When a marketing company buys equipment on a client's behalf as the client's purchasing agent, can it charge the client sales tax on that equipment if the out-of-state supplier didn't collect tax?

Plain-English summary

A creative-marketing company wanted to offer a new service: buying specialized software, hardware, and equipment on behalf of its clients, as their purchasing agent, and charging a separate hourly "handling fee" for coordinating the purchase. It asked the Comptroller how to handle Texas tax when the equipment supplier is out of state and doesn't collect Texas tax.

The Comptroller ruled the company cannot charge its clients sales tax in that situation. Because it's acting as the client's agent (not reselling the equipment as a seller), the company itself must accrue Texas use tax on the purchase and remit it to the Comptroller — standing "in the shoes" of its client, the actual buyer. It may then bill the client a "use tax reimbursement" for that exact amount, but the invoice can never say "sales tax" or plain "use tax," because Texas law treats any amount collected and labeled as "tax" as money the collector must actually remit to the state (even if the agent already paid it on its own use-tax return) — a double-remittance trap.

What this means for you

Agencies, brokers, and buying-service businesses

If you purchase items on a client's behalf under a genuine agency arrangement — you're acting for them, they consent, and they control the purchase — you are not "selling" those items to your client, so you shouldn't collect sales tax on them. Instead, you owe use tax yourself as the actual purchaser (accrue and remit it on your own sales/use tax report), and you can pass along that cost to the client only as a "reimbursement," never as a tax charge.

Anyone billing clients for taxes paid on their behalf

Watch your invoice wording carefully. Labeling a line item "sales tax" or "use tax" (rather than "tax reimbursement") when you're not actually the taxable seller can trigger an independent obligation under Tax Code § 111.016 to remit that exact amount to the Comptroller — on top of whatever use tax you already paid — simply because it's "money represented to be a tax."

Accountants and tax professionals

The ruling applies the three-part agency test from Comptroller's Decision No. 47,797 (2008) — acting for the principal, mutual consent, and principal control — and reinforces the "agent stands in the shoes of the principal" doctrine from STAR Accession No. 200703903L (the 2007 event-planner ruling). Note the company can act as seller in some transactions (its own marketing services) and as agent in others (the equipment purchases) — the same entity, different roles, analyzed transaction by transaction.

Common questions

Q: If I'm a genuine purchasing agent for my client, do I ever charge sales tax?
A: No — as the client's agent, you're not the seller, so you don't collect sales tax from the client on the item itself. You accrue and pay use tax yourself (if the supplier didn't collect it) and can bill the client only a "use tax reimbursement."

Q: What happens if I mistakenly bill my client for "sales tax" instead of "reimbursement"?
A: Under Tax Code § 111.016, an amount billed and represented as "tax" must be remitted to the Comptroller regardless of your actual tax liability — so a wording mistake can force you to pay the state twice on the same transaction.

Q: Does this ruling apply to my agency arrangement?
A: Not automatically. This is a private letter ruling binding on the Comptroller only for the taxpayer and facts submitted, and it cannot be relied on by any other taxpayer — genuine agency status turns on your specific facts (control, consent, and who's acting for whom).

Citations and references

Statutes, rules, and decisions:

• Tex. Tax Code § 151.051 (Sales Tax Imposed); § 151.101 (Use Tax Imposed)
• Tex. Tax Code § 151.008 ("Seller" or "Retailer")
• Tex. Tax Code § 151.052 (Collection by Retailer); § 151.103 (Collection by Retailer; Purchaser's Receipt)
• Tex. Tax Code § 111.016 (Payment to the State of Tax Collections)
• Comptroller's Decision No. 47,797 (2008) (three-part agency-relationship test)
• STAR Accession No. 200703903L (Mar. 1, 2007) (event planner as purchasing agent)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201809004L

Original ruling text

September 7, 2018

RE: Private Letter Ruling No. 20180118113731

* Taxpayer No. *

Dear ***:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated Dec. 6, 2017, and your follow-up submission dated Jan. 11, 2018. Detrimental reliance relief is provided under Rule 3.10, Taxpayer Bill of Rights.

You requested guidance with respect to certain equipment purchases you intend to make on behalf of your client, including the specific treatment of tax on such purchases when the sellers are not engaged in business in Texas.

Facts Presented

*** (Taxpayer), provides creative marketing services to clients in Texas. Taxpayer’s employees and subcontractors work onsite at a client's office and produce various marketing materials, including graphic designs, websites, videos, and photographs.

