Download Presentation 7 - Texas Wide Open for Business

Freeport Exemption
Simply put, the Freeport Exemption provides
a property tax exemption on inventory that is
detained in Texas for 175 days or less. Qualified inventory includes goods, wares,
ores, and merchandise (except for oil, gas, or
other petroleum products). To qualify, the goods must be in Texas for
certain purposes, such as assembly, storage,
manufacturing, processing, or fabrication.
Relevant legal authorities...
Texas Constitution Article VIII,
Section 1-J
Constitution- Sec. 1-j. CERTAIN TANGIBLE PERSONAL PROPERTY EXEMPT FROM AD VALOREM
TAXATION. (a) To promote economic development in the State, goods, wares, merchandise, other tangible personal
property, and ores, other than oil, natural gas, and other petroleum products, are exempt from ad
valorem taxation if:
(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 this State.
(b) The governing body of a county, common, or independent school district, junior college district, or
municipality that, acting under previous constitutional authority, taxes property otherwise exempt by
Subsection (a) of this section may subsequently exempt the property from taxation by rescinding its
action to tax the property. The exemption applies to each tax year that begins after the date the action is
taken and applies to the tax year in which the action is taken if the governing body so provides. A
governing body that rescinds its action to tax the property may not take action to tax such property after
the rescission.
Constitution continued...
(c) For purposes of this section:
(1) tangible personal property shall include aircraft and aircraft parts;
(2) property imported into this State shall include property brought into
this State;
(3) property forwarded outside this State shall include property
transported outside this State or to be affixed to an aircraft to be
transported outside this State; and
(4) property detained in this State for assembling, storing, manufacturing,
processing, or fabricating purposes shall include property, aircraft, or
aircraft parts brought into this State or acquired in this State and used by
the person who acquired the property, aircraft, or aircraft parts in or who
brought the property, aircraft, or aircraft parts into this State for the
purpose of repair or maintenance of aircraft operated by a certificated air
carrier.
Texas Tax Code, Section 11.251
History
The Texas Tax Code once contained a Freeport provision,
Section 11.01(d), that attempted to provide tax relief for
goods, wares, and ores (other than oil or gas) shipped into
the state for assembly, storage, manufacturing, processing,
or fabrication, and then shipped out of state within 175
days. However, that provision was held to be unconstitutional in
Dallas County Appraisal District v. L. D. Brinkman and
Company (Texas), Inc., 701 S.W.2d 20 (Tex. App.-Dallas
1985. writ ref'd n.r.e.). In that case, the Texas Court of
Appeals held that under Article VIII, Section 1 of the Texas
Constitution, that property in Texas is taxable regardless of
how long it is in the state, except for property otherwise
exempt under the Texas Constitution or property actually in
interstate commerce.
Therefore, former Section 11.01(d) of the Tax Code,
was not authorized by the Texas Constitution. Furthermore, under federal case law, property is not
considered to be in "interstate commerce" if it is
being stored, assembled, manufactured,
processed, or, fabricated. As a result of the Brinkman case, most property that
was formerly considered "not taxable" under Section
11.01(d) was subject to ad valorem taxation.
So something had to be
done to fix the situation and
provide a method to restore
the inventory exemption... An
Amendment to the Texas
Constitution was proposed.
The proposed constitutional amendment would restore the inventory
tax relief previously unlawfully granted under Section 11.01(d) of Code,
except for a few main differences: First, the local taxing jurisdictions could choose to take specific action
to continue taxing Freeport goods within their boundaries. But that
decision had to be made by April 1, 1990. Local taxing jurisdictions
can later elect to revoke the decision to tax Freeport property. But once
the exemption is enacted, the qualifying property remains exempt from
ad valorem taxation indefinitely. Second, it would apply to property acquired within Texas and shipped
out of state as well as property imported into Texas and later shipped
out of state. In other words, property detained in Texas for 175 days or
less.
Also, ad valorem tax relief would be extended to aircraft, aircraft parts,
and other items in the state temporarily for use in the repair or
maintenance of aircraft. Meanwhile...
H.B. 2959, which passed in the 1989 regular
session, contained several provisions to assist
in the administration of the proposed Freeport
exemption. Those provisions would take effect
January 1, 1990, but only if the proposed
constitutional amendment was approved by the
voters. H.B. 2959 would add Section 11.251 to
the Tax Code, further defining and limiting the
scope of the Freeport exemption and providing
formulas to be used by appraisal districts in
determining the portion of an inventory that
represents goods eligible for the exemption.
How is this an
Economic Development Tool?
Factors to consider in whether or not the Freeport Exemption would be an effective
economic development tool:
-Value loss to appraisal role as a result of the exemption- How much of the current
property tax parcel count is comprised of inventory that would potentially be exempt
under the Freeport or Goods in Transit exemptions? -Value gain to the appraisal role as a result of added real property tax base resulting
from attracting businesses to set up facilities in the area-- No state metrics exist that
track the return on taxable dollar value loss granted under the exemption.
-Unmeasurable gains to the community- sales tax collections, increased jobs, increase
in resulting investments, etc.
-Can the State's funding formula make up for the loss (in the manner to which the school
district is accustomed?)
-What neighboring counties and their respective cities/districts ARE attracting the
manufacturers, industrial businesses, factories, etc.? Do they have the benefit of using
the Freeport Exemption as an economic development incentive?
-Texas is only one of a handful of states that taxes inventory... Is your area losing
business and economic growth opportunities to other states?
-How much of the current property tax parcel count is comprised of inventory that would
potentially be exempt under the Freeport or Goods in Transit exemptions? Freeport v. Goods In Transit
The Goods-in-transit exemption is similar to the
Freeport exemption with two key differences:
The Goods-in-transit exemption may apply to
goods traveling inside the state.
The Goods-in-transit exemption is only available
for goods stored at locations that are owned by
someone other than the owner of the goods
themselves (public warehouse).
Governing body may elect to revoke its decision
to exempt "Goods in Transit" at any point.
Enacting the Freeport Exemption is
possible in one, two, and three
ways: -City -County
-School District
The officials of the
governing entities vote to
decide
Discussion
Quick mention of the legislature's proposed amendment to
be voted on state-wide that allows increase of time limit in
Texas for aircraft parts...