Were separately stated rock-and-sand transportation charges exempt when the seller relied on oral FOB-pit terms but lacked a written contract or carrier bill of lading proving pre-shipment title transfer?

Plain-English summary

A rock-and-sand seller took customer orders, arranged contract haulers, separately invoiced the material and transportation without marking up freight, and charged tax only on the material. The seller said the terms were FOB pit, but those terms were not typed on the invoice and the seller normally had no written customer contracts.

The March response explained that separately stated transportation was nontaxable only if ownership passed to the buyer before movement. It identified two ways to substantiate that result on these facts: a customer contract stating that title passed at the pit, or a third-party carrier bill of lading showing FOB-pit shipping terms. Merely placing FOB terms on the seller's invoice had no effect.

After the taxpayer's representative disagreed, the April follow-up emphasized the duty to keep records supporting deductions and exclusions and the rule's definition of a contract as a document evidencing the parties' title-passage agreement. It concluded that oral contracts and FOB terms were insufficient on the client's facts and that the transportation charges were taxable.

What this means for you

Separately stating freight and passing through the hauler's exact charge did not establish exemption. The seller needed contemporaneous documentary proof that title passed before transportation began.

Common questions

When could separately stated transportation be nontaxable? When ownership transferred to the buyer before movement and the seller could substantiate that fact.

What documents did the March response identify? A written customer contract stating title passed at the pit, or a third-party carrier bill of lading showing FOB pit.

Were oral FOB terms enough? No, under the final April response.

Did FOB wording on the seller's own invoice control? No.

Did the absence of a freight markup make the transportation nontaxable? No. That fact did not replace proof of pre-transport title transfer.

Citations and references

• Tex. Tax Code § 111.002 — Comptroller rulemaking authority.
• Comptroller Rule 3.291(a)(2) — records must substantiate claimed deductions or exclusions.
• Comptroller Rule 3.303(b)(2), (3) — title passage, FOB terms, delivery, and contract documentation.
• Tex. Bus. & Com. Code §§ 2.319 and 2.401(b)-(c) — cited for title passage when a contract is silent and delivery uses a carrier.
• American BioMedical Corp. v. Bullock, 551 S.W.2d 177 — cited for the exemption claimant's burden of proof.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8704L0804B09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller April 8, 1987

Dear ***:

Thank you for your recent letter on behalf of CORP ABC; however, I
disagree.

Valid rules and regulations promulgated by an administrative agency
acting within its statutory authority have the force and effect of
law. The Comptroller is given this authority in Section 111.002.

Rule 3.291(a)(2) states in part " . . records must be kept to sub-
stantiate any claimed deductions or exclusions authorized by law."
(emphasis added). In addition,

"A contract refers to a document which serves as evidence that the
seller and the buyer agree at what point title to property passes
from the seller to the buyer." Rule 3.303 (b)(3) emphasis added.

"If the contract is silent as to the passage of title and delivery
is by a common or contract carrier, then title passes in accordance
with Section 2.319 and Section 2.401(b)(c) of the Texas Business and
Commerce Code. If F.O.B. (free on board some location) terms are used,
F.O.B. terms will determine transfer of title. If there are no F.O.B.
terms, title will pass at the point of physical delivery of the property
to the buyer. F.O.B. terms generally are for establishing liability
in case of accident and so are irrelevant when delivery of tangible per-
sonal property is by the seller's own vehicle." Rule 3.303(b)(2)

It is well settled in Texas that one claiming an exemption must clearly
bring himself within the scope of the exemption and must prove that he
is entitled to the exemption being claimed. American BioMedical Corp.
v. Bullock, 551 S.W. 2d 177, (Tex. Civ. App. 1977--Austin err. ref.
n.r.e.).

Oral contracts and F.O.B. terms are not sufficient to exempt your
client from collecting sales tax on transportation charges. There-
fore, your client's charges for transportation of the material are
taxable.

This opinion is based upon the facts presented. If there are addi-
tional or different facts, this opinion may change.

Please feel free to contact me if you have additional questions. You
may write me, call toll free 1-800-252-5555 from anywhere in Texas or
telephone 512/463-4600.

Sincerely,
Al Van Allen
Tax Policy
Tax Administration Division

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller March 18, 1987

Dear ***:

Thank you for your recent letter which is restated with response below.

CORP ABC takes orders for rock and sand products; contacts contract
haulers; terms are F.O.B. Pit; invoices rock and/or sand products
separately from transportation; charges sales tax on rock and/or sand;
does not charge sales tax on transportation.

CORP ABC does not add any mark-up to freight charges. Customers pay
exact amount that CORP ABC pays contract haulers.

As stated in the first paragraph, terms are F.O.B. Pit. This can be
confirmed/verified by reviewing invoices which clearly indicate that
freight is being invoiced to and paid by the purchaser. F.O.B. terms,
although obvious, are not typed on the invoice. CORP ABC does not
normally enter into written contracts with purchasers.

We assume that we are and have been handling Sales Tax on
transportation correctly by not charging said tax. Please confirm.

Response: The principal involved here is that separately stated charges
for
transporting commodities are not taxable if ownership to the goods has
transferred to the buyer before movement.

If you do not have a contract with your customer, stating that title
passes at
the pit, we would consider that title to the goods transferred to the
customer
prior to delivery if you use a third party carrier who gives you a bill
of lading
showing shipping terms "F.O.B. Pit." If you have neither of these
documents,
your charges for transportation are taxable.

The fact that you might state F.O.B. terms on your invoice would have no
effect on the taxability of transportation charges.

This opinion is based upon the facts presented. If there are additional
or
different facts, this opinion may change.

Please feel free to contact me if you have additional questions. You may
write me, call 1-800-252-5555 toll free from anywhere in Texas, or
telephone
512/463-4600.

Sincerely,
AL Van Allen
Tax Policy
Tax Administration Division