SECTION 3.367. Timber Items (Tax Code, §151.3162 and §151.317)

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Equipment--An apparatus, device, hand tool, simple machine, or expendable supply item. Examples include axes, handsaws, ropes, tree measurement devices, harnesses for tree climbing, eye protection goggles, ear protection devices, components of above-ground sprinkler systems or underground sprinkler systems, boards or mats used for access to commercial timber sites, and expendable supplies such as lubricants, solvents, and rags. The term "equipment" includes repair, replacement parts, and accessories for equipment. A computer or software program may qualify, if it is used exclusively in the production of timber. For example, a computer used exclusively to measure or track the growth of the trees to determine harvest time is a timber item. However, computers and software used in business accounting, bookkeeping, word processing, preparation of payrolls and employee evaluations, or other non-production activities are not timber items. The term does not include furniture, office supplies, or office equipment.

(2) Machinery--A powered-operated machine. Examples include chain saws, chippers, machinery used to drill holes for planting, machinery used to fertilize, harvesters, slashers, merchandisers including total merchandising systems, debarkers, delimbers, grapples, log stackers, feller bunchers, loaders including knuckleboom loaders, skidders, tractors, bulldozers, welding machines, compressors, and generators. The term "machinery" includes repair, replacement parts, and accessories for machinery. The term does not include motor vehicles or repair, replacement parts, or accessories for motor vehicles except for motor vehicles that qualify as timber machines and timber trailers.

(3) Original producer--a person who:

(A) harvests timber that the person owns and continues to own until the timber is processed, packed, or marketed; or

(B) is the grower of the timber, exercises predominant operational control over the growth of the timber, and bears the risk of loss of investment in the timber.

(4) Pollution control equipment--Machinery and equipment that are used by an original producer to control pollution that results from the processing, packing, or marketing of timber products by the original producer.

(5) Production of timber--Activities to prepare the production site or to plant, cultivate, or harvest commercial timber that will be sold in the regular course of business. The term includes construction, repair, and maintenance of private roads and lanes exclusively used for access to commercial timber sites. Activities at a harvest site to cut down commercial timber, debark, delimb, chip, slash, and to prepare and load harvested timber qualify as the production of timber but are not manufacturing operations as described in subsection (f) of this section. The use of a timber trailer to haul the harvested logs or chips from the harvest site for delivery to a saw mill also qualifies as the production of timber. Transportation of timber products from a location other than a commercial timber harvest site does not qualify.

(6) Timber machine--A self-propelled motor vehicle specially adapted to perform a specialized function for use primarily in timber operations. Timber machine does not include any self-propelled motor vehicle specifically designed or adapted for the primary purpose of transporting timber or timber products including a self-propelled motor vehicle designed to transport cargo and adapted with a cargo loading device. For information concerning the exemption of a timber machine from motor vehicle sales tax under Chapter 152 of the Tax Code, see §3.72 of this title (relating to Farm Machines, Timber Machines and Trailers).

(7) Timber trailer--A trailer or semitrailer designed for and used primarily in a timber operation. For information concerning the exemption of a timber trailer from motor vehicle sales tax under Chapter 152 of the Tax Code, see §3.72 of this title (relating to Farm Machines, Timber Machines and Trailers).

(b) Qualifying items. Persons may claim a partial refund or credit for Texas sales or use taxes paid on purchases of the following items:

(1) seedlings of trees commonly grown for commercial timber. Examples of trees commonly grown for commercial timber include hardwood or pine trees;

(2) defoliants, desiccants, fertilizers, fungicides, herbicides, and insecticides that are exclusively used in the production of timber for sale;

(3) machinery or equipment that is exclusively used in the production of timber for sale, including accessories, repair or replacement parts, and lubricants for the machinery or equipment;

(4) tangible personal property sold or used as a component of an underground irrigation system that is exclusively used in the production of timber for sale. For example, a contractor who has a lump-sum contract to install an underground irrigation system as an improvement to realty is the consumer of the incorporated materials and must pay sales tax on purchases. As authorized by Tax Code, §151.3162(b)(2), the contractor may request a partial refund or credit for tax that the contractor paid on the qualifying components of the irrigation system. For further information on contracts to improve real property, see §3.291 of this title (relating to Contractors); and

(5) machinery or equipment, including pollution control equipment, that the original producer uses to process, pack, or market timber product, if the machinery or equipment meets the requirements enumerated in subsection (d)(1) of this section. Examples of eligible machinery and equipment include stacking sticks used to dry the lumber, forklifts, and conveyors.

