Did exchanging promotional 'West Texas Bucks' for auction items create taxable sales, and who owed tax on donated merchandise?

Plain-English summary

Participating retailers gave customers one “West Texas Buck” for each dollar spent. Customers later used only those promotional dollars to bid on merchandise, meals, and services donated for a television company's auction.

The Comptroller agreed that the promotional dollars had no monetary value, so exchanging them for auction items was not a “sale” under Texas Tax Code Section 151.005. The television company did not collect sales tax from winning bidders.

Tax still applied to the donated merchandise. A retailer that had bought an item tax-free for resale owed tax on its purchase price when it diverted the item to the promotion under Section 151.154. For a donated new motor vehicle, the winning bidder owed the stated $10 motor-vehicle gift tax upon title transfer, while the dealer owed no tax.

Common questions

Did the auction exchange create a taxable sale? No, because the promotional currency had no monetary value.

Did that mean the merchandise escaped tax entirely? No. A donating retailer could owe tax on the purchase price of an item previously bought for resale.

Who paid tax on the donated vehicle? The letter said the winning bidder paid a $10 motor-vehicle gift tax when title transferred.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8901L0917F09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller January 12, 1989

Dear ***:

Thank you for your letter of January 9, 1989, concerning the prop-
er taxation of merchandise "purchased" with 'West Texas Bucks'.

*** Television Corporation is conducting a promotional
campaign ('Buy West Texas First') designed to encourage area resi-
dents to buy from local retailers, particularly participating
retailers. Participating retailers issue a customer one "West
Texas Buck" for each dollar spent on a purchase. Participating
retailers 'donate' merchandise that will be "sold" at an auction
at the end of the promotional campaign. Persons may "purchase"
merchandise by bidding using "West Texas Bucks" only.

In our January 11, 1989 telephone conversation, you told me that
the retailer and *** Television Corporation enter into
an advertising contract that requires the retailer to contribute
merchandise valued at ten per cent (10%) of the cost of the adver-
tising package.

We concur with your conclusion that the 'West Texas Bucks' have no
monetary value. In doing so, we find that the transactions in-
volving the exchange of 'West Texas Bucks' for merchandise, meals,
and services are not sales as defined in Section 151.005 of the
Texas Tax Code. *** Television Corporation will not be
making sales at the auction. Because these are not sales, *
Television Corporation will not be required to collect sales tax
on "sales" and persons "purchasing" merchandise will not be re-
quired to pay sales tax.

However, sales tax must be paid on the merchandise. Retailers con-
tributing or donating merchandise will be liable for sales tax based
on the purchase price if the merchandise was purchased tax-free under
a resale certificate. Section 151.154 requires a person who uses an
item purchased under a resale certificate for any purpose other than
holding it for resale to pay sales tax on the purchase price.

Additionally, on January 12,1989, we discussed the tax liability
regarding a new motor vehicle (vehicle) contributed by a motor
vehicle dealer. You stated that title to the vehicle will trans-
fer from the dealer to the winning bidder. The winning bidder
will be required to pay the $10.00 motor vehicle gift tax to the
county tax assessor-collector when the title is transferred. The
dealer will not incur a tax liability.

Let me know if I may be of further assistance.

Sincerely,
Eddie C. Washington
Tax Correspondence