Texas offers specific sales tax exemptions that can benefit the energy and manufacturing industries.
“These two industries are considered ‘tent poles’ for the Texas economy,” says Chris Wallace, senior manager in Weaver’s state and local tax practice. “Even in the information age, a large percentage of the state’s economy is directly or indirectly tied to energy companies and manufacturers. The state wants to encourage businesses to stay in Texas, expand in Texas and locate to Texas.”
Smart Business spoke with Wallace about how energy companies and manufacturers can fully take advantage of the available tax incentives and exemptions.
What should energy and manufacturing companies know about Texas sales tax exemptions?
It’s a good news, bad news scenario. The good news is that Texas offers numerous exemptions to the energy and manufacturing industries related to equipment, supplies and other operational purchases. The bad news is that the exemptions can be complicated, subject to change and difficult to track when you consider how many vendor invoices companies have to process. The bottom line is that companies need to be proactive if they want to benefit from the exemptions that the Texas legislature has granted to them.
What are examples of specific exemptions that lead to refunds?
Exemptions for exploration and production companies are all over the board — well services, lease equipment, chemicals, etc. One simple exemption many businesses miss out on is oil-soluble chemicals. Since these chemicals become part of the oil and gas stream and are later resold, clients can purchase them tax free. However, vendors are required to charge tax on these chemicals unless they receive an exemption form from the purchaser.
As for manufacturing, operations obviously vary greatly from company to company. Let’s use an example everyone is familiar with — restaurants. A restaurant can issue an exemption certificate in lieu of tax when purchasing cooking equipment such as a microwave. Since the microwave causes a physical change to the product that is being sold, it qualifies as exempt manufacturing equipment. Again, it is the purchaser who is ultimately responsible for issuing the appropriate exemption form when making the purchase to ensure they take advantage of the exemption.
How can energy and manufacturing companies take advantage of sales tax exemptions in Texas?
It’s a three-step process. First, companies need to understand the exemptions that the legislature has granted to them. Next, they need to identify the vendors from which they make exempt purchases and that may have erroneously charged sales tax on exempt purchases. The last step is to communicate with the vendors, provide any needed exemption forms and then monitor them to minimize or eliminate future tax overpayments.
Are Texas sales tax exemptions significantly different than other states?
Not surprisingly, it is difficult to find a state with sales tax exemptions for the energy industry that are as generous as those in Texas. Most states do not offer any specific exemptions for the energy industry. Many states offer some exemptions related to manufacturing. However, with a high sales tax rate and many useful exemptions, Texas manufacturers stand to benefit more than most others.
What are some mistakes companies might be making regarding tax incentives, and how can they mitigate them?
All companies take steps to ensure that they are charging tax correctly to their customers. However, most companies do not make the same effort with regard to the taxes they pay to suppliers. The most common mistake, which leads to tax exemptions being wasted, is when companies assume their vendors are charging tax correctly without proactively addressing the issue. Reviewing all vendors that make a material amount of sales to your company is the best way to improve your sales tax compliance and reduce both overpayments and underpayments. Comptroller regulations require that a vendor charge tax on a purchase even if an exemption can be applied if the vendor does not receive the required exemption forms from the purchaser.
If a company is audited for sales tax by the Comptroller, won’t the auditor explain the exemptions that apply to that business?
Unfortunately, it is exceedingly rare for an auditor to be forthcoming with information about exemptions and potential refunds when conducting an audit. Their audit procedures are specifically designed to focus solely on underpayments. Offhand, I can only remember one audit in my entire career where an auditor voluntarily scheduled refunds related to these kinds of operational exemptions.
How can businesses ensure they’re utilizing all of the exemptions available to them?
One option is to engage a service provider to do a sales tax refund review. This consists of a detailed review of a company’s purchases to identify vendors who charge tax on exempt items. The adviser would communicate its findings to management and review specific vendors and invoices where tax was charged in error to help reduce future overpayments.
The service provider can tailor reviews to require minimal assistance from the company’s personnel. It’s not uncommon to only need five to 10 hours of a company’s time to complete a sales tax refund review. Saving money by taking advantage of available exemptions is much more ‘knowledge intensive’ than
Chris Wallace is a senior manager in state and local tax services at Weaver. Reach him at (972) 448-9294 or