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.