Untitled Texas Attorney General Opinion ( 1997 )

QBfficeof tfy Plttornep @eneral
&ate of I&exa$
DAN MORALES December 19,1997
ATTORNEY
GENERAL
The Honorable Bill Ratliff Opinion No. DM-463
Chair, Finance Committee
Texas State Senate Re: Whether fkeport exemption from ad valorcm
P.O. Box 12068 tax applies to property sold to an m-state owner
Austin, Texas 787 11 who uses it to mamtfacture products that are
shipped out of state (RQ-932)
Dear Senator Ratliffz
You ask about the interpretation of the fkport exemption l%omad valorem tax,’ created by
article VIII, section l-j of the Texas Constitution and implemented by section 11.251 of the Tax
Code. The typical f&port exemption applies to property that moves into and out of the state but
is not exempt from state tax as a burden on interstate commerce,~ because a break in the interstate
txansit of the property subjects it to state property tax.g As well as applying to property brought into
the state, the Texas keeport exemption applies to property acquired in the state that is trsnsported
out of the state within 175 days. Thus, the Texas Reeport exemption applies to “businms inventories
destined for out-of-state shipment.‘” Article VIII, section l-j, adopted in 1989: provides in part:
(a) To promote economic development in the State, goods, wares,
merchandise, other tangible personal property, and ores, other than oil,
‘scclion 11.01 of the Tax Code provides that “[a]U real and tangible personal property that this state. has
jtietion to tax is taxable unless exempt by law.” The person who owns property on January 1 of each year is liable
foradv&mmlaximposedforthatyear. TaxCodep§21.02(tanpiblepcrsonalpropeaytaxablebytaxingunitifitis
located then on January I), 23.01 (all taxable prop&y appraised at its market value as of January I), 32.01 (on January
1 of each year, tax lien attaches to prop&y to secure payment of taxes, penakies and interest).
‘U.S. cONST.art I, 5 8,cl. 3;seeEaconv. IZlinois, 227U.S. 504(1913).
‘See Branif/Aimurys. Inc. v. Nebraska State Bd. ofEqualization,
347 U.S. 590.597-98 (1954); Dalh County
Appraicar Dirt. v. Brinbmm, 701 S.W.Zd 20,23 (Tex. App.-Dallas 1985, writ ref d n.r.e.); Attorney General Opinion
H-1308 (1978) at 3.
TEX. LEG. Cau~cu., Analyses ofPmposed
Constititional
Amendments, November 7.1989 Election, at 23.
Tex. S.J. Res. 11, $ 2,71st Leg., RS., 1989 Tex. Gen. Laws 6415,6415-17; see Cmstitution of Texas-
Adopted Amendments, 71st Leg., 6th C.S., 1989 Tex. Gem Laws 25,32 (following index).
The Honorable Bill Ratliff - Page 2 (DM-463)
natural gas, and other petroleum products, are exempt from ad valorem
taxation iE
(1) the property is acquired in or imported into this State to be
forwarded outside this State, whether or not the intention to forward the
property outside this State is formed“ or the destination to which the
property is forwarded is specified when the property is acquired in or
imported into this State;
(2) the property is detained in this State for assembling, storing,
manufacturing, processing, or fabricating purposes by the person who
acquired or imported the property; and
(3) the property is transported outside of this State not later than
175 days after the date the person acquired or imported’ the property in
.lhis State.
Political subdivisions that acted before April 1, 1990, could tax such property.8
Section 11.251 of the Tax Code defines “tkeport goods” as “property that under Article VIII,
Section l-j, of the Texas Constitution is not taxable’* and provides that “[a] person is entitled to an
exemption t?om taxation of the apprsised value of that portion of the person’s-inventory or property
consisting of &eeport goods.“‘0 The statute also establishes procedures for determining the value
of fieeport goods in the taxpayer’s inventory or property.”
Your opinion request arises in the context of a particular fact situation, which you present
as follows:
The present situation involves Alliance Compressors, a company that
manutMures air conditioning compressor. The property in question consists
of the compressors and related parts and raw materials. Alliance assembles
%z Dallas County Appraisal Dirt. v. Brinkman, 701 S.W.2d at 22 (appraisal diskict argued under prior
freeport stah~tethat propertyowner must intend to forward specific goods out of state, as oppwed to forwarding
percentage of such goods).
