Are sales from Texas-Mexico border duty-free stores, picked up in 'No Man's Land,' Texas receipts for franchise tax even though the goods are exported?

Plain-English summary

A taxpayer operating border duty-free stores asked whether its export sales count as Texas receipts for franchise tax. The stores are Class 9 U.S. customs bonded warehouses; a customer pays at the store, and a store employee carries the goods to the border ("No Man's Land"), where a U.S. Customs agent certifies export to Mexico. Title stays with the taxpayer until export is certified. The Comptroller said the sales are Texas receipts.

• Sales tax vs. franchise tax are different. Under the Import-Export Clause, no state may tax imports or exports, and under the stream-of-export doctrine goods leave state taxing power once export has commenced (see Virginia Indonesia Co. v. Harris County Appraisal Dist., 910 S.W.2d 905 (Tex. 1995)). That is why the agency exempts duty-free-shop sales from sales tax (a transactional tax on the goods).
• Franchise tax is a privilege tax. The franchise tax is a tax on the privilege of doing business in Texas, not a direct tax on the goods. Courts strike down direct taxes on goods in the stream of export but uphold taxes on the business of handling goods, so the franchise tax is not a prohibited direct tax.
• Controlling authority. Comptroller's Decision No. 25,039 (1990) held that sales from duty-free stores and/or customs bonded warehouses constitute Texas receipts for franchise tax, even if the store is located in a Texas area subject to federal jurisdiction.
• What is relevant. The key fact is that delivery occurs within Texas - true whether title passes at the store or at the border point in Texas. The taxpayer's retention of title until export certification is not the deciding factor.

Currency note: This letter describes the pre-2008 franchise tax (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The current tax also sources gross receipts to Texas; confirm the present rules.

What this means for you

Border retailers and duty-free operators

Exempt-from-sales-tax does not mean exempt-from-franchise-tax. Even where U.S. Customs treats your goods as exported (so no sales tax applies), the receipts can still be Texas receipts for the franchise tax because that tax reaches your business activity in Texas, keyed to in-Texas delivery - not to where title ultimately passes or that the goods leave the country.

Multistate tax professionals

Keep the two doctrines separate: the Import-Export Clause / stream-of-export analysis governs a direct transactional tax on the goods (sales tax), while a privilege tax on doing business (franchise tax) is judged under the business-activity line of cases and can include export-bound receipts delivered in-state.

Common questions

Q: If duty-free sales are exempt from sales tax, why are they franchise-tax receipts?
A: Sales tax is a direct tax on the goods (barred in the stream of export); franchise tax is a privilege tax on doing business in Texas, which is not barred and reaches in-Texas deliveries.

Q: Does the taxpayer keeping title until export change the answer?
A: No. The Comptroller said the relevant fact is in-Texas delivery, whether title passes at the store or at the border point.

Q: Does a store sitting in a federally controlled border area avoid Texas receipts?
A: No. Comptroller's Decision No. 25,039 (1990) held such sales are Texas receipts even in a federally controlled area.

Citations and references

Constitutional and case authority:

• U.S. Constitution, Import-Export Clause - no state tax on imports or exports (basis for the sales-tax exemption, not the franchise tax)
• Virginia Indonesia Co. v. Harris County Appraisal Dist., 910 S.W.2d 905 (Tex. 1995) - stream-of-export doctrine
• Comptroller's Decision No. 25,039 (1990) - duty-free/customs-bonded-warehouse sales are Texas receipts for franchise tax

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200203891L

Original ruling text

March 25, 2002

Subject: Receipts in duty-free shops

Question: Taxpayer sells goods from duty-free stores along the border of Texas
and Mexico. The duty-free stores are class 9 U.S customs bonded warehouses
(governed by U.S Custom's regulations Title 19) and are authorized to sell
goods for use outside the U.S Customs territory. Taxpayer is bonded with the
U.S Treasury. Goods brought into a store are assigned entry numbers, and
Taxpayer is responsible for the goods until they are delivered to a point
designated by U.S Customs as the point of exportation from the U.S to a
contiguous foreign country.

A customer pays at the store and receives a sales ticket. A store employee
takes the purchased goods to the border crossing location commonly known as "No
man's land," and waits for the customer. The location is an area controlled by
authorized agents of U.S. Custom. Upon showing of the sales ticket, the store
employee hands the goods to the customer. Security employees, acting as U.S
Customs' agents, stamp a certification that goods were in fact exported to
Mexico on Taxpayer's copy of the sales ticket.

Title remains with Taxpayer until the goods are certified as having been
exported in order to comply with the terms of Taxpayer's bond. Taxpayer
follows the controlling authority's position and delivers goods to a border
point designated by U.S Customs as an export point. At this point, the terms
of Taxpayer's bond have been fulfilled, and Taxpayer is released from any
obligation.

1) Are the sales of "Duty-Free" goods to customers who pick up these goods in
"NO MAN'S LAND" considered Texas Receipts for franchise tax purposes, even
though as per U.S Customs, the goods are for use outside of United States
territory?

2) Is the fact that title of the goods remains with Taxpayer until the goods
are certified as having been exported a relevant factor?

Answer: Under the Import-Export Clause of the United States Constitution, no
state may impose tax on "imports" or "exports." Under the "stream of export"
doctrine applied by courts, "goods are not subject to state taxation once
exportation has commenced, which occurs when goods have been shipped, or
entered with a common carrier for transportation to another state, or have been
started upon such transportation in a continuous route or journey." Virginia
Indonesia Co. v. Harris County Appraisal Dist., 910 S.W.2d 905 (Tex. 1995).
The agency exempts from sales tax those sales that occur at duty-free shops as
export sales. See 8109L0369B09 (stating that sales at duty-free shops have
entered the stream of export.). However, sales tax is a transactional tax,
whereas franchise tax is a privilege tax for doing business in Texas. Courts
have struck down state taxes that are a direct tax on goods for violating the
Import-Export Clause, but have upheld state taxes that are a tax on the
business of handling goods. Because franchise tax is a tax imposed on a
corporation for doing business, our franchise tax is not a prohibited direct
tax on goods in the stream of export. The agency recognized this distinction
as can be seen in Comptroller's Decision No. 25,039 (1990). This hearing
decision held that sales from duty-free stores and/or customs bonded warehouses
constitute Texas receipts for franchise tax purposes even if the stores are
located within an area of Texas that is subject to federal jurisdiction.

For franchise tax purposes, what is relevant is the fact that the delivery
occurs within Texas. This is true whether title transferred to the customer
at the duty-free store in Texas or at the border point in Texas.

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