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Unpackaging the Texas Freeport Tax Exemption

By David Eseke

The Texas Freeport Tax Exemption is a valuable opportunity for companies that do business in Texas to reduce their tax burden—sometimes, by a significant amount. However, the exception can be confusing, like much of the tax code. If your business operates in the Lone Star State, it’s important to understand the basics of the Freeport Exemption to ensure you’re not leaving money on the table.

An Brief Overview

The Freeport Exemption is a constitutional amendment that exempts certain goods, which the government has dubbed Freeport goods, from property taxes. If your business has inventory in the state of Texas for a short period of time (175 days or less) before transporting it out of state, you may be able to claim a business personal property tax exemption on that inventory.

If you apply for a Freeport Exemption, your savings will be based on the percent of tangible property goods that your business moved out of Texas within the 175-day window during the previous year.

Background

The Freeport Exemption originated in 1989, when Texas voters approved the amendment as part of a state-wide push to incentivize companies to move to the state. But the exemption doesn’t apply everywhere: It’s up to each local taxing jurisdiction to decide whether to offer the exemption. With each city, county and school district in Texas representing a separate tax entity, it’s no surprise that many businesses are unsure of whether they are located in an area that is approved for the exemption.

Triple Freeport

This is considered the “holy grail” of Freeport Exemptions, where the local city, county and independent school district all support the Freeport exemption for a given location. In some cases, you can actually reach Quadruple Freeport, where the local hospital jurisdiction also recognizes the Freeport Exemption. However, since there’s not always a hospital authority, Triple Freeport is most commonly considered the ideal tax situation.

Below is an example of how much a company stands to benefit from the Freeport Exemption. Let’s assume the company has $10 million in inventory value (business personal property, or BPP). Let’s also assume that approximately 50% of the inventory is Freeport-eligible. The tables below show the savings this company could realize just by filing an application:

In this example, utilizing the Freeport Exemptions available to this company by the City of Dallas, Dallas ISD, Dallas County and Parkland Hospital, inventory tax obligation drops by $136,061.75.

Eligibility

Let’s assume some or all of the various taxing jurisdictions in which your business operates have approved the Freeport Exemption. The following conditions must also be met:

  • The inventory must fall under the categories of finished goods, supplies, raw materials or work in process. (The exemption does not apply to oil, natural gas, or liquid or gaseous materials that are immediate derivatives of the oil refining or natural gas.)
  • The Freeport goods that are eligible for this exemption must be transported out of Texas within 175 days of the date that they are acquired, manufactured or brought into the state.
  • “Goods-in-transit” that meet the Freeport property requirements can be sold within Texas, but they still have to be transported out of the state within 175 of being acquired or imported into the state.

Submitting an Application

It’s important to note that the Freeport Exemption application is an annual process. Applications are due to your county’s appraisal district by April 30 of the tax year for which you are requesting the exemption. You’ll also be required to provide supporting documentation, such as relevant inventory and sales reports and financial statements.

Understanding Your Eligibility

The Texas Freeport Exemption is one of the many great things about doing business in our state. But to avoid leaving money on the table, it’s important to understand the ins and outs of the exemption and how they impact your business. If you’re unsure about your eligibility or how the exemption affects your business, speak to a real estate consultant with local expertise who can help you leverage the tax code to its fullest.

David Eseke is a Senior Director within Cushman & Wakefield’s Industrial Tenant Representation group.

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