‘F%operty“imported into tbis State” includes property brought into the state. Tex. Cmst. art. VIII, 5 l-j(c)(2).
‘Id. art. VIII, 5 l-j@).
Tax Code 5 11.251(a).
‘Old. 5 11.251(b).
“Id. 5 11.25 I(c) - (h) (exemption for freeport goods determined on basis of data for prior year).
p. 2599
The Honorable Bill Ratliff - Page 3 (DM-463)
compressors which sre sold to Trane Air Conditioning Company, which in
tum assembles the compressors into air conditioning units, many of which am
trsnsported to out of state buyers.
On the basis of this situation, you ask the following question:
Is a property owner allowed an exemption pursuant to the provisions of
Article VIII, Section l-j, Texas Constitution for property of the type that
otherwise meets the requirements of that provision, if the property is not sold
or transported out of the state by them, but is instead sold to an in-state
purchaser who uses the property in manufacturing other items which are then
transported out of state?
The only question you raise relates to the fact that Alliance Compressors does not itself
forward the compressors out of state but sells them to another in-state manufacturer who
incorporates them into air conditioners that sre sold out of state.‘r You ask us to assume that some
of Alliance’s property satisfies the requirements for the iieeport exemption explicitly stated in article
VIII, section l-j(a) ofthe Texas Constitution. I3 For purposes of discussion, we will assume that on
a specific date Alliance Compressors acquires or imports raw materials and related parts, that
AIIiance mauatures the raw materials and related parts into compressors and sells the compressors
to Trane, and that Trane incorporates them into air conditioners, some of which are transported out
of state within 175 days of the specific date on which Alliance acquired or imported the raw
materials and related parts. We will also assume that Alliance detained the property in Texas “for
assembling, storing, msnufacturing, processing, or fabricating purposes,” and that the taxing unit at
issue did not choose to continue taxing such property.”
A review of the legislative history of the constitutional and statutory provisions authorizing
the &eport exemption will help us answer your question. An earlier t?eeport statute’s adopted
without constitutional authorixation was found to be invalid to the extent it attempted to exempt
property not in interstate wmmerce,‘6 and the legislature subsequently proposed the wnstitutional
amendment. Under the earlier f&port statute, “[plroperty brought into Texas temporarily to be
‘We do not consider any questions as to the availability of the freeport exemption to Tram.
“A decision that the tkeport exemption applies to my propexty requires evidentbuy showings and the
resohuion of fact que.kms. We cannot make such findings in an attomey general opinion, but we can assume that fact-
findings have been made.
‘Tex. Cast. art. VIII, 0 l-j(a)(2), (b).
‘=Actof May 26, 1979,66tb Leg., RS., ch. 841, 5 1, 1979 Tex. Gen. Laws 2217,2233 (formerly codiiied at
TaxC!ode§ 11.01).
‘%ee Dallas GWZ~JJ Appraisal Dirt., 701 S.W.Zd at 23.
p. 2600
The Honorable Bill Ratliff - Page 4 (DM-463)
proceased before shipment to other states, such as cloth to be sewn into blue jeans or microprocessor
chips to be assembled into computers, was exempted from taxation.“” A bill analysis for the
resolution proposing article VIII, section l-j, stated that the proposed amendment “would apply to
property acquired in Texas, as well as to property imported into the state.“‘* It further stated that
“[t]his would avoid any discrimination against Texas-produced goods that are kept in the state for
processing--for example, circuit boards used in personal computers or oranges squeezed into juice.“i9
Thus, the wnstitutional amendment was understood to exempt Texas goods that became component
parts of items shipped out of state.
The legislation adopted to implement article VIII, section l-j of the Texas Constitution
tracked the three subsections of the wnstitutional provision that describe the goods subject to the
exemption,” and also required f&port goods to be “under the continuous ownership of the person
who transports the property out of this state from the time the property is acquired by that person for
trsnsportation out of this state.“*’ The next session of the legislature repealed the provision requiring
wntinwus ownership of the goods as well as the subsections tracking the wnstitutional language.”
