Are freight charges billed directly by a third-party carrier to the buyer part of the taxable sales price in Texas?

Plain-English summary

A taxpayer asked the Comptroller whether transportation charges billed directly by a third-party carrier to the purchaser must be included in the "sales price" on which Texas sales or use tax is computed. The taxpayer laid out two situations and its own conclusion, and the Comptroller concurred that the transportation charges in either situation are not taxable.

• Situation 1 (use tax): The buyer purchases goods from an out-of-state retailer and arranges its own third-party carrier to haul them to its Texas plant. The carrier bills the buyer directly for the transportation; the retailer's invoice does not include freight.
• Situation 2 (sales tax): The buyer purchases goods from a Texas retailer, and the retailer engages a carrier, but by agreement the carrier bills the buyer separately. Again the carrier does not sell the goods and bills only for transportation.

In both cases the buyer should not include the third-party carrier's transportation charge in the "sales price" when computing sales tax under §151.051 or use tax under §151.101. The reasoning: the 1987 amendment that added transportation to the "sales price" definition (§151.007) was intended to reach freight billed by the seller of the goods, not freight billed by an independent carrier that only provides transportation and does not sell the item. Rule 3.303 likewise provides that a third-party carrier that only transports (and does not sell the item) is not responsible for collecting or remitting the tax, and use tax (Rule 3.346 / §151.101) does not apply to charges the sales tax does not reach.

What this means for you

Buyers arranging their own freight

If you hire an independent carrier that only hauls your goods — and does not sell them to you — the carrier's separately billed transportation charge is not part of the taxable sales price, so you do not accrue sales or use tax on it. This holds whether you bought from an out-of-state or a Texas seller.

The dividing line is who bills the freight

Freight billed by the seller of the goods is included in the taxable sales price and is taxed. Freight billed by a third-party carrier that merely transports the goods is not. Keep documentation showing that the carrier billed you directly and did not sell you the property.

Carriers that only transport

A third-party carrier that only provides transportation and does not sell the item being delivered is not responsible for collecting or remitting the tax on its charge.

Common questions

Q: Is freight taxable if the carrier bills me directly?
A: No. Transportation charges billed directly to the buyer by a third-party carrier that only transports the goods are not included in the taxable sales price.

Q: Does it matter whether the seller was in Texas or out of state?
A: No. The result is the same for a sales-tax purchase from a Texas retailer (§151.051) and a use-tax purchase from an out-of-state retailer (§151.101).

Q: When is freight taxable then?
A: When it is billed by the seller of the goods. The 1987 change to the "sales price" definition (§151.007) was aimed at seller-billed transportation.

Q: Does the carrier have to collect tax on the freight?
A: No, as long as the third-party carrier only provides transportation and does not sell the item being delivered.

Q: Can I rely on this 1988 letter today?
A: Treat it as guidance only. It is based on the facts presented and can change with different facts; on the STAR system it binds the Comptroller only as to the taxpayer it was issued to and may no longer reflect current policy.

Citations and references

Statutes: Tex. Tax Code § 151.007 (definition of "sales price," including seller-billed transportation), § 151.051 (sales tax), and § 151.101 (use tax, complementary to sales tax).

Rule: 34 Tex. Admin. Code § 3.303 — transportation and delivery charges; subsection (b) provides that a third-party carrier that only provides transportation and does not sell the item is not responsible for collecting or remitting the tax. The letter also refers to Rule 3.346 (use tax complementary to sales tax).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8809L0894B07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TX 78774

BOB BULLOCK
Comptroller September 8, 1988

Dear *:

Thank you for your letter of September 1, 1988, concerning the taxability
of transportation charges billed by the carrier directly to the purchaser.

I concur with your conclusion that the transportation charges in either
situation are not taxable.

This opinion is based on the facts presented. If there are different of
additional facts, the opinion may change.

If you have any questions or need additional information, you may call
our toll free 1-800-252-5555. The regular number is 512/463-4600. You may
write me at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,
Eddie C. Washington
Tax Correspondence Division

September 1, 1988

Dear *:

Re: Request of Information - Sales and Use Tax
Charges for Transportation Billed by a Third Party

We are writing to request advice concerning taxation of the following
situations under Texas Tax Code Sections 151.051 and 151.101. If the
conclusion reached below accurate-
ly reflects the position of the Comptroller of Public Accounts, please so
indicate by executing a copy of this document and returning it to me.

