the activity is manufacturing, processing, fabricating or similar tangible personal property production, not a service or repair businessCRITICALEach plant location and its start date recorded, including any new or expanded linesAffiliated entities that buy for the plant identified and their permits verifiedTax owner named in the company (controller, tax manager or outside advisor) with authority to sign certificates

Classifying purchases

Items that become an ingredient or component part of the product are flagged as exempt materialsCRITICALMachinery and equipment used directly in manufacturing identified separately from general plant equipmentCRITICALItems used in or during the process (tooling, dies, jigs, process chemicals, catalysts) reviewed against the Comptroller guidance for each categoryItems used before or after the manufacturing process (storage, administration, shipping, sales) treated as taxable unless a specific rule says otherwiseCRITICALRepair and replacement parts for exempt equipment reviewed individuallySafety gear, cleaning supplies and office items checked and defaulted to taxable unless documented otherwiseMixed-use items assigned an allocation method and the supporting study kept on file

Utilities and consumables

Electricity and natural gas use studied to see whether predominant use is in manufacturing at each meterCRITICALWhere a meter serves both plant and office space, the predominant-use determination is documented with square footage or kWh sub-meteringExemption certificates for utilities filed with the utility provider and renewed when the use changesCompressed air, water, steam and process gases reviewed for direct use in the processFuel and lubricants for exempt equipment reviewed

Certificates and documentation

Completed Texas Sales and Use Tax Exemption Certification (Form 01-339 or equivalent) issued to each vendor claiming the exemptionCRITICALCertificate states the specific exemption reason, not just a general statementCRITICALVendor name, purchaser name, permit number and signature date present on every certificateBlanket certificates limited to the item categories you actually buy from that vendorCertificates stored where an auditor can retrieve them by vendor within a dayProcess flow diagrams and equipment lists kept as support for direct-use claimsRecords retained for at least the period required by Texas rules, with a longer internal period for open audits

ERP configuration and review

Tax codes or tax categories in the ERP separate exempt manufacturing purchases from taxable purchasesCRITICALItem master carries an exemption flag or tax category for materials, tooling and MROVendor master stores the certificate on file date and expiry or review dateAccounts payable posts self-assessed use tax when a vendor charges no tax on a taxable itemCRITICALUse tax accrual account reconciled monthly and reported on the Texas returnQuarterly sample of exempt purchases tested against the criteria aboveCapital projects reviewed before invoices are paid so exempt equipment is separated from taxable installation or building items

Every critical item left open is a likely audit exposure. Close the critical items first, then work through the rest. This checklist is a planning aid, not tax advice: confirm treatment of specific items with the Texas Comptroller rules and your tax advisor.

Exempt purchase review from your ERP data

Optional: have us show how an ERP-connected assistant can flag likely exempt versus taxable purchase lines for your tax team to review.

Optional. The tool and every export work without this. No spam.

How to use the checklist

Work through each group with a copy of your plant equipment list and last year's purchasing report in front of you. Tick items you can prove with a document, not items you believe are true. Mark the critical items first because they are the ones auditors test. Export the result to PDF or Excel and assign an owner and a date to every open line, then re-run it each year or when a new line, building or entity is added.

What the exemption turns on

The central question is use. Items that become part of the product, and equipment used directly in making it, are the core of the exemption. Items used before the process starts or after it ends, such as warehousing, administration and sales activity, generally are not. Electricity and natural gas follow a predominant-use test. Because the line between direct and indirect use is fact specific, the checklist pushes you to document the process and review borderline items one at a time instead of exempting whole account codes.

Ingredient or component of the finished product
Machinery used directly in the manufacturing process
Utilities where manufacturing is the predominant use
Self-assessed use tax on taxable items bought without tax

Documentation auditors ask for

A Texas audit typically samples exempt purchases and asks for the certificate, the invoice and a reason the item qualifies. A certificate without a stated reason, signed by the wrong entity or missing a permit number is a common finding. Keep certificates searchable by vendor, keep a short memo for each category of equipment explaining its role in the process, and store the plant flow diagram with it. This turns an audit from a scramble into a retrieval exercise.

Common mistakes and ERP notes

The most frequent error is treating a whole purchasing category as exempt because one item in it was. The second is failing to accrue use tax when a vendor does not charge tax on a taxable item, which then shows up as an assessment with interest. In your ERP, give exempt and taxable purchases different tax codes, make the exemption flag part of item setup, and reconcile the use tax accrual account every month. In SAP this is usually a tax code and condition type setup, in Oracle a tax rule or exemption, and in Epicor or SyteLine a tax code assigned on the vendor and item.

Frequently Asked Questions

Does the exemption apply to all equipment in a Texas plant?

No. It generally covers equipment and materials used directly in manufacturing, not every asset in the building. Warehouse racking, office equipment and sales or administrative assets are usually taxable. Review items individually and keep documents showing the role of each major machine in the process.

What certificate do I give my vendor?

Texas vendors generally accept the Texas Sales and Use Tax Exemption Certification, Form 01-339, with the exemption reason stated and your permit number filled in. Confirm the current form and instructions on the Texas Comptroller website before issuing certificates to suppliers.

Do I still owe use tax on exempt purchases?

No, if the item truly qualifies. But if a vendor did not charge tax on an item that is not exempt, you owe use tax directly. Your accounts payable process should detect those lines and accrue the tax so it is reported on the Texas return.

How long should we keep exemption certificates?

Keep them for at least as long as the statute of limitations for the related returns plus any open audit period. Texas generally expects records to be kept for four years, but many companies keep certificates longer so they can support multi-year audit sampling.

If your exempt purchase review still lives in spreadsheets, Netray can help read invoices and purchase orders from your ERP and flag likely exempt versus taxable lines for your tax team to approve.

Talk to an Expert Explore More Free Tools

Related Tools

Country & Tax

More Country & Tax tools

See all