Texas House Will Review, Could Repeal, Sales Tax Exemptions for Ships, Ship Equipment

On Feb. 10, 2010, the Texas House of Representatives' Committee on Ways and Means will hold a hearing to review several existing sales tax exemptions, including an important one for certain ships and ship equipment. This hearing is part of an interim study to determine if the body should consider repealing this and other sales tax exemptions when the full legislature next meets in 2011.

Interim studies include public hearings, as well as other opportunities to brief legislators and staff on the relevant topics. The studies also lead to written reports that are circulated to all members of the legislature. This means opportunities exist for your position on an issue to be included in - or excluded from - the results of a legislative study. These studies typically result in legislation being introduced in the next legislative session.

If your company is in the maritime industry or heavily relies upon it, you will need to be prepared to educate legislators on how such a sales tax exemption repeal will negatively impact your business in Texas.

The current sales tax exemption for certain ships and ship equipment is found in Section 151.329 of the Texas Tax Code. It states that the following are exempt from Texas sales tax:

• materials, equipment, and machinery that enter into and become component parts of a ship or vessel that is of eight or more tons displacement and is used exclusively and directly in a commercial enterprise, including commercial fishing; or used commercially as a vessel for pleasure fishing by individuals as paying passengers on the vessel;
• a ship or vessel of eight or more tons displacement, that is used exclusively and directly in a commercial enterprise and is sold by the vessel's builder;
• materials and labor used in repairing, renovating, or converting a ship or vessel that is of eight or more tons displacement and that is used exclusively and directly in a commercial enterprise;
• materials and supplies purchased by the owner or operator of a ship or vessel operating exclusively in foreign or interstate coastal commerce if the materials and supplies: are loaded on the ship or vessel and used in the maintenance and operation of the ship or vessel; or enter into and become component parts of the ship or vessel; and
• materials and supplies purchased by a person providing stevedoring services for a ship or vessel operating exclusively in foreign or interstate coastal commerce if the materials and supplies are loaded aboard the ship or vessel and are not removed before the departure of the ship or vessel.

The sales tax exemption for certain ships and ship equipment was expected to cost the state $31 million in 2009, and is projected to rise to $42 million by 2014. With the state projecting a multi-billion dollar shortfall next year, it is possible that lawmakers will consider eliminating such exemptions in order to help solve the state's fiscal problems.

Gardere has a very experienced and effective Austin-based government relations practice for legislative and regulatory matters. With more than 100 years of combined experience lobbying the Texas Legislature, Gardere represents Fortune 10 companies, trade associations, privately held companies and public entities. If you have any questions about the content of this alert or require additional information, please contact Gardere Partners Mark Vane (mvane@gardere.com or 512.542.7077) or Kimberly A. Yelkin (kyelkin@gardere.com or 512.542.7001).

IRS CIRCULAR 230 DISCLOSURE:

This communication has not been prepared as a formal legal opinion within the procedures described in Treasury Department Circular 230. As a result, we are required by Treasury Regulations to advise you that for any significant Federal tax issue addressed herein, the advice in this communication (including any attachments) was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.