When two corporations consolidate portions of their businesses into a joint venture through a multi-step reorganization — forming and merging several single-member LLCs and a limited partnership along the way — does any step trigger Texas sales or use tax?

Plain-English summary

Two corporations (Corporation A and Corporation B) were consolidating portions of their businesses into a joint venture through an elaborate multi-step reorganization: Corporation A restructured its wholly-owned LLC by spinning off certain assets into a new single-member LLC, then distributed that new LLC's interest back to itself; Corporation B formed two new single-member LLCs, which together formed a limited partnership, into which Corporation B contributed joint-venture assets in exchange for a 100% partnership interest, then contributed its own partnership stake into the two new LLCs; finally, both corporations combined their restructured entities into a newly formed joint LLC (each ending up with a 50% stake), accomplished by merging Corporation A's LLC with the limited partnership and by Corporation B contributing its LLC ownership interests.

The Comptroller confirmed none of these steps trigger Texas sales or use tax, for two independent reasons that recur throughout the analysis:

1. Occasional sale exemption. Where a wholly-owned entity contributes assets to another entity it wholly owns (like Step 1A: LLC1 contributing assets to its own newly formed, 100%-owned LLC2), that's a nontaxable "occasional sale" — Tex. Tax Code § 151.304 and Rule 3.316(e) exempt transfers of all or substantially all of a person's business property where the real/ultimate ownership stays "substantially similar" before and after (defined as an 80%+ ownership threshold). The Comptroller treated these as nontaxable contributions of assets, not sales.
2. Not a sale of tangible personal property at all. Distributions and transfers of ownership INTERESTS in LLCs or partnerships (as opposed to the underlying business assets themselves) simply aren't sales of tangible personal property under Tex. Tax Code § 151.010's definition of taxable items — so they're outside the sales/use tax's scope regardless of the occasional-sale exemption. The same logic applies to a merger of two companies, which the Comptroller does not consider a sale of tangible personal property.

What this means for you

Corporate tax counsel structuring joint ventures or reorganizations

Contributions of a wholly-owned entity's assets into another wholly-owned entity generally qualify as nontaxable occasional sales under the 80%+ "substantially similar ownership" test — and separately, moving ownership INTERESTS (LLC membership interests, partnership interests) around, or merging entities, doesn't implicate sales/use tax at all since interests aren't tangible personal property.

M&A and business formation advisors

This letter is a useful template for analyzing multi-step reorganizations step by step: identify which steps are asset transfers (test them against the occasional-sale/80% threshold) versus which are interest transfers or mergers (which fall outside TPP sales entirely and don't even need the occasional-sale exemption).

Accountants and tax professionals

Note the layered analysis — some steps here didn't need the occasional-sale exemption because they were never taxable sales of TPP in the first place (interest transfers, mergers), while others (asset contributions between wholly-owned entities) specifically relied on the occasional-sale exemption and its ownership-continuity test.

Common questions

Q: Does contributing business assets to a newly formed, wholly-owned subsidiary trigger Texas sales tax?
A: Generally no, if it qualifies as an "occasional sale" — meaning the real/ultimate ownership of the property stays substantially similar (80%+) before and after the transfer, per Tex. Tax Code § 151.304 and Rule 3.316(e).

Q: Is transferring or distributing an LLC or partnership ownership interest a taxable sale in Texas?
A: No — transfers of ownership interests in LLCs or partnerships are not sales of tangible personal property at all, so they fall outside Texas sales/use tax regardless of the occasional-sale exemption.

Q: Does merging two companies trigger Texas sales/use tax?
A: No — the Comptroller does not consider a merger of two companies to be a sale of tangible personal property.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.010 (taxable items limited to TPP sales and certain taxable services)
• Tex. Tax Code § 151.304 (occasional sale exemption)
• 34 Tex. Admin. Code Rule 3.316(e) (transfer without change in ownership — 80% substantially-similar-ownership threshold)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200005353L

Original ruling text

May 26, 2000

Dear ** and **:

Your letter to Tom Soto, requesting a ruling on the Texas sales and use tax
consequences of the following transactions has been referred to me for
response. Your fact situation and questions are restated below followed by my
response.

FACTS

Corporation A and Corporation B are consolidating portions of their business
enterprises into a joint venture. The consolidation will occur as follows.

Step 1 - Reorganization of Corporation A business.

A. Corporation A is the sole owner of LLC 1, a single member Delaware limited
liability company that is treated as a division or branch of Corporation A for
federal income tax purposes. LLC1 has several business operations, some of
which will be included in the joint venture, and sale of which will not. To
segregate its nonjoint venture assets from its joint venture assets, LLC1
intends to form LLC2, a Delaware single member limited liability company and
contribute its nonjoint venture assets to LLC2 in exchange for a 100% ownership
interest.

