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. Tangible personal property that becomes an ingredient or component of an item manufactured for sale, as well as taxable services performed on a manufactured product to make it marketable are exempt. The exemption also applies to tangible personal property that makes a chemical or physical change in the product being manufactured and is necessary and essential in the manufacturing process, as well as semiconductor fabrication and pharmaceutical biotechnology cleanrooms and equipment. Texas businesses are exempt from paying state sales and use tax on labor for constructing new facilities.

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.

Gas and electricity are also exempted from state sales and use taxes if used in the processing, storage, and distribution of data by a qualified data center (a facility certified by the Comptroller as a qualifying data center under Section 151.359).

Construction Labor

Construction labor is not taxable for new construction projects (building new structures and completing unfinished structures). In addition, the labor to increase the production capacity of a manufacturing or processing production unit in a petrochemical refinery or chemical plant is not taxable.

Food & Over-the-Counter Drugs & Medicines

Food products (such as flour, sugar, bread, milk, eggs, fruits, vegetables and similar groceries) and over-the-counter drugs and medicines that are required by the U.S. Food and Drug Administration to be labeled with a Drug Facts panel, as well as prescription drugs, are not taxable.

Data Centers

Tangible property necessary to operate a data center is exempt from state sales and use taxes provided the data center meets certain criteria. The single-occupant Texas data center must be at least 100,000 square feet, specifically built or refurbished to house servers and data processing and storage equipment, not be used primarily for delivery of telecommunications services, and have an uninterruptable power source, backup generator, and advanced security and safety technology.

The data center would have to create at least 20 permanent jobs, not including jobs transferred from within the state, with a salary 120% or higher than the average salary in the county in which the data center was built. The data center owner would have to make or agree to make a capital investment of at least $150 million in the data center over a 5-year period. The exemption would expire 10 years after the date of the first exemption for an operator that invested more than $150 million and less than $200 million, and 15 years if the operator invested more than $200 million.

Large data center projects, those comprising at least 250,000 square feet of space, creating at least 40 new full-time jobs paying at least 120% of the average county wage, and entailing a capital investment of at least $500 million in the project over a 5-year period are eligible for a 20-year state and local tax exemption.

A data center is not eligible for these sales tax exemptions if the data center has entered into a Chapter 313 agreementlimiting the appraised value of the data center's property.

Research & Development

Beginning January 2014, companies engaged in qualified research activities (as defined under federal tax law) in Texas may choose between accepting a sales tax exemption or a franchise tax credit for materials, software and equipment used for R&D purposes. The sales tax exemption can be applied to the sale, storage, or use of depreciable tangible personal property directly used in qualified research.

Chapter 380/381 Financing

Chapters 380 and 381 of the Local Government Code provide legislative authority for Texas municipalities and counties to provide a grant or a loan of city or county funds or services in order to promote economic development. Local governments have utilized the provisions under this law to provide a wide array of incentives that have drawn businesses and industries to locales throughout Texas. Whether a local government provides any such incentive is completely discretionary. A city or county may provide a Chapter 380 or 381 grant in the form of a sales or property tax rebate.

Telecom, Internet & Cable TV

Providers of telecommunications, internet access, and cable television services can obtain a refund of the state sales and use taxes paid on tangible personal property use or consumed in transmitting, routing, or distributing those services.

Film, Video & Audio Production Companies & Broadcasting Companies

A production company may claim a sales or use tax exemption on items or services necessary and essential and used or consumed during the production of a motion picture, commercial, television project, corporate film, infomercial, or video game. These rules apply only to projects intended for commercial distribution, broadcast, or some other exhibition.

Exempt items include tangible personal property that becomes a component part of the qualifying motion picture, video or audio recording, or broadcast; cameras; film; film developing chemicals; lights; props; sets; teleprompters; microphones; digital equipment; special effects equipment and supplies; audio or video routing switchers located in a studio; certain services; and certain other equipment and tangible personal property that are necessary and essential to and used directly in the production.

Non-exempt items include office equipment or supplies; maintenance or janitorial equipment or supplies; machinery, equipment, and supplies used in sales or transportation activities; machinery, equipment, or supplies used in distribution activities, unless otherwise exempted; taxable items used incidentally in a qualifying production or broadcast; telecommunications equipment and services; transmission equipment; security services; motor vehicle parking services; and food and beverages.

Production companies can also obtain hotel occupancy tax exemptions (state and local occupancy taxes can be waived after the 30th day for stays longer than 30 consecutive days) and tax refunds or exemptions for fuels used off road.

Enterprise Zones

The Texas Enterprise Zone Program also offers opportunities for sales and use tax refunds.