200903297L



March 3, 2009

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

Thank you for your follow up email of January 16, 2009. You asked that we 
address the following questions arising from my response to you dated December 
23, 2008. In that letter I had addressed the taxability of a barge constructed 
by a company for their own use.

I have reproduced Question 2 and my response from the December 23rd 
correspondence.

2. If the barge is occasionally used for non-commercial purposes, does the 
taxability change?

Response: The taxability does change. Tax Code 151.329(1)(A) states the 
components must be “used exclusively and directly in a commercial 
enterprise...” If Company X were to use the barge for non-commercial purposes, 
tax would be due on the items purchased tax free with an exemption certificate. 


Tax Code 151.155 states in part: “…if a purchaser certifies in writing to a 
seller that a taxable item sold, leased, or rented to the purchaser will be 
used in a manner or for a purpose that qualifies the sale of the item for an 
exemption from the taxes imposed by this chapter, and if the purchaser then 
uses the item in some other manner or for some other purpose, the purchaser is 
liable for the payment of the sales tax on the value of the taxable item for 
any period during which the item is used in the divergent manner or for the 
divergent purpose.” For additional information related to divergent use, please 
refer to Tax Code 151.155(b), (c) and (d).

You asked if it is permissible to use the method described in 34 TAC Sec. 
3.297(a)(5) to calculate tax due if your client occasionally operates the barge 
for non commercial purposes.

Response: I agree the method described in 34 TAC Sec. 3.297(a)(5) is 
acceptable.

I have also reproduced Question 3 and my response from the December 23rd 
correspondence.

3. Would the use of the barge in intrastate commerce affect the tax exemption 
of materials and supplies purchased for maintenance and operation of the barge?

Response: Materials and supplies purchased for maintenance and operation of the 
barge in intrastate waters are taxable. 

Rule 3.297(b)(3)(B) states: “Operation of the vessel in a manner other than in 
foreign or interstate commerce will result in a loss of the exemption for 
ships' stores and sea stores for the quarterly period in which the nonexempt 
operation occurs. [emphasis added]

You asked if it is permissible to use the method described in 34 TAC Sec. 
3.297(a)(5) to calculate tax due if your client occasionally operates the barge 
in intrastate commerce.

Response:  Because 34 TAC Sec. 3.297(b)(3)(B) states that operation of the 
vessel in a manner other than in foreign or interstate commerce results in a 
loss of the exemption for ships' stores and sea stores for the quarterly period 
in which the nonexempt operation occurs, it would not be appropriate to use the 
methods in 34 TAC Sec. 3.297(a)(5) to calculate tax due. Tax should be reported 
and remitted on items purchased tax free for the ships’ stores and sea stores 
in the quarter that the barge was operated in intrastate waters.

Our understanding of sea stores and ships' stores are described as:

Sea stores stock items for use and consumption in the operation and maintenance 
of a ship or vessel.

Ships' stores stock items that are held for sale to crew members or passengers; 
these items are sold only in international waters. (From 9506L1352B01)

Complete Texas sales tax information, including rules, statutes, publications, 
and frequently asked questions, can be found on the Sales and Use Tax Web page 
at:  http://window.state.tx.us/taxinfo/sales/.  

This opinion is based on the information presented.  Other information, though 
similar, may yield different results.  

I hope this information is helpful. If you have any questions or need more 
information, you may email us at tax.help@cpa.state.tx.us, call me at 
1-800-531-5441 (x50037).

Sincerely,


Lindey Osborne
Tax Policy Division
Team Leader, Sales Tax Policy




December 23, 2008

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

Thank you for your letter of November 12, 2008. You asked that we address the 
taxability of the self construction of a new barge. 

FACTS PRESENTED

Company X is in the process of self-constructing a new barge of eight or more 
tons displacement. The barge will be operated by Company X in its business 
operations to transport material from customers and suppliers located in Texas 
and in other states to Company X’s facilities in Texas as well as to Company 
X’s locations in other states. Company X plans to use the barge exclusively for 
commercial purposes nationwide and potentially in international waters.

You asked that we provide answers to the following questions.

1. Do materials, equipment and machinery purchased by Company X to construct 
the barge qualify for an exemption from sales and use tax? 

Response: Tax Code 151.329(1) exempts materials, equipment, and machinery that 
enter into and become component parts of a ship or vessel that is of eight or 
more tons displacement and is: (A) used exclusively and directly in a 
commercial enterprise…

Therefore, Company X can issue an exemption certificate for the component parts 
of the barge it will use in its commercial enterprise. For example, items that 
form the framework, floor, engine, radios, etc.

However, Company X owes tax on the materials, equipment and machinery it uses 
in the construction of the vessel. For example, machinery and equipment such as 
welding and cutting torch equipment and related materials, power or hand tools, 
etc. 

2. If the barge is occasionally used for non-commercial purposes, does the 
taxability change?

Response: The taxability does change. Tax Code 151.329(1)(A) states the 
components must be “used exclusively and directly in a commercial 
enterprise...” If Company X were to use the barge for non-commercial purposes, 
tax would be due on the items purchased tax free with an exemption certificate. 


Tax Code 151.155 states in part: “…if a purchaser certifies in writing to a 
seller that a taxable item sold, leased, or rented to the purchaser will be 
used in a manner or for a purpose that qualifies the sale of the item for an 
exemption from the taxes imposed by this chapter, and if the purchaser then 
uses the item in some other manner or for some other purpose, the purchaser is 
liable for the payment of the sales tax on the value of the taxable item for 
any period during which the item is used in the divergent manner or for the 
divergent purpose.” For additional information related to divergent use, please 
refer to Tax Code 151.155(b), (c) and (d).

3. Would the use of the barge in intrastate commerce affect the tax exemption 
of materials and supplies purchased for maintenance and operation of the barge?

Response: Materials and supplies purchased for maintenance and operation of the 
barge in intrastate waters are taxable. 

Rule 3.297(b)(3)(B) states: “Operation of the vessel in a manner other than in 
foreign or interstate commerce will result in a loss of the exemption for 
ships' stores and sea stores for the quarterly period in which the nonexempt 
operation occurs. [emphasis added]

4. What are the sales and use tax implications regarding the use of employee 
labor for the self-constructed barge? How does it apply to services provided by 
non-employees?

Response: Tax Code 151.057(1) excludes from sales or uses taxes the services of 
Company X’s employees to construct or repair the barge. It states:

(1) a service performed by an employee for his employer in the regular course 
of business, within the scope of the employee's duties, and for which the 
employee is paid his regular wages or salary.

This means that if Company X uses its employees to construct or repair a barge 
for use by Company X, no tax is due on the wages or salaries paid to Company 
X’s employees.

Regarding non-employees, Tax Code 151.329(3) exempts labor and materials used 
in repairing, renovating, or converting a ship or vessel that is of eight or 
more tons displacement and that is used exclusively and directly in a 
commercial enterprise.

Additional information is needed to determine the taxability of non-employees 
that are fabricating parts of the new barge for Company X to determine the 
taxability of their charges.

I hope this information is helpful. I'll be glad to help you if you have 
additional questions. You may e-mail your questions to 
lindey.osborne@cpa.state.tx.us. My direct telephone line is (512) 475-0037. The 
toll-free number is 1-800-531-5441, ext. 5-0037.

This opinion is based upon the facts presented.  If there are different or 
additional facts, this opinion may change.  

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/tpsrvc.

Sincerely,


Lindey Osborne
Tax Policy Division




ACCESSION NUMBER: 200903297L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 03/03/2009
TAX TYPE: SALES