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...