DAN MORALES

ATTORNEY GENERAL 

# QBffice

oftfy Plttornep @eneral &ate of I&exa$ December 19,1997

The Honorable Bill Ratliff Chair, Finance Committee Texas State Senate P.O. Box 12068 Austin, Texas 78711 Opinion No. DM-463 Re: Whether fkeport exemption from ad valorcm tax applies to property sold to an m-state owner who uses it to mamtfacture products that are shipped out of state (RQ-932) Dear Senator Ratliffz You ask about the interpretation ofthe fkport exemption l%om ad 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 ofthe state but is not exempt from state tax as aburden on interstate commerce,~ because abreak in the interstate txansitofthe property subjects itto stateproperty tax.g Aswell asapplying toproperty brought into the state, the Texas keeport exemption applies toproperty acquired in the state that is trsnsported out ofthe statewithin 175days. 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 1of each year is liable foradv&mmlaximposedforthatyear. TaxCodep§21.02(tanpiblepcrsonalpropeaytaxablebytaxingunitifitis located then on January I), 23.01 (all taxable prop&y appraised atits market value as of January I), 32.01 (on January 1of 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. of Equalization,

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 of Pmposed 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 TexasAdopted 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 istransported outside ofthis State not later than 175days 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 11.251ofthe TaxCode defines “tkeport goods” as“property thatunder Article VIII, Section l-j, ofthe Texas Constitution is not taxable’* and provides that “[a] person is entitled to an exemption t?omtaxation ofthe apprsised value ofthat portion oftheperson’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 aparticular fact situation, which you present asfollows: The present situation involves Alliance Compressors, a company that

manutMures airconditioning 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 freeportstah~te

thatpropertyownermustintend 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).

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compressors which sre sold to Trane Air Conditioning Company, which in tum assembles the compressors into air conditioning units, many ofwhich am trsnsported to out of state buyers. On the basis ofthis situation, you ask the following question: Is aproperty owner allowed an exemption pursuant to the provisions of Article VIII, Section l-j, Texas Constitution for property of the type that otherwise meets therequirements ofthat provision, ifthe property isnot sold or transported out of the state by them, but is instead sold to an in-state purchaser who usestheproperty inmanufacturing other items which arethen 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 ofAlliance’s property satisfies therequirements forthe iieeport exemption explicitly stated in article VIII, section l-j(a) ofthe Texas Constitution. I3For purposes ofdiscussion, we will assume that on a specific date Alliance Compressors acquires or imports raw materials and related parts, that AIIiance mauatures therawmaterials andrelated parts into compressors and sellsthe compressors to Trane, and that Trane incorporates them into air conditioners, some ofwhich 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.” Areview ofthe legislative history ofthe 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 factfindings 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~JJAppraisal Dirt., 701 S.W.Zd at23.

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proceased before shipment to other states, such ascloth tobe sewn into bluejeans ormicroprocessor 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, aswell 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 boardsusedinpersonal computers ororanges squeezed intojuice.“i9 Thus, the wnstitutional amendment wasunderstood 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 ofthe wnstitutional provision that describe the goods subject to the exemption,” and also required f&port goods to be “under the continuous ownership ofthe person who transports the property outofthis state fromthe time the property is acquired by that person for trsnsportation out ofthis state.“*’The next session ofthe legislature repealed theprovision requiring wntinwus ownership ofthe goods aswell asthe 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 oftheperson who ships the property out of state from the time the property was acquired by that person. However, manufacturers commonly sell their products “FOBthe plant,” so that ownership twhnically is transferred on the plant’s loading dock. Some taxing jurisdictions, citing theTax Code, haverefusedto grantthis type ofgood 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 asingle 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).

=‘Actof 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. JAWS1770, 1771. UHouse Research Orgsnizatim, Bill Analysis, H.B. 1859,72d Leg. (1991) at2.

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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 orthe 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 ofwntinuous 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 ofthis State not later than 175 days after the date the person acquired or imported the property in this State.” Thus, the person who acquired orimported theproperty in this statemust also detsin itin 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 orimported theproperty inthis stateto own theproperty wntinuously until itis trsnsported out of state. This construction ofthe wnstitutional provision was explicitly adopted as subsection 11.251(k) by a 1993 smendment, providing as follows:

Property that meets the requirements ofArticle Vm, Sections l-j(a)(l) and (2), ofthe Texas Constimtion and that is transported outside ofthis 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 1is the person who transports it outside ofthis 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.

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Tbis provision makes express the intent that led to the 1991 smendment.2’ We note that someportions ofsection 11.251oftheProperty Tax Code assume that f&port property is wntinuously owned by one person during the 175days. Subsection 11.25l(d), the main provision .onvaluing &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 ofthe state before the expiration of 175days, subsection 11.251(e) allows the chief appraiser to “use the average lengtb oftime a component part was held in this state by the property owner during the preceding year.” Subsection 11.251(f) provides as follows:

Ifthe property owner was not engaged intransporting &report goods out ofthis statefor the entire preceding year, the chief appraiser shall calculate the percentage ofcost described in Subsection (d)‘8forthe portion ofthe 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 11.25l(k). Subsections 11.25l(e) and (f) may assume that continuous ownership remains in one person, but they do not require it. Moreover, these provisions arerelevant to fleeport goods that are under the wntinuous ownership ofone person. In any case, subsection 11.25l(g) provides another method for valuing f&port goods “[i]fthe 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 itout ofthe state, but instead sells itto an in-state purchaser who uses theproperty in manufacttuing other items which are then transported out of state within 175 days of the time the first person acquired or imported it. Asour discussion shows, the person who acquires or imports the property andwho detains it for appropriate purposes need not own itwntinuously until it is transported out ofstate. Moreover, when article VIII, section l-j wasproposed by the legislature, itwas 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 awarehouse fortransportation 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...)

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In conclusion, assuming that the property otherwise meets the requirements of article VIII, section l-j, Texas Constitution, webelieve that the treeport exemption is available for the property where it is acquired or imported in this stateby aperson who detains it in the state “for assembling, storing, manufacturing, processing, or fabricating purposes,” even though the property is not sold or transported out ofthe 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 175days 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, ormateri& 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”).

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### 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 175days after the date the property was acquired in or imported into the state. The freeport exemption is available toproperty where itis acquired orimported inthis stateby aperson who detains it in the state “for assembling, storing, manufacturing, processing, or fabricating purposes,” even though the property is not sold or transported out ofthe state by that person, but is instead sold to an in-state purchaser who usestheproperty inmanufacturing other items which arethen transported out of state within 175days 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 ofTexas JORGE VEGA First Assistant Attorney General SARAH J. SHIRLEY Chair, Opinion Committee prepared by Susan L. Garrison Assistant Attorney General

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