Sales Tax Exposure for Manufacturers in Texas

What is Sales Tax Exposure for Manufacturers in Texas?

Sales tax exposure for manufacturers arises when businesses fail to correctly apply the sales tax exemptions for industrial equipment or fail to account for nexus in Texas. Manufacturers who misapply exemptions or overlook nexus may face significant backtaxes, penalties, and audits. This exposure can also come from misreporting use tax on out-of-state purchases.

Understanding Sales Tax Nexus for Manufacturers in Texas

• Physical Nexus: Manufacturers with a physical presence in Texas, such as a facility, employees, or inventory, are required to collect sales tax on taxable sales made in Texas.
• Economic Nexus: Texas imposes economic nexus on manufacturers with over $500,000 in sales in the state, regardless of whether the business has a physical presence in Texas.

For more details on nexus, visit our Sales Tax Nexus page.

Exemptions for Manufacturers in Texas

Texas offers sales tax exemptions for specific manufacturing activities and equipment. These exemptions include:

• Machinery and equipment used in manufacturing: Purchases of machinery, equipment, and parts used directly in the manufacturing process may be exempt from sales tax.
• Raw materials: Purchases of raw materials that are incorporated into the finished product may be exempt.
• Production-related services: Services that are directly related to the production process, such as installation, may be exempt from sales tax.

Manufacturers must apply these exemptions correctly to avoid sales tax exposure. For more on sales tax exemptions, visit our Texas Sales Tax Exemptions page.

Special Tax Rules for Manufacturers in Texas

In addition to sales tax exemptions for industrial equipment, manufacturers must be aware of special sales tax rules that apply to them. Some examples include:

• Taxability of components: Certain components used in the production process, such as packaging, may be taxable depending on their use in the process.
• Repair and maintenance exemptions: Repairs and maintenance on manufacturing equipment may be exempt from sales tax if the equipment is used directly in the manufacturing process.
• Production equipment purchases from out-of-state: Manufacturers who buy production equipment from out-of-state may face use tax exposure if the vendor doesn’t collect Texas sales tax.

Learn how special tax districts impact manufacturers in Texas on our Special Tax Districts page.

Use Tax Exposure for Manufacturers in Texas

Manufacturers often face use tax exposure in Texas when they:

• Purchase machinery or industrial equipment from out-of-state vendors that don’t collect Texas sales tax.
• Buy parts and raw materials from out-of-state vendors.
• Make out-of-state purchases and fail to remit use tax to the Texas Comptroller’s office.

Manufacturers often deal with use tax for out-of-state purchases. For more information, check our Use Tax page.

Common Sales Tax Mistakes for Manufacturers in Texas

Manufacturers often make these mistakes, leading to sales tax exposure:

• Misapplying exemptions: Failing to properly apply exemptions for machinery or raw materials.
• Incorrectly claiming use tax exemptions: Purchasing production equipment from out-of-state vendors and not reporting it as use tax.
• Failure to track exemptions: Not keeping proper records of exempt purchases or sales for resale.
• Misunderstanding nexus: Assuming that nexus only applies to businesses with physical presence in Texas, without understanding economic nexus rules.

These errors can lead to audits, penalties, and back taxes.

How Sales Tax Exposure Builds Over Time for Manufacturers in Texas

Sales tax exposure for manufacturers in Texas tends to build over time due to cumulative errors. For example, misapplying tax exemptions on industrial equipment or missing use tax obligations for out-of-state purchases can go unnoticed until an audit triggers a review.

Common causes of growing exposure include:

• Incorrect application of exemptions.
• Failure to report use tax on out-of-state purchases.
• Inadequate record-keeping for exempt sales and purchases.
• Failure to apply economic nexus rules when making sales in Texas.