(c) Partial refund or credit for sales or use tax paid on qualifying items. A person who, during the period beginning October 1, 2001, and ending December 31, 2007, pays Texas sales or use tax on the purchase, lease, or rental of a qualifying item as set out in subsection (b) of this section may either request a partial refund of the tax directly from the comptroller or take a credit on a sales tax return for a portion of the tax. The amount of the partial refund or credit is determined by the date that the qualifying item is purchased, leased, or rented, as provided in paragraphs (1) - (3) of this subsection. At the time of the purchase, lease, or rental, the purchaser must pay sales or use tax to the retailer and may not issue an exemption certificate to the retailer. A purchaser must accrue and pay use tax to the comptroller on qualifying items purchased out-of-state for use in Texas (see §3.346, concerning Use Tax). The purchaser may take the partial credit on the sales and use tax return when the purchaser reports and pays the tax to the comptroller. The amount of credit will be determined by the date on which the purchaser brings the qualifying items into this state.

(1) If a qualifying item is purchased, leased, or rented from October 1, 2001 through December 31, 2003, then the purchaser is entitled to a refund or credit in an amount equal to 33% of the tax paid on the item.

(2) If a qualifying item is purchased, leased, or rented from January 1, 2004 through December 31, 2005, then the purchaser is entitled to a refund or credit in an amount equal to 50% of the tax paid on the item.

(3) If a qualifying item is purchased, leased or rented from January 1, 2006 through December 31, 2007, then the purchaser is entitled to a refund or credit in an amount equal to 75% of the tax paid on the item.

(4) A purchaser may seek a refund or take a credit for tax paid on exempt timber items within the following limitations:

(A) A purchaser who elects to take a credit must claim the credit on a sales or use tax return for a report period that ends not later than the first anniversary of the date that the timber item was purchased, leased, or rented. For example, a quarterly filer who purchases and pays tax on a qualifying item on October 2, 2001, may take the 33% credit on any quarterly return up to and including the return for the quarter that ends September 30, 2002.

(B) A purchaser who elects to claim a refund directly from the comptroller must submit a written claim not later than December 31 of the calendar year immediately following the year in which the tax was paid. For example, a purchaser who purchases a timber item and pays tax on October 2, 2001, must submit a refund claim for 33% of tax paid by December 31, 2002.

(C) A purchaser who fails to take a credit on a return before the expiration of the limitation period provided in subparagraph (A) of this paragraph may still request a refund directly from the comptroller within the limitation period provided in subparagraph (B) of this paragraph.

(5) Interest. Sales or use taxes paid on timber items that are purchased, leased, or rented from October 1, 2001 through December 31, 2007, are not taxes paid in error, and no interest under Tax Code, §111.064, is due on partial refunds or credits taken on timber items.

(6) Taxable services. Sales or use taxes paid on maintenance, repair, or remodeling performed on qualifying machinery or equipment from October 1, 2001 through December 31, 2007, are not eligible for the partial refund or credit. A purchaser may claim a partial refund or take a credit for tax paid on separately stated charges for parts, accessories, and lubricants for qualifying machinery or equipment.

(7) Rentals and Leases. The amount of partial refund or credit will be determined by the date on which the lessee takes possession of the items. The lessee may not claim a refund or take credit until tax has been paid. The limitations in which the refund or credit must be claimed or taken, as provided in paragraph (4) of this subsection, are based on the date the lessee paid tax.

