The Texas Tax Code provides that, as a general matter, Texas sales and use tax are imposed on sales of “tangible personal property” or “taxable services.” [1] However, various exemptions apply to these items to provide relief to taxpayers where public policy dictates it should be given. One of the more common exemptions is the “sale-for-resale” exemption. Broadly speaking, the sale-for-resale exemption provides that the purchase of a taxable item can be exempt from Texas sales and use tax if the purchaser intends to resell the item as, or as part of, another taxable transaction.
Complexities may arise in determining whether a sale-for-resale has occurred. Additionally, another layer of issues exists with respect to proving the exempt nature of a transaction.
The Sale-for-Resale Exemption
Texas Tax Code 151.302(a) provides that the “sale for resale” of a taxable item is exempted from Texas sales and use tax. [2] The phrase “sale for resale,” in turn, is defined to include several different transactions. Most commonly, a “sale for resale” means a sale of:
“…tangible personal property or a taxable service to a purchaser who acquires the property or service for the purpose of reselling it as a taxable item as defined by Section 151.010 in the United States of America or a possession or territory of the United States of America or in the United Mexican States in the normal course of business in the form or condition in which it is acquired or as an attachment to or integral part of other tangible personal property or taxable service…” [3]
Or…
“…a taxable service performed on tangible personal property that is held for sale by the purchaser of the taxable service…” [4]
The sale-for-resale exemption rules reflect the general public policy consideration that tax should only be paid by the end-customer to a transaction. This is particularly important in business sectors involving separated manufacturing and retail steps, i.e., where multiple businesses are involved in the manufacture of the various components of a product, and other businesses are involved in the transport and retail sale of that product. Rather than taxing each individual business on the same product, the sale-for-resale exemption dictates that only the end-customer will (or should) owe Texas sales or use tax.
While simple on its face, the sale-for-resale exemption may involve significant complexities in practice. For example, the Texas Tax Code provides that tangible personal property used to perform a taxable service is not considered resold unless the “care, custody, and control” of the property is transferred to the purchaser of the service. [5] However, it’s not clear what constitutes “care, custody, and control” for purposes of this provision. As another example, there may be a question as to how the exemption should apply with respect to transactions that include some items for resale, and some items for use by the purchaser (i.e., not for resale). These types of questions are fact-dependent and the tax-impact will vary from transaction to transaction.
Resale Exemption Certificates
Other issues may arise in establishing that a taxpayer is entitled to use the sale-for-resale exemption. The determination of whether a transaction is exempt from Texas sales and use tax is generally construed against the taxpayer, and for the Texas Comptroller. [6] With respect to the sale-for-resale exemption, proving the exemption is most commonly achieved through requesting a “resale certificate” from the purchaser. [7] The certificate represents the purchaser’s attestation of their intent to resell the tangible personal property or taxable service at issue, and thus somewhat eases the seller’s responsibility to confirm that the product is in fact being resold.
Resale certificates are subject to a great deal of scrutiny by the Texas Comptroller. The form must generally be acceptable to the Comptroller, so many taxpayers opt to use the form promulgated directly by the Comptroller’s office. The form must also be sufficiently filled out. Comptroller Rule 3.285 sets forth guidelines for properly-completed certificates, including:
- The name and address of the purchaser;
- The purchaser’s sales tax permit number;
- A description of the items generally sold, leased, or rented by the purchaser in its regular course of business;
- A description of the taxable items being purchased tax-free;
- The purchaser’s signature and date; and
- The name and address of the seller.
Failure to complete any of the above items may, and likely will, result in the certificate being denied by the Comptroller’s office, and the transaction being deemed taxable.
[1] Tex. Tax Code § 151.051(a), 151.010.
[2] Tex. Tax Code § 151.302(a).
[3] Tex. Tax Code § 151.006(a)(1).
[4] Tex. Tax Code § 151.006(a)(4).
[5] Tex. Tax Code § 151.302(b).
[6] See, e.g., Southwest Royalties, Inc. v. Hegar, 500 S.W.3d 400, 404 (Tex. 2016).
[7] Tex. Tax Code § 151.151.
