Tax free(lancer)?

October 20, 2006 3:30 PM

Is it possible for an individual who does freelance work (computer programming, design, etc.) in Texas to purchase equiment used to do such work tax-free (such as computers)?

A friend of mine recently told me that in Texas one can purchase a computer tax free - if that computer is used in some capacity to produce a good or service for resale.

I've been googling and reading Texas tax code - and I am not coming up with any info i comprehend or understand in regards to this. I found tax exemption certificates (check out page 2) but the FAQ seems to say that only organizations are exempt.

Looking at this tax code page section B 2 led me to Tax Code, chapter 151, Subchapter H which has a list of sales-tax-exempt goods and services.

Tax Code 151.H has this to say:

§ 151.318. PROPERTY USED IN MANUFACTURING.

• (a) The following items are exempted from the taxes imposed by this chapter if sold, leased, or rented to, or stored, used, or consumed by a manufacturer:
  • (2) tangible personal property directly used or consumed in or during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary or essential to the manufacturing, processing, or fabrication operation and directly makes or causes a chemical or physical change to:
    • (A) the product being manufactured, processed, or fabricated for ultimate sale; or
    • (B) any intermediate or preliminary product that will become an ingredient or component part of the product being manufactured, processed, or fabricated for ultimate sale;
  
  
  • (8) tangible personal property used or consumed during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary and essential to a quality control process that tests tangible personal property that is being manufactured, processed, or fabricated for ultimate sale;
  
  


• (d) In this section, "manufacturing" includes each operation beginning with the first stage in the production of tangible personal property and ending with the completion of tangible personal property having the physical properties (including packaging, if any) that it has when transferred by the manufacturer to another.


• (p) For the purposes of this section, the manufacturing of computer software begins with the design and writing of the code or program for the software and includes the testing or demonstration of the software.


• (r) A taxpayer claiming an exemption under this section has the burden of proof that the exemption is applicable and that no exclusion under Subsection (c) applies.

Anyone else have any experience on this?

posted by jimmy0x52 to Law & Government (7 answers total)

Wouldn't you be more comfortable getting this info from a tax attorney rather than here?
posted by lisaj32 at 4:15 PM on October 20, 2006

Response by poster: I've posted the same question to a CPA friend in AZ - I'm just curious if anyone here has had actual experience doing this.
posted by jimmy0x52 at 4:38 PM on October 20, 2006

Best answer: I don't know specifically about Texas, but in most states you would have an exemption only if your business was reselling computers. For example, you buy computers, install software, and then sell them to clients. In that case the computers and software would be exempted.

You get an exemption for things "used or consumed" in building a product that end up going to the customer. For example nuts and bolts used to build your widget ultimately are shipped to the customer. Your computer is not shipped to the customer.

Equipment used in your own business is not exempt from sales taxes because you are the end user. You can deduct the cost of the computer, including sales taxes, from your business income. After the deduction, the sales tax is effectively reduced by the rate of your income tax.
posted by JackFlash at 5:43 PM on October 20, 2006

Response by poster: I think this is a special texas law...
posted by jimmy0x52 at 9:10 PM on October 20, 2006

Best answer: Jimmy - I asked the same thing to a *very* helpful person from the Texas office in charge of tax and resale licenses via email. His explanation was the same as JackFlash's ... the key word is used/consumed. That means that it went *into* the production and is handed out. So in this case, the CDs you distribute your software on could be exempt, but the computer is not.

If this was not the case, then any equipment that's used in the manufacture of a product that is put up for sale -- i.e. a drill press, or a farm tractor, or whatever -- would be tax-exempt. Since that isn't true, you can pretty much assume your interpretation of the law is not true.

(I'd look the email up for you, but I'm in Arkanasas right now and my only 'net connection is via my cell phone... kinda slow.)
posted by SpecialK at 9:53 PM on October 20, 2006

Response by poster: SpecialK: Thank you - this is the info I'm looking for - a first-hand account.

You explanation makes much sense. The law is just so wordy.

If you remember please forward me the e-mail and thanks again!
posted by jimmy0x52 at 6:41 AM on October 21, 2006

Response by poster: It's just so weird because the word "used" can have many different meanings. And when you deliberately put it next to the word "consumed" it eliminates that meaning (in my head).

Ah well.
posted by jimmy0x52 at 6:43 AM on October 21, 2006