If goods originally purchased for export are stuck in storage at a Texas freight forwarder after the export deal falls through, and a new buyer is found in Texas instead, does the sale lose its tax-exempt export status?

Plain-English summary

The taxpayer bought five mobile power plants for export to Venezuela. The vendor delivered the remaining two plants to a Texas freight forwarder in 2014. They stayed in the freight forwarder's possession after sanctions prevented the planned export, and a new buyer intended to use them to generate electricity in Texas.

The Comptroller answered yes to whether the two plants could be sold in Texas. Under Rule 3.323(c)(3), property in the hands of a freight forwarder was not treated as property stored or used by the taxpayer. Because the taxpayer had not used the plants and would sell them in the form and condition acquired, the ruling said the transaction met the definition of a sale for resale under Rule 3.285(b)(1)(A).

The result does not make the buyer's end use tax-free. The seller remained responsible for collecting any sales tax due under Section 151.052 or obtaining a properly completed resale or exemption certificate. Because the seller was making sales in Texas, it also had to obtain a Texas sales and use tax permit.

What this means for you

Goods held by a freight forwarder

The ruling's result depends on the particular custody and use facts: the plants remained with the freight forwarder and the taxpayer did not use them. Owner storage or use in Texas can change the export analysis.

A later Texas sale

A seller may meet the sale-for-resale definition when it sells unused property in the form or condition acquired. That classification does not eliminate the seller's collection or certificate obligations for the sale to the new buyer.

Documentation

Keep evidence of custody, nonuse, condition, the buyer's intended use, and any resale or exemption certificate. This private letter ruling is limited to the taxpayer and facts presented.

Common questions

Q: Did the ruling say the Texas buyer's purchase was automatically nontaxable?

A: No. It said the seller's transaction met the sale-for-resale definition and required the seller to collect tax due or obtain a properly completed certificate.

Q: Why did the freight-forwarder custody matter?

A: The ruling says property in the hands of a freight forwarder was not covered by the owner-storage provision, and the taxpayer had not used the plants.

Q: What did the seller need to do?

A: Obtain a Texas sales and use tax permit and collect any tax due or obtain a properly completed resale or exemption certificate.

Citations and references

• Tex. Tax Code § 151.051, § 151.052, § 151.307, and § 151.330
• 34 Tex. Admin. Code § 3.323(b), (c)(3) and § 3.285(b)(1)(A)
• U.S. Const. art. I, § 10, cl. 2
• Executive Order 13850

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202005020L

Original ruling text

May 7, 2020

RE: Private Letter Ruling No. PLR 20190410110028

Dear ****:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: (1)] We are responding to your request dated April 5, 2019. Additional information was provided on May 15, 2019. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of property sent to a freight forwarder, that is subsequently sold for resale in Texas.

Facts Presented

**** (Taxpayer) is a non-Texas corporation in the business of importing and exporting electrical equipment including mobile power plants, turbines, and related items. Taxpayer does not do business in Texas nor do they have a Texas Sales and Use Tax Permit.

In 2013, Taxpayer entered into a contract with the government of Venezuela (customer) for the purchase and installation of five mobile power plants (power plants) and entered into another contract with COMPANY (vendor) for the purchase of the power plants. The vendor delivered the power plants to a freight forwarder in Texas in 2014. Two power plants remain in the custody and possession of the freight forwarder.

Two power plants were exported in 2015 per the customer contract and export of the remaining three was delayed due to the customer not having built the appropriate infrastructure in time. On Nov. 1, 2018, The President of the United States issued Executive Order 13850 which prohibited certain transactions with Venezuela, preventing Taxpayer from completing their contract and exporting the last three power plants.

Because the power plants become obsolete quickly, Taxpayer was forced to find other buyers, and was able to export one to a foreign buyer in 2018.

Taxpayer has found a buyer for the two remaining power plants in Texas. This buyer intends to use them to generate electricity in Texas. The remaining two power plants have never left storage at the freight forwarder.

Question, Ruling, and Analysis

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

Question: Are the two remaining power plants sent to a freight forwarder, which were originally purchased for export, now eligible to be sold in Texas?

Ruling: Yes.

Analysis: Texas imposes a sales tax on the sale of each taxable item in this state. Section 151.051 (Sales Tax Imposed). The term “sale” includes the furnishing, preparation, or service of food, meals, or drinks. Section 151.005(6) (“Sale” or “Purchase”). The “term taxable item” includes tangible personal property and taxable services. Section 151.010 (Taxable Item).

On the basis of the import and export clause of the United States Constitution, Article 1, §10, clause 2, tangible personal property imported into or exported from Texas is exempt from taxation by the Tax Code, §151.307 and §151.330, so long as the property retains its character as an import or export. Rule 3.323(b) (Imports and Exports).

Rule 3.323(c)(3) states:

Storing property in Texas by the owner prior to exportation is a use of that property in Texas. Property stored or otherwise used or consumed in Texas by the owner loses its exemption as an export... Sufficient time will be allowed to arrange for shipping. Property in Texas longer than 30 days from date of purchase will be presumed to have been stored. Any use of the property in Texas by the owner prior to export also causes the loss of the export exemption. Property in the hands of a freight forwarder is not covered by this provision.

Taxpayer initially purchased the remaining two power plants from the vendor for the purpose of exporting them to a customer outside of the United States. These were shipped to the freight forwarder and placed into storage in 2014 and have remained there to date. Under the provision of Rule 3.323(c)(3) Taxpayer never made use of the power plants.

A sale for resale includes the sale of a taxable item to a purchaser who acquires the taxable item for the purpose of reselling it with or as a taxable item in the United States or Mexico in the normal course of business in the form or condition in which it is acquired. Rule 3.285(b)(1)(A) (Resale Certificate; Sales for Resale).

Because Taxpayer has not made use of the power plants, they would be selling them in the normal course of business in the form or condition in which they were acquired and would meet the definition of a sale for resale in Rule 3.285(b)(1)(A). Taxpayer is responsible for collection of any sales tax due under Section 151.052 (Collection by Retailer) or obtaining a properly completed resale or exemption certificate. Because Taxpayer is selling items in Texas, they must obtain a Texas sales and use tax permit.

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. 20190410110028.

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.