An analysis of the proposed legislation stated as follows:
HB 1859 would correct sn error in the legislation passed in 1989 to
implement the “i?eeport” wnstitutional smendment. The Tax Code currently
requires that, in order to qualify for exemption, property must be under the
continuous ownership of the person who ships the property out of state from
the time the property was acquired by that person. However, manufacturers
commonly sell their products “FOB the plant,” so that ownership twhnically
is transferred on the plant’s loading dock. Some taxing jurisdictions, citing
the Tax Code, have refused to grant this type of good a “l?eeport” exemption,
although the Constitution does not impose this limitation.”
We agree with the bill analysis that the wnstitutional provision does not limit the exemption
to property owned by a single person during the time it is in Texas. It states three wnditions to be
“House Research organization, Bill Analysis, C.S.S.J.R 11,71st Leg., RS. (1989) st 2.
‘ld. at 3.
qex. Const. art VIlI, 5 l-j(s)(l) - (3).
=‘Act of May 29,1989,71st Leg., RS., ch 534,$ I,1989 Tex. Gen. Laws 1749, 1750 (cad&d ss Tax Code
5 11.251).
=Act of May 22,1991,72d Leg., RS., ch. 504.5 1,199l Tex. Gen. JAWS 1770, 1771.
UHouse Research Orgsnizatim, Bill Analysis, H.B. 1859,72d Leg. (1991) at 2.
p. 2601
The Honorable Bill Ratliff - Page 5 (DM-463)
met to exempt certain types of tangible personal property from ad valorem taxation. The first
condition is as follows:
(1) the property is acquired in or imported into this State to be
forwarded outside this State, whether or not the intention to forward the
property outside this State is formed or the de&nation to which the property
is forwarded is specified when the property is acquired in or imported into
this State.-
This subsection does not impose any condition of wntinuous ownership by one person. The second
and third conditions do include references to the person who acquires or imports the property:
(2) the property is detained in this State for assembling, storing,
manufacturing, processing, or fabricating purposes by the person who
acquired or imported the property; and
(3) the property is transported outside of this State not later than 175
days after the date the person acquired or imported the property in this
State.”
Thus, the person who acquired or imported the property in this state must also detsin it in the
state “for assembling, storing, manufacturing, processing, or fabricating purposes,” and the date on
which that person acquired or imported the property starts the 175-day period during which the
property must be transported out of the state. These provisions do not require the person who
acquired or imported the property in this state to own the property wntinuously until it is trsnsported
out of state. This construction of the wnstitutional provision was explicitly adopted as subsection
11.251(k) by a 1993 smendment, providing as follows:
Property that meets the requirements of Article Vm, Sections l-j(a)(l)
and (2), of the Texas Constimtion and that is transported outside of this state
not later than 175 days after the date the person who owns it on Jamrary 1
acquired it or imported it into this state is t&port goods regardless of
whether the person who owns it on January 1 is the person who transports it
outside of this state?6
Vex. Const. art. VIII, 5 l-j(a)(l).
Urex. Const. art. VIII, 5 l-j(a)(2), (3) (emphasii added).
=Act of May 25,1993,73d Leg., RS., ch. 779, $ 1.1993 Tcx. Gen. Laws 3056.3056.
p. 2602
The Honorable Bill Rattiff - Page 6 (DM-463)
Tbis provision makes express the intent that led to the 1991 smendment.2’
We note that some portions of section 11.25 1 of the Property Tax Code assume that f&port
property is wntinuously owned by one person during the 175 days. Subsection 11.25 l(d), the main
provision .on valuing &report goods, does not incorporate this presumption, but it can be found in
subsections 11.251(e) and 11.251(f). To determine whether component parts held in bulk were
transported out of the state before the expiration of 175 days, subsection 11.251(e) allows the chief
appraiser to “use the average lengtb of time a component part was held in this state by the property
owner during the preceding year.” Subsection 11.251(f) provides as follows:
If the property owner was not engaged in transporting &report goods out
of this state for the entire preceding year, the chief appraiser shall calculate
the percentage of cost described in Subsection (d)‘8for the portion of the year
in which theproperiy owner was engaged in transpotiingfieepotigooak out
ofthis state. [Emphasis added.]
