200710043L



October 15, 2007

**************
**************

Dear **************:

I have been asked to respond to your questions regarding whether a 
manufacturing exemption is available to COMPANY A on point of sale wrapping and 
packaging items. I apologize for the delay in answering your questions.

Facts:
COMPANY B is a wholly-owned subsidiary of parent company, COMPANY A. COMPANY B 
manufactures, imports, and distributes men’s, women’s and children’s apparel. 
COMPANY B manufacturers and subcontracts with sub manufacturers in other 
countries for COMPANY A. COMPANY A has exclusive control of the designs and 
patterns manufactured by COMPANY B. You are aware of another taxpayer who 
settled their case on a similar issue and believe this situation should also be 
afforded the same treatment.

Case settlements with other taxpayers do not create a binding precedent because 
there is no substantive decision issued based on the merits of the contentions. 
Therefore, COMPANY A must prove their exemptions under the statute.

Our review of the contracts you supplied indicates that COMPANY A is not acting 
as a manufacturer.  We did not see evidence that COMPANY A did anything other 
than order products to be resold at COMPANY A’S various retail outlets. The 
section of the contract to which you directed our attention states that COMPANY 
A provided the specifications with regards to quality, size, description, 
color, and dimensions to the manufacturer and authorized COMPANY B to use their 
proprietary trademarks or logos in the manufacture of the retail products .  A 
refund cannot be approved on the basis of the contracts supplied.

Texas Tax Code Section 151.302(c) provides that external packaging such as bags 
used for packaging tangible personal property for the purpose of furthering the 
sale of the tangible personal property may not be purchased for resale. Rule 
3.314(c) provides that sales tax is due on packaging supplies sold to 
retailers.  

Rule 3.314 also provides that sales or use tax is not due on containers or 
packaging supplies purchased by manufacturers for use as a part of the 
completion of the manufacturing process.  For the purposes of the rule, the 
manufacturing process is complete when the tangible personal property being 
produced has been packaged by the manufacturer as it will be sold. 

Hearing 40,767 addressed a petitioner that sells private label items to end 
consumers and claimed the bags used at retail checkout were exempt.   The 
petitioner argued that the manufacturing process was not completed until the 
items were bagged at the checkout counters, citing Rule 3.300(a)(9)(A). That 
section of the rule provides that completion of the manufacturing process 
includes the packaging that the product has “when it is transferred by the 
manufacturer to another.”  In response to those arguments the ALJ stated:

"However, in view of the language of both Section 151.302, and Section 151.318, 
as well as Rules 3.300 and 3.314, the only reasonable interpretation of the 
exemption is that manufacturing is complete when the product is packaged for 
sale, such as wrapped, boxed, etc., not when several packaged products are 
placed into a bag for transport by the customer."

Based on the above interpretation, plastic and paper bags used at the checkout 
counters to hold grocery items for the customer are clearly not exempt because 
the manufacturing of the items has been completed prior to that point, while 
paper and plastic bags used to package items directly from the delicatessens, 
meat departments, bakeries, etc. would be exempt because that packaging is the 
completion of the manufacturing process. 

Therefore, the exemption that COMPANY A is seeking is not contingent upon 
whether or not COMPANY A is considered a manufacturer because the bags the 
products are placed into for transport out of the retail store are not used in 
the completion of the manufacturing process.

I hope this information is helpful. If you have any additional questions, 
please call me at (800) 531-5441 ext. 5-0037 or directly at 512-475-0037. You 
may write to me at Tax Policy Division, Attn. Sales Tax Policy, P. O. Box 
13528, Austin, TX 78711-3528.

A complete set of rules, the entire text of the Tax Code, and a wealth of other 
information are available through our website at www.window.state.tx.us. For 
sales tax information, click on “Sales Tax” under “Quick Links” on the left 
side of the page. To locate the rule cited above, select the “rules” link on 
the next webpage and scroll to the item of interest.

Our goal is to provide you with prompt, professional service. Please take a 
moment to complete our on-line survey at: 
http://aixtcp.cpa.state.tx.us/surveys/tpsurv2/index.html.

This opinion is based on the information presented. If there are additional or 
different facts, the opinion could change.

Sincerely,


Lindey Osborne
Sales Tax Policy, Team Leader
Comptroller of Public Accounts




ACCESSION NUMBER: 200710043L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 10/15/2007
TAX TYPE: SALES