Situation 1

A taxpayer purchases tangible personal property from a retailer not doing
business in Texas. The property is delivered to the taxpayer's plant in Texas
(the Texas Tax Code Sec. 151.105 use presumption holds). The
taxpayer/purchaser arranges for a third party to transport the property to its
plant. The carrier does not purchase the property from the retailer (and
resell it to the taxpayer). The carrier invoices the taxpayer/purchaser for
the transportation service directly (the retailer does not include the
transportation charge on its invoice and the carrier does not invoice the
retailer for any transportation charges related to this transaction).

Situation 2

A taxpayer purchases tangible personal property from a retailer doing
business in Texas. The retailer engages a third party carrier to transport the
taxable item purchased, but pursuant to an agreement with the
taxpayer/purchaser, the carrier will bill the taxpayer separately. The carrier
does not purchase the property from the retailer (and resell it to the
taxpayer). The carrier invoices the taxpayer/purchaser for the transportation
service directly (the retailer does not include the transportation charge on
its invoice and the carrier does not invoice the retailer for any
transportation charges related to this transaction).

Issue

Whether the charges for transporting the tangible personal property are
includable in the "sales price" on which the taxpayer must either accrue use
tax under Texas Tax Code Sec. 151.101 (Situation 1) or accrue sales tax under
Texas Tax Code 151.051 (Situation 2).

Conclusion

The taxpayer should not include the transportation charges, as described
above, in the "sales price" of the tangible personal property when determining
the amount of Texas tax due in either situation.

Discussion

The legislative and judicial history of charges for transportation
described above indicates that the taxpayers involved had purchased a service.
The change in Texas Tax Code Sec. 151.007 to include transportation charges in
the "sales price" of a taxable item sold was intended to capture transportation
charges billed by the seller of the tangible property regardless of when the
sales event occurred.

The change however, produced an unusual constructive side effect in that
Texas Tax Code Sections 151.051 and 151.101 require a taxpayer to compute any
sales or use tax on the "sales price" of the taxable item as defined in Texas
Tax Code Sec. 151.007. Because the later code section includes transportation
charges in the definition of "sales price," a taxpayer must, constructively,
include any transportation charges relating to the purchase of a taxable item
in the tax basis, even though the seller of the item did not provide or bill
for its transportation.

Texas Administrative Code Sec. 3.303(a) provides that"...sales tax
applies to all transportation...charges to a customer when a taxable item is
sold...on or after October 1, 1987, and the delivery charges are billed by the
seller...to the purchaser..." Subsection b provides that "...a third party
carrier will not be responsible for collecting or remitting tax as long as the
third party carrier only provides transportation and does not sell the taxable
item being delivered."

The language of 34 TAC Sec. U3.303(a) and (b) implies that sales tax does
not apply to transportation charges billed by a third party carrier and such
carriers are not responsible for collecting and remitting sales tax. However,
the code section does not address the statutory construction discussed above
and does not clearly exempt third-party-billed transportation charges from the
Texas tax.

Texas Administrative Code, Part 34, Section 3.346 defines the Texas use
tax a "complementary" to the sales tax. The code section also provides that
Texas use tax is not applicable to transactions involving items not subject to
the Texas sales tax, confirming construction of Texas Tax Code Sec. 151.101.

Based on the legislative and judicial history concerning similar
transactions, we believe that the 69th Texas Legislature intended to subject to
sales taxation only those transportation charges billed by the seller of the
tangible property, not transportation charges billed by a third party carrier.

Transportation charges billed by a third party carrier, then, are not
includable in the "sales price" for determining any existing Texas sales tax
liability of the purchaser under Texas Tax Code Sec. 151.051. Correspondingly,
such transportation charges are not includable in the "sales price" for
determining any existing Texas use tax liability of the purchaser under Texas
Tax Code Sec. 151.101.

We appreciate your attention to this issue. If you have any questions
concerning the facts presented above, or would like to discuss this information
request in further detail, please feel free to call me at ***.

Sincerely,