(d) Original producer.

(1) The original producer may qualify for the partial refund or credit only if:

(A) the processing, packing, or marketing occurs at or from a location operated by the original producer;

(B) at least 50% of the value of the timber products processed, packed, or marketed at or from the location during the most recent calendar year is attributable to products produced by the original producer and not purchased or acquired from others; and

(C) the original producer does not for consideration process, pack, or market timber products that belong to others, unless the value of the product that belongs to another person is 5.0% or less of the total value of the timber products processed, packed, or marketed by the original producer.

(2) Two or more corporations that operate timber activities on the same or adjacent tracts of land and that are entirely owned by the same individual or a combination of the individual, the individual's spouse, and the individual's children may qualify as an original producer for the purposes of this paragraph.

(e) Exemption for timber items. After December 31, 2007, the purchase, lease, or rental of timber items will be exempt from sales or use tax, and a purchaser may issue a retailer a properly completed exemption certificate in lieu of paying tax on qualifying items that are purchased, leased, or rented after December 31, 2007. After December 31, 2007, taxable services performed on qualifying items will be exempt under Tax Code, §151.3111.

(f) Exemption for off-road, heavy-duty diesel equipment. A person who uses off-road heavy-duty diesel equipment in timber operations may claim an exemption from the Texas Emissions Reduction Plan Surcharge imposed by Tax Code §151.0515 provided the equipment is exclusively used in the production of timber for sale.

(g) Manufacturing. A person who processes or fabricates tangible personal property to be sold is a manufacturer and may be entitled to manufacturing exemptions provided by Tax Code, §151.318. See §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing) for information on tax exemptions for equipment and supplies used in manufacturing. For information regarding wrapping and packaging supplies purchased by manufacturers, see §3.314 of this title (relating to Wrapping, Packing, Packaging Supplies, Containers, Labels, Tags, Export Packers, and Stevedoring Materials and Suppliers).

(h) Gas and electricity exemption. Effective October 1, 2001, natural gas and electricity used in timber operations are exempt from sales and use taxes. See §3.295 of this title (relating to Natural Gas and Electricity) for further information regarding the exemption of natural gas and electricity.

(i) Buildings. Buildings, structural components of buildings, and/or the materials used to build, construct, or fabricate buildings are not timber items and are taxable.

(1) Buildings include any structures or edifices enclosing a space within their walls, and usually are covered by a roof, the purpose of which may be to provide storage, shelter, or housing, or to provide work, office, or sales space. Examples of buildings include residential quarters, offices, storage facilities, and warehouses.

(2) A building or structure that is essentially an item of equipment or machinery necessary for timber production may be considered timber equipment if it is specifically designed for such use and cannot be economically used for any other purpose. For example, a commercial greenhouse is timber equipment if it is used to grow seedlings of trees commonly grown for commercial timber.

(3) Pollution control equipment and machinery or equipment used in processing, packing, or marketing by an original producer, may qualify even if the machinery and equipment are affixed to real property. For a timber producer to qualify for sales tax refunds or credits on qualifying items that are installed under a contract to improve real property, the timber producer must enter into a separated contract. Additionally, the contract must separately state the charges for the qualifying items from the charges for other tangible personal property. See §3.291 of this title (relating to Contractors) for information regarding new construction contracts. See §3.357 of this title (relating to Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance) for information regarding nonresidential real property repair, remodeling, or restoration.

(j) Repeal of previous exemption. Effective October 1, 2001, the exemption in Tax Code, §151.3161, that took effect on October 1, 1995, is repealed. That provision allowed a tax exemption for the first $50,000 of the purchase price of each complete unit of machinery or equipment used exclusively in a commercial timber operation to prepare the site, plant, cultivate, or to harvest timber in the regular course of business.

Source Note: The provisions of this §3.367 adopted to be effective December 31, 2002, 27 TexReg 12367; amended to be effective April 13, 2005, 30 TexReg 2085