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Activities that have transaction tax exemptions are sometimes closely related to services with no tax incentives. The most common example of this is what we refer to as “remanufacturing”. Often remanufacturing activities are mistaken for taxable services because the taxpayer describes them as “repairing tangible personal property.” It is essential to include the details to ensure that you take advantage of the exemptions and credits available while also avoiding potential exposure down the road.

      Brad Ayres
      State Tax Manager

When determining whether you are a remanufacturer, the main factors to consider are possession and your plans for the product afterward. You MUST possess legal and equitable title to the item being remanufactured¹ AND ultimately hold the product you are remanufacturing for sale.

Machine Shop – Remanufacturing an Engine

When a machine shop purchases a used car engine and proceeds to tear it down and replace all the necessary components, repairing as many parts as possible, they are remanufacturing that engine. Remanufacturing an automobile engine is afforded the same exemptions and credits available to the original engine manufacturer of the new products. All replacement parts are nontaxable purchases for resale. The exemptions don’t stop there.

Any third-party services to the product being remanufactured are exempt as well. Following the machine shop example above, if that machine shop sends their engine out to get the cylinders bored to a different size, it is not taxable. The machine shop can issue an exemption certificate to the company boring the cylinders claiming the service is not taxable because the engine is being remanufactured.

Machine Shop – Repairing a Customer’s Engine

However, If the same machine shop is hired to tear down and rebuild their customer’s engine, which the customer retains legal possession of at the time of the service, they are performing a taxable service of repairing tangible personal property. The exemptions explained in the previous example of remanufacturing do not apply to the machine shop in this scenario.

Specific transactions might be “purchases for resale,” and thus not taxable, for the machine shop repairing their customer’s engine. However, they are outweighed by all taxable activities and purchases compared to the remanufacturing machine shop.

There are numerous situations where transaction taxes are determined by what activities are taking place. The most important part of researching taxability is getting all of the details included. You never know when you might find yourself missing out on many sales tax breaks because you only provide an overview of your activities.

¹ – Texas Comptroller’s Decision, No. 39,933, 05/30/2002

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