Can a Direct Payment Permit holder get a refund of only the local (city) sales tax it paid a seller, using an exemption certificate?

Plain-English summary

A seller received a refund request from one of its customers ("Company A") and asked the Comptroller whether it was valid. Company A had issued the seller an exemption certificate and asked for a refund of city (local) sales tax only, saying it had erroneously paid local tax on items that were first used or stored outside any local taxing jurisdiction.

The Comptroller said the refund request was not valid, for two connected reasons:

• Local tax followed the seller's location. Because Company A actually paid sales tax on the items, the seller was required to collect city sales tax based on the location of the seller's place of business — not based on where the items were later first used or stored. So the local tax was collected correctly.

• You can't carve out just the local tax with an exemption certificate. Company A holds a Direct Payment Permit. It could have handled the purchase by giving the seller a direct payment exemption certificate in lieu of state and all local taxes, and then accruing and remitting the appropriate taxes directly to the Comptroller. Under that approach, if the items were first used (or, if not used, first stored) outside a local taxing jurisdiction, local tax would not be due. But Company A did not do that. It cannot now obtain a refund of only the local sales tax it paid the seller — the exemption certificate it presented is not valid, and the local taxes cannot be refunded.

What this means for you

Sellers who receive after-the-fact refund claims

If a customer paid you sales tax and later asks for a refund of just the local portion, be cautious. When the customer paid tax on the sale, local tax is sourced to your place of business, and a customer generally cannot use an exemption certificate to peel off only the local tax after the fact.

Direct Payment Permit holders

The direct payment mechanism only works if you use it up front: issue a direct payment exemption certificate covering state and all local tax at the time of purchase, then self-accrue and remit directly to the Comptroller. That is what lets you avoid local tax on items first used or stored outside a local taxing jurisdiction. Issuing a plain exemption certificate later to claim a local-only refund does not work.

Common questions

Q: Can a Direct Payment Permit holder get a refund of only the local sales tax it paid a seller?
A: No. The exemption certificate presented for that purpose is not valid, and the local taxes cannot be refunded.

Q: How is local sales tax sourced when the buyer paid tax on the purchase?
A: The seller collects city sales tax based on the location of the seller's place of business, not where the items were first used or stored.

Q: How could the buyer have avoided the local tax?
A: By issuing a direct payment exemption certificate up front — in lieu of state and all local taxes — and then accruing and remitting the correct tax directly to the Comptroller. Then local tax would not be due on items first used or stored outside a local taxing jurisdiction.

Q: Can I rely on this 1988 letter for my own situation?
A: Treat it as guidance only. It is based on the specific 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

Rules and statutes: The letter applies the Texas Direct Payment Permit and local-tax sourcing rules but does not cite a specific rule or Tax Code section by number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8809L0919F01

Original ruling text

September 30, 1988

Dear ** :

Thank you for your letter concerning a refund request you received from
Company A.

As I understand, Company A issued you an exemption certificate and requested a
refund of city sales tax only. They stated that they erroneously remitted
local tax to your firm on items that were first used or stored outside any
local taxing jurisdiction.

Because Company A paid sales tax on the items purchased, you are required to
collect the city sales tax based on the location of your place of business and
not based on the location where the items were first used or stored.

Company A holds a Direct Payment Permit. As such, they could have issued
you a direct payment exemption certificate in lieu of the state and all local
taxes on the items purchased for their own use. They would then have accrued
and remitted the appropriate taxes directly to this office. If the items were
first used or if not used, were first stored outside a local taxing
jurisdiction,local tax(es) would not be due.

Company A cannot obtain a refund of only the local sales tax paid to you.
The exemption certificate is not valid and the local taxes cannot be refunded.

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

Please feel free to contact me if you have any questions or need more
information. You may write to me or call toll free 1-800-252-5555. The
regular number is 512 463-6666.

Sincerely,

Jo Ann Dieck
Tax Correspondence Division

Texas State Comptroller of Public Accounts
Capitol Station
Austin, Texas 78774

Attn: Sales Tax Policy

Dear Sir:

We would like an opinion from the Comptroller on whether the enclosed refund
claim we received from Company A is valid. Specifically, we request answers
to the following questions:

1. Which company's statute of limitations controls the earliest date for
   which a refund can be granted? This question anticipates one of the
   companies could have a statute of limitations waiver in effect.

2. May a direct pay permit holder, such as Company A, request a refund for
   only the local tax they paid, or must the exemption cover all tax on the
   transaction?

3. Is there a procedure, such as an assignment of our right to the refund,
   that would enable Company A to obtain this refund directly from the
   Comptroller?

4. Company A issued an exemption certificate, rather than a direct pay
   exemption. Is this acceptable?

5. Is the exemption certificate as presented valid?

6. Does the Comptroller approve the refund of the local tax requested?
   If so, are there any special procedures that we should follow. Obviously,
   we will make certain we collected and remitted to the Comptroller the
   local tax at issue.

Your prompt response would be appreciated.

Very truly yours,