Sales Tax State Activity Update - June 2005

Manufacturing Telecommunications?

The Texas Comptroller of Public Accounts ruled that networking equipment was not used in manufacturing tangible personal property for sale.

The petitioner provides local telephone services within its franchise area, and intraLATA (Local Access Transport Area) toll service between its facilities and the facilities of other telephone companies within its LATAs. InterLATA service to other points in and out of the states in which the petitioner operates is provided though connection with long-distance carriers. The petitioner filed a claim for refund for networking equipment used directly in providing its telephone services.

Texas sales and use tax law provides an exemption for necessary or essential tangible personal property directly used or consumed, provided that it also directly makes or causes a chemical or physical change to "the product" being manufactured or "any intermediary or preliminary product" becoming an ingredient or component of such product. The petitioner asserted that its networking equipment qualified for the exemption.

In a previous decision of the Comptroller, such networking equipment did not produce tangible personal property for sale. Telecommunications services are to be treated purely as a service and any conversion of voice to signal and the procedures required to deliver the signal are inherent in the service. The equipment used to transmit the service does not produce tangible personal property for sale and therefore is not exempt.

The full text can be viewed here.

(Texas Comptroller of Public Accounts, Hearing No. 39,547, 1/20/2005 )

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