How did Texas sales tax apply when a contractor filed a damaged-freight claim and transferred the damaged item to the carrier?

Plain-English summary

A contractor worked as a lump-sum contractor on some new construction, a separated contractor on other new construction, and a provider of nonresidential repair or remodeling services.

For damaged-freight claims, the Comptroller treated a lump-sum new-construction contractor as a consumer. A separated new-construction contractor or nonresidential repair or remodeling provider was treated as a seller.

When a seller filed a claim and the freight company planned to resell the damaged item, sales tax was excluded from the claim and the carrier could give the seller a resale certificate. The carrier then collected tax on its salvage sale unless the buyer supplied resale or exemption documentation. If the carrier kept the item without selling it, the carrier paid sales tax to the seller on the claim amount.

When a consumer filed the claim, the claim included the sales tax the consumer had paid because that tax formed part of the item's total value. The carrier could issue a resale certificate on that total claim value, then collect tax on a later salvage sale unless documented otherwise. If it kept the item, it paid tax on the claim amount.

The letter described three distinct transactions: the consumer's original purchase, the consumer's claim transfer of the damaged item to the carrier, and the carrier's salvage sale. Each needed tax or proper documentation in place of tax.

What this means for you

Whether sales tax belonged in a freight-damage claim depended on the claimant's role as seller or consumer. The carrier's acquisition and later salvage disposition were separate taxable transactions, not merely adjustments to the original supplier sale.

Common questions

Was a lump-sum new-construction contractor a seller or consumer? A consumer.

What about a separated contractor or nonresidential remodeler? A seller.

Could the carrier give a resale certificate? Yes, when it took the item for resale.

Did a consumer's claim include previously paid sales tax? Yes, as part of the item's total value.

Citations and references

The letter did not identify a numbered statute or administrative rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9107L1123C04

Original ruling text

July 22, 1991

Dear **:

Thank you for your recent letter regarding sales tax on damaged
freight claims. During our telephone conversation you explained
your company sometimes operates as a lump-sum contractor and
sometimes as a separated contractor on new construction.

When your company operated as a lump-sum new construction
contractor, you are a consumer filing a freight claim. When your
company operates as a separated new construction contractor or as
a nonresidential repair or remodeling service provider, you are a
seller filing a freight claim. The freight company is not selling
to you and the claim does not affect the transaction between you
and your supplier. Tax paid may become a part of the freight
claim as described in the following paragraphs.

When a seller submits a claim for freight damages and the item
will be sold by the freight company, sales tax should not be a
part of the claim. The freight company may issue the seller a
valid and properly completed resale certificate in lieu of sales
tax. Unless sold for resale or sold to an exempt entity, sales
tax must be collected by the freight company on the sales price
when the item is sold. The freight company must pay sales tax to
the seller on the claim amount if the freight company takes
possession of the item and does not sell it.

When a user or consumer submits a claim for freight damages and
the item will be sold by the freight company, sales tax paid by
the user or consumer on the purchase of the item should be a part
of the claim. The sales tax paid by a consumer when purchasing a
taxable item is a part of the total value of the item, and the
freight claim should reimburse the consumer for the total value.
A valid and properly completed resale certificate may be issued by
the freight company in lieu of sales tax on the total value.
Sales tax must be collected by the freight company on the sales
price when the item is sold unless sold for resale or to an exempt
entity. The freight company must pay sales tax on the claim
amount if the freight company takes possession of the item and
does not sell it.

Sales tax is a transaction tax. The first transaction occurs when
the consumer originally purchases the taxable item and pays sales
tax on the sales price. The second transaction occurs when the
consumer files a freight claim for the consumer's total value
which includes the sales tax paid on the taxable item and gives
possession of (i.e. sells) the taxable item to the freight
company. The third transaction occurs when the freight company
sells the taxable item for the salvage value. Each transaction
must be taxed or have proper documentation in lieu of the tax.

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

You may call me toll free at 1-800-252-5555, ext: 3-3690. The
Austin number is 512/463-3690. You may also write to Tax
Administration at the above address.

Sincerely,

David Somerville
Tax Administration Division