B. LLC1 will then distribute its interest in LLC2 to Corporation A.

Step 2- Reorganization of Corporation B business.

A. Corporation B will form LLC3 and LLC4, which are both single member
Delaware limited liability companies.

B. LLC3 and LLC4 will form LP, a Delaware limited partnership, with LLC3 as a
limited partner and LLC4 as the general partner. Under Delaware law neither
LLC3 nor LLC4 are required to have an economic interest in LP at the time of
formation and neither will have an economic interest at the time of formation.
Corporation B will subsequently transfer joint venture assets to the LP in
exchange for admission as a limited partner with a 100% economic interest in
LP. Corporation B will then contribute its interest in the LP partnership to
LLC3 and LLC4 as a 99.8% limited partnership interest to LLC3 and a 0.2%
general partnership interest to LLC4.

Step 3 - Consolidation of the joint venture assets.

Corporation A and Corporation B will form LLC5, a Delaware limited liability
company:

Corporation A will contribute LLC1 to LLC5 by having LLC1 merge with LP.

Corporation B will contribute its ownership interests in LLC3 and LLC4 to LLC5.
LLC3 and LLC4 will thereafter be treated as branches or divisions of LLC5 for
federal income tax purposes.

After the merger, Corporation A and Corporation B will each own 50% of LLC5.
LLC5 will be treated as a partnership for federal income tax purposes.

ISSUE

The issue is whether any Texas sales or use taxes will result from the proposed
transactions. Our analysis indicates that no Texas sales or use taxes will be
triggered by the transactions because the transfers are either occasional sales
or the transfers do not involve the sale of tangible personal property.

Taxable items under the Texas Limited Sales, Excise, and Use Tax are limited to
the sale of tangible personal property and certain taxable services. Tex. Tax
Code 151.010. In addition, the Texas Tax Code exempts "occasional sales" from
the Texas sales and use tax. "Occasional sales" are defined to include:

(3) a transfer of all or substantially all the property used by a person in the
course of an activity if after the transfer the real or ultimate ownership of
the property is substantially similar to that which existed before the
transfer;

Tex. Tax Code 151.304. Comptroller Rule 3.316 further defines "transfers
without change in ownership" as follows:

(e) Transfer without change in ownership.

(1) Any transfer of all or substantially all the property held or used by a
person in the course of an activity, when after such transfer the real or
ultimate ownership of such property is substantially similar to that which
existed before such transfer, is an occasional sale. Since ownership must be
transferred, "transfer" does not include the lease or rental of property.

(2) For the purposes of this section, stockholders, bondholders, partners, or
other persons holding an interest in a corporation or other entity are regarded
as having the "real or ultimate ownership" of the property of such corporation
or other entity. Ownership is "substantially similar" if the person
transferring the property owns 80% or more of the stock in the corporation to
which the transfer is being made. Ownership is "substantially similar" if 80%
or more of the stock in the corporation making the transfer is owned by the
transferee.

(3) "All or substantially all" of the property will be considered to have been
transferred if 80% or more is transferred.

34 Tex. Admin. Code 3.316(e).

RULING REQUEST

The above-described transactions will not be subject to the Texas sales and use
tax for the following reasons:

1. Because LLC1 has a 100% ownership interest in LLC2, the contribution of
   assets from LLC1 to LLC2 in Step 1A will be an occasional sale that is not
   subject to the Texas sales and use tax.

Response: We would treat this as a nontaxable contribution of assets and not as
a sale.

2. Because a distribution of an interest in a limited liability company is not
   the sale of tangible personal property, LLC 1's distribution of its interest in
   LLC2 to Corporation A in Step 1B will not be subject to the Texas sales and use
   tax.

Response: We agree.

3. Because Corporation B will be a limited partner owning a 100% economic
   interest in LP at the time of the contribution of assets from Corporation B to
   LP in Step 2B, this contribution will be an occasional sale that is not subject
   to the Texas sales and use tax.

Response: We would treat this as a nontaxable contribution of assets and not as
a sale.

4. Because the transfers of ownership interests in limited liability companies
   are not the sale of tangible personal property, Corporation B's transfer of
   LLC3 and LLC4 to LLC5 in Step 2C will not be subject to the Texas sales and use
   tax.

Response: We agree.

5. Because the merger of two companies is not considered to be a sale of
   tangible personal property, the merger of LLC1 with LP in Step 3 will not be
   subject to the Texas sales and use tax.

Response: We agree.

This opinion is based on the facts presented. Other facts though similar may
provide a different result. I hope this information answers your questions.
If you need additional information, please call me toll-free at 1-800-531-5441,
extension 3-4502. The direct line is 512/463-4502. You may also write to Tax
Policy Division, Comptroller of Public Accounts. You may also e-mail our tax
help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division

cc: Tom Soto