Could a Texas provider of a nontaxable service add a 'Texas Price Adjustment' to recover sales tax paid on consumed items?

Plain-English summary

The Comptroller concluded that the described "Texas Price Adjustment" did not violate Rule 3.324(b)(4). The rule prohibited collecting sales tax on a nontaxable service and prohibited a provider from directly passing through its own sales-tax cost while labeling that amount as "tax."

The letter explained that in Texas the provider was treated as the consumer of items used to perform the service. The provider therefore paid tax on those items rather than collecting tax on a portion of the nontaxable service. It could recover that cost through pricing, including an amount called a tax reimbursement or the industry-proposed "Texas Price Adjustment," so long as the charge was not represented as tax imposed on the customer.

The adjustment used a factor approximating the tax rate paid on the cost of the consumed item. The Comptroller approved that method as a way to recover the provider's cost without misleading customers. The letter also warned that any amount represented and collected as tax had to be remitted to the state.

What this means for you

A provider's own sales-tax expense can be part of its price for a nontaxable service. The critical distinction in this letter was labeling and representation: the provider could recover its cost, but could not tell the customer that Texas imposed sales tax on the nontaxable service.

This is a fact-specific 1991 letter applying the rule then in effect. Pricing descriptions, contracts, and current rules should be reviewed before using a similar charge today.

Common questions

Did the Comptroller approve the "Texas Price Adjustment"? Yes. The letter said it did not violate Rule 3.324(b)(4).

Why was the provider allowed to charge it? The provider was recovering its own cost, including tax paid on items consumed in performing the service, rather than collecting sales tax imposed on the customer.

Could the provider label the amount simply as "tax"? No. The rule prohibited passing through the provider's tax cost as though it were tax on the nontaxable service, and amounts represented as tax had to be remitted to the state.

Did direct-pay permit holders eliminate the adjustment? No. The letter described direct-pay customers' resistance to a charge labeled as tax as one reason the industry developed the price-adjustment terminology.

Citations and references

• 34 Tex. Admin. Code Rule 3.324(b)(4), described in the letter as governing tax representations and reimbursements for nontaxable services.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9108L1130E06

Original ruling text

August 15, 1991

Dear *****:

Thank you for asking about the "Texas Price Adjustment" charge
and whether it violates Rule 3.324 (b)(4).

That provision of the rule prohibits the collection of tax on
non-taxable services. It also prohibits the service provider
from directly passing through and labeling as "tax," the amount
of sales tax paid by the service provider on items consumed in
performing the non-taxable service.

The "Texas Price Adjustment" does not violate the rule. I
understand that the "Texas Price Adjustment" came about because
some vendors distribute the same price list to customers in
various states. In some states the vendor is considered the
retailer of the items used in performing the service and collects
tax in addition to the price listed. Because of different tax
rates in the different states, the tax is not included in the
price listed. Neither is the tax considered in calculating the
price listed because the items can be purchased tax-free for
resale in most states.

In Texas, the service provider is considered the consumer of
the items and must pay tax on those items instead of collecting
tax on any portion of the service. Since the listed price does
not reflect the cost of the tax, the service provider must either
accept a smaller profit margin for items consumed in Texas,
or must pass the cost on to the customer in some manner other
than labeling it as "tax." Texas law requires that any amount
represented to be a tax and collected as a tax must be turned
over to the state. For many years we have allowed the service
provider to recover the tax by labeling the amount "tax reimbursement,"
or otherwise calling it a reimbursement for tax paid by the service
provider as opposed to tax imposed on the customer.

Many vendors however, experienced problems in getting the tax
reimbursement from Direct Pay Permit holders who insisted on giving
Direct Pay Certificates instead of paying an amount considered to
be "tax." Other vendors simply failed to identify the amount as
reimbursement and were required to remit the amount collected to
the state. To solve the problem, the industry proposed the "Texas
Price Adjustment" scheme to the comptroller and we agreed that it
would be an effective method of recovering the tax cost without
misleading customers into thinking that the state was imposing tax
on the service transaction. The list price of the item is adjusted
by a factor that closely approximates the rate of tax paid on the
cost of the item.

Nothing in the rule is intended to prohibit the service provider
from recovering the cost (including tax) of items consumed in
performing the service. It is not a violation of the rule to explain
to customers that the "Texas Price Adjustment" is a method of
recovering the sales tax paid on items consumed in performing the tax.

This opinion is based on the facts presented. Other facts though
similar may provide a different result.

If you have other questions or need more information please call
or write. The toll-free number is 1-800-531-5441; my extension
is 3-4675. The regular number is (512) 463-4675.

Sincerely,

Tom Soto
Tax Administration