Is an in-store product demonstration and sampling service taxable in Texas, and does the provider owe tax on the supplies it uses even if it bills clients a flat fee for them?

Plain-English summary

The Texas Comptroller ruled that a food-marketing company's in-store product demonstration and sampling services are not taxable, since "demonstration services" aren't on Texas's statutory list of taxable services — but the company still owes sales tax on all the supplies, equipment, and client products it buys to perform the demonstrations, and billing clients a flat reimbursement charge for those items doesn't change that outcome.

The company sets up product displays and hands out free samples of grocery brands' food products to shoppers, buying napkins, spoons, cups, and the client's own products from the grocery store where each demo happens. It pays sales tax on those purchases at the register, then bills its clients a demonstration fee plus a separate reimbursement charge covering the cost (without markup) of the supplies and products used. Because demonstration services aren't a taxable service under Section 151.0101, the demonstration fee itself isn't taxable. But under the rule that "sales of taxable tangible personal property to persons who make gifts of the property or use the property for samples or advertising purposes are taxable," the company — as the one giving away free samples — is the taxable end-user of everything it buys for the demo, regardless of how it structures its billing to clients. The reimbursement charge is simply part of the price of the nontaxable service, not a separate taxable sale.

What this means for you

Product demonstration, sampling, and event marketing companies

You don't charge sales tax on your demonstration/marketing fee itself, but you DO owe sales tax when you buy the supplies and sample products you use — and structuring your invoice as a separate "reimbursement" line item for those costs doesn't let you avoid that tax or shift the obligation to your client. Pay tax at time of purchase (as this taxpayer did) and build it into your pricing.

Brands and grocery retailers hiring demonstration/marketing services

Expect your marketing vendor's demonstration fee to be nontaxable, but any reimbursement for supplies/products used is really just part of that nontaxable service price — it shouldn't be treated as a separate taxable transaction on either side.

Accountants and tax professionals

The controlling rule is 34 Tex. Admin. Code § 3.301(c)(1) (Promotional Plans) combined with Comptroller's Decision No. 33,295 (1996), which establishes the general principle that providers of nontaxable services owe tax on all taxable items used to provide that service — billing method or invoice structure doesn't change the underlying tax obligation.

Common questions

Q: Are in-store product demonstrations and free-sample giveaways taxable services in Texas?
A: No. Demonstration services aren't on the statutory list of taxable services in Section 151.0101, so the demonstration fee itself is nontaxable.

Q: Does the demonstration company still owe tax on anything?
A: Yes — sales tax on the supplies and sample products it purchases to perform the demonstrations, because giving away free samples/promotional items is a taxable use, not a resale.

Q: If I separately bill clients a flat "reimbursement" charge for supplies, does that make it a taxable sale instead of part of the nontaxable service?
A: No. The reimbursement charge (and the tax already paid on the items) is treated as part of the price of the nontaxable service, regardless of how it's itemized on the invoice.

Q: Can another demonstration/marketing company rely on this ruling?
A: No. It's binding on the Comptroller only for the requesting taxpayer and facts presented, and cannot be relied on by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code §§ 151.010, 151.051, 151.0101 (taxable item; imposition; taxable services list)
• 34 Tex. Admin. Code § 3.301(c)(1) (Promotional Plans, Coupons, Retailer Reimbursement)
• Comptroller's Decision No. 33,295 (1996) (nontaxable-service providers owe tax on all taxable items used to provide the service)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201805011L

Original ruling text

May 11, 2018

RE: Private Letter Ruling No. 2017010178

** Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE] We are responding to your request dated July 14, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of in-store product demonstrations and marketing activities (demonstration and marketing services).

Facts Presented

** (Taxpayer) is a Connecticut corporation that markets food products to grocery store customers on behalf of private food brands and manufacturers (Clients). The Taxpayer provides its demonstration and marketing services at grocery stores where Clients sell their food products. Taxpayer purchases its Clients’ food products and any related items used in the demonstration and marketing service (e.g., napkins, plastic spoons, paper cups) from the grocery store where the demonstration takes place. Taxpayer pays applicable sales tax on the in-store purchase of taxable items. Taxpayer does not sell any food products to Clients or patrons.

Taxpayer’s demonstration and marketing service includes setting up product displays and offering free samples of a Client’s products to grocery store patrons. Taxpayer does not sell products to the patrons. Taxpayer provides the demonstration services to anyone in the store, and not by way of an invitation or as the result of an advertisement of the demonstration.

Taxpayer included an example of a typical demonstration and marketing service agreement. Under the agreement, Taxpayer invoices its Clients a minimal flat charge for supplies (e.g. napkins, plastic spoons, paper cups, etc.) used in the demonstrations, a demonstration fee, which represents the marketing service for demonstrating the clients' products, and the cost without any markup of client's products used in the demonstration.

Questions, Rulings, and Analysis

Our restatements of your ruling requests are shown below, followed by our responses and analysis.

Question One: Are Taxpayer’s marketing and demonstration services taxable?

Ruling One: No, Taxpayer is not providing a taxable service.

Question Two: Are Taxpayer’s reimbursement charges to its Clients for items purchased subject to tax?

Ruling Two: No. The reimbursement charges for these items and the tax paid on them are part of the sales price of the nontaxable service provided to its Client. Taxpayer owes tax on all taxable items used to provide the nontaxable service.

Analysis:

Texas imposes a tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term “taxable item” includes tangible personal property and taxable services. Section 151.010 (Taxable Item). However, only those services specifically enumerated in Section 151.0101 (Taxable Services) are taxable. Section 151.0101 does not include demonstration services in the list of taxable services; therefore, Taxpayer is not providing a taxable service.

Taxpayer indicated that it pays sales tax on items it purchases in-store for use in the demonstrations. Taxpayer does not sell or transfer any products to Clients. Rule 3.301(c)(1) (Promotional Plans, Coupons, Retailer Reimbursement) states, “Sales of taxable tangible personal property to persons who make gifts of the property or use the property for samples or advertising purposes are taxable.” Taxpayer is properly paying tax on the taxable items used in the nontaxable demonstration services provided to Clients. See Comptroller’s Decision No. 33,295 (1996) (holding that providers of nontaxable services must pay sales or use tax on all taxable items used to provide the service). The reimbursement charges for these items and the tax paid on them are part of the sales price of the nontaxable service provided.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 2017010178.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.