We do not believe that these subsections undermine the clear language of subsection
11.25 l(k). Subsections 11.25 l(e) and (f) may assume that continuous ownership remains in one
person, but they do not require it. Moreover, these provisions are relevant to fleeport goods that are
under the wntinuous ownership of one person. In any case, subsection 11.25 l(g) provides another
method for valuing f&port goods “[i]f the property owner or the chief appraiser demonstrates that
the method provided by Subsection (d) significantly understates or overstates the market value of
the property qualified for an exemption.”
Your question raises a single legal issue: Is the freeport exemption available for property
where the person who acquired or imported it in this state and who detains it in the state “for
assembling, storing, manufacmring, processing, or fabricating purposes,” does not sell or transport
it out of the state, but instead sells it to an in-state purchaser who uses the property in manufacttuing
other items which are then transported out of state within 175 days of the time the first person
acquired or imported it. As our discussion shows, the person who acquires or imports the property
and who detains it for appropriate purposes need not own it wntinuously until it is transported out
of state. Moreover, when article VIII, section l-j was proposed by the legislature, it was understood
to exempt Texas goods that became component psrts of items shipped out of state.29
nId. The bill was titled “[an act] . relating to the ad valorem taxation of cotton.” The bill contained
pmvisions relating to the exemption of cotton stored in a warehouse for transportation o&de of the state, but subsection
11.251(k) refers to freeport goods generally, not expressly to cotton. See Cynthia M. Ohlenforstq Jeff W. Donill,
& Kathryn A. Christmann, Taration, 47 SMU L. REV. 1649, 1673 (1994).
?kx Code subsection 11.251(d) stat& how the chief appraiser is to determine tbe appraised value of freeport
goods.
=%ouse Research Organization, Bill Analysis, C.S.S.J.R 11,71st Leg. (1989) at 3. See Tax Code. $ 11.25 l(e)
(continued...)
p. 2603
TheHonorableBillRatliff - Page 7 (DM-463)
In conclusion, assuming that the property otherwise meets the requirements of article VIII,
section l-j, Texas Constitution, we believe that the treeport exemption is available for the property
where it is acquired or imported in this state by a person who detains it in the state “for assembling,
storing, manufacturing, processing, or fabricating purposes,” even though the property is not sold
or transported out of the state by that person, but is instead sold to an in-state purchaser who uses
the property in manufacturing other items which are then transported out of state within 175 days
of the time the first owner acquired it. The determination that the &report exemption applies to
specific property owned by Alliance and sold to Trane involves questions of fact, which cannot be
addressed in the opinion process.
(in d&mining market value of t?eepmi goods assembled or manufactured in this state, chief appraiser shall exclude
‘ybe cost of equipment, macw, or materi& that entered into and became cmnponent pm of the t?eepat goods but
were not themselves t&pat goods or that were not transported outside the state before the expiration of 175 days”).
p. 2604
The Honorable Bill Ratliff - Page 8 (DM-463)
SUMMARY
Article VIII, section l-j of the Texas Constitution establishes sn
exemption Ram ad valorem tax for “Roeport” goods, that is, certain property
destined for shipment out-of-state within 175 days after the date the property
was acquired in or imported into the state. The freeport exemption is
available to property where it is acquired or imported in this state by a person
who detains it in the state “for assembling, storing, manufacturing,
processing, or fabricating purposes,” even though the property is not sold or
transported out of the state by that person, but is instead sold to an in-state
purchaser who uses the property in manufacturing other items which are then
transported out of state within 175 days of the time the first owner acquired
it.
Whether the freeport exemption applies to specific property owned by
one person and sold to another involves questions of fact, which cannot be
addressed in the opinion process.
DAN MORALES
Attorney General of Texas
JORGE VEGA
First Assistant Attorney General
SARAH J. SHIRLEY
Chair, Opinion Committee
prepared by Susan L. Garrison
Assistant Attorney General
p. 2605