In order to provide its services, Taxpayer’s employees require specific software, hardware, and other specialized equipment that a client often does not have. Taxpayer is contemplating offering a new, additional service for these clients. As part of this service, Taxpayer would enter into an agency agreement with the client for the purpose of purchasing the necessary items (collectively Equipment) on the client’s behalf. Taxpayer would pay sales tax to the supplier at the time of purchase if the supplier is engaged in business in Texas. Taxpayer would, in turn, bill the client for that exact amount, including a separate line item for reimbursement of the sales tax paid to the supplier. However, if the supplier is not engaged in business in Texas and is not required to charge or collect Texas use tax, Taxpayer would bill the client for the exact amount of the purchase and would add a charge for Texas sales tax.

Taxpayer would charge its client a separate hourly “Handling Fee” for this service regardless of whether the supplier from which Taxpayer purchased the Equipment is engaged in business in Texas. This hourly fee would not be based on the cost of the Equipment, but rather on the amount of time necessary for Taxpayer’s staff to coordinate the Equipment purchase.

Taxpayer notes in proposed contract language that when it charges its client the amount of the sales tax it has paid, it will reflect the charge as a reimbursement of tax paid. Taxpayer also states, however, that it “shall add Texas sales tax to the cost of the Equipment when invoicing client for that item” when Taxpayer purchases the Equipment from an out-of-state seller that is not engaged in business in Texas—i.e., when the seller did not collect the use tax from Taxpayer.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Should Taxpayer charge its client sales tax on Equipment it purchased on the client’s behalf from a supplier that is not engaged in business in Texas?

Ruling: Taxpayer may not charge its clients sales tax when operating in agency for them. Taxpayer should accrue use tax on its sales and use tax report, and remit the tax to the comptroller. Taxpayer may charge its clients a tax reimbursement fee on its invoice.

Analysis: Each sale of a taxable item in Texas is subject to sales tax. Section 151.051 (Sales Tax Imposed). The storage, use, or other consumption of a taxable item in Texas is subject to use tax when purchased from a retailer for storage, use, or consumption in this state. Section 151.101 (Use Tax Imposed).

Under Section 151.008 (“Seller” or “Retailer”) a “seller” or “retailer” is “a person engaged in the business of making sales of taxable items of a kind the receipts from the sale of which are included in the measure of the sales or use tax….”

In contrast, an agent is a person empowered, for example, to purchase items on behalf of a principal. The three elements of an agency relationship are: (1) the agent is acting for the principal; (2) both parties consent to the arrangement; and (3) the agent is under the control of the principal. See Comptroller’s Decision No. 47,797 (2008).

A person may act as both a seller and an agent, but not in the same transaction. Here, Taxpayer acts as a seller when it provides its client the marketing materials. Taxpayer acts as an agent when it purchases the Equipment on the client’s behalf. It should not collect sales or use tax on that Equipment, even if the supplier is not engaged in business in Texas and does not collect the tax or a resale certificate from Taxpayer.

A seller who makes a sale subject to sales tax is responsible for collecting the sales tax from the purchaser. Section 151.052 (Collection by Retailer). A seller who makes a sale subject to use tax is only responsible for collecting the use tax from the purchaser if the seller is engaged in business in Texas. Section 151.103 (Collection by Retailer; Purchaser’s Receipt).

An agent purchasing items on behalf of a principal is “standing in the shoes” of the principal and must pay or accrue tax as if the principal itself were personally making the purchase. STAR Accession No. 200703903L (Mar. 1, 2007) (“When an event planner acts as an agent for a customer in acquiring taxable items, the event planner may not issue a resale certificate to a supplier in lieu of tax. The event planner should pay or accrue tax at the time of the purchase and then bill the client for the exact amount of the purchase, including the tax.”)

Furthermore, the agent must ensure that its invoicing indicates that the principal is only reimbursing the exact sales price of the item and the use tax. If the invoice indicates that a charge is for “use tax,” as opposed to “use tax reimbursement,” then Section 111.016 (Payment to the State of Tax Collections) requires the agent to remit to the comptroller the amount charged, even if the agent has already accrued and paid use tax on the item, because the amount received from the principal is “money represented to be a tax.”

Taxpayer, therefore, must accrue use tax when buying from an out-of-state supplier not engaged in business in Texas. Taxpayer may, then, charge its client for “use tax reimbursement.”

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. 20180118113731.

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.