DAN MORALES 

ATTORNEY GENERAL 

QBffice of tfy 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 787 11 

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 of the 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 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. 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 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~te that property owner 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 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~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)‘8 for 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