CS C.S.H.B. 1855 75(R)BILL ANALYSIS WAYS & MEANS C.S.H.B. 1855 By: Eiland 4-22-97 Committee Report (Substituted) BACKGROUND Section 151.318, Tax Code (Property Used in Manufacturing), exempts various items from the sales tax that are purchased for use in the manufacturing process. Subsection (c)(2) strictly excludes from exemption intraplant transportation equipment, other equipment, materials, and supplies, which are not used directly in the manufacturing process. In the recent Tyler Pipe v. Sharp and Chevron Chemical v. Sharp cases, the courts determined the Comptroller's interpretation of the law regarding the taxable status of certain items used in the manufacturing process was too narrow, and substantially broadened the scope of the exemption. PURPOSE This bill limits the sales tax exemption for manufacturing machinery and equipment to items that are directly used in the manufacturing process and that directly make or cause a chemical or physical change to the products being manufactured. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1.Amends Section 151.318, Tax Code, by amending Subsections (a) and (c), and adding Subsection (r) as follows: (a) Limits the exemption to items that are directly used in the manufacturing process and that directly make or cause a chemical or physical change in the product, or in any intermediate or preliminary product being manufactured, processed, or fabricated for ultimate sale. Also specifically exempts certain machinery and equipment that is used to power, supply, support, or control equipment that is exempt in the production of electricity, chilled water, or steam for ultimate sale. (c) Specifically excludes from exemption: intraplant transportation equipment, specifically piping and conveyors; and machinery equipment or supplies used to maintain or store other items. (r) Requires taxpayers to maintain proof that purchases of taxable services and tangible personal property are exempted under this section and not excluded from the exemption. SECTION 2.Effective date: October 1, 1997. SECTION 3.Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE C.S.H.B. 1855 clarifies that machinery and equipment that are used in the production of intermediate or preliminary products that eventually become part of the product for ultimate sale are also exempt from the sales tax. H.B. 1855 had no such provisions, but rather had provisions barring from exemption that machinery, equipment, and supplies used to manufacture, maintain, repair, or remodel items that are not sold.