When could a Texas seller sell paper or plastic bags tax free to distributors, manufacturers, processors, repackagers, and prepared-food businesses?

Plain-English summary

The Comptroller told a bag seller to presume every sale taxable until the buyer provided a properly completed resale or exemption certificate.

Distributors buying bags for resale could give resale certificates. Manufacturers and processors could give exemption certificates for bags and other packaging used on products they manufactured or processed. But a business that merely repackaged tangible property made by someone else owed tax on the bags and could not use the manufacturing exemption.

Prepared-food businesses that cooked or otherwise prepared food for immediate consumption counted as processors. They could buy both paper and plastic bags tax free for the food they made for sale; Texas drew no distinction based on whether the packaging material was biodegradable.

What this means for you

The seller needed to classify the buyer's role and retain the right certificate. Resale, manufacturing, processing, and mere repackaging produced different results even when the physical product was the same bag.

Common questions

Could a distributor buy bags tax free? Yes, for resale and with a resale certificate.

Could a manufacturer buy them tax free? Yes, for packaging its own manufactured or processed product and with an exemption certificate.

Could a repackager claim the same exemption? No, when it only repackaged goods manufactured or processed by others.

Were paper hamburger bags treated differently from plastic ones? No. Both were exempt when bought by the person making the hamburgers for sale.

Citations and references

• House Bill 11 — wrapping-and-packaging law change discussed in the letter

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9109L1137C07

Original ruling text

September 25, 1991

Dear ***:

Thank you for your recent letter expressing concern about H.B. 11 as
it affects your company. You also asked several questions that I
have listed below with appropriate answers.

Question. Since the majority of our business is done with distributors,
how would we know if our bags are primary or secondary packaging.
In many cases our products are resold to customers we don't know and
we have no idea how the bags are to be used.

Answer. Under the Texas Tax Code, all sales are presumed to be
taxable unless a resale or exemption certificate is presented by the
purchaser to the seller. You should regard all your sales as taxable
sales until a properly completed certificate is presented by
your customer.

Persons (distributors?) in the business of reselling bags, who
purchase bags from you to resell to others who will then package a
product for sale, may issue you a resale certificate in lieu of tax.
It will then be the distributor's responsibility to collect the tax
if he sells to someone other than a manufacturer or processor.

Under the Comptroller's interpretation of H.B. 11, manufacturers and
processors are allowed to retain their exemption for bags, as well as
other wrapping and packaging materials, used to wrap or package the
product being manufactured or processed. If your customers are
manufacturers or processors, they may present you with an exemption
certificate in lieu of tax.

If your customers take tangible personal property manufactured or
processed by others and repack it for resale, tax is due from your
customers on the sales price of your bags. Your customers may not
issue and you may not accept an exemption certificate in lieu of tax.

Question. When prepared food products are purchased, a sales tax
is collected. With the current understanding that packaging is a
part of the cost of the product, is the cost of packaging no
longer considered a cost of the finished product? Are you
therefore going to delete the packaging cost from the finished
price for purposes of taxing the consumer at the retail level, or
are you going to make the consumer pay the sales tax on the sales
tax?

Answer: The cost of the packaging is part of the cost of the
product. The cost of packaging cannot be deleted from the cost of the
finished product. The consumer is paying sales tax on the sales tax
previously paid by the seller of the product.

In the case of the prepared food, persons who cook or otherwise
prepare food for immediate consumption are processors for tax purposes
and may continue to buy their wrapping and packaging materials tax
free by issuing an exemption certificate in lieu of tax.

Question. At this time of great debate of environmental concerns,
does it make sense to adversely tax paper products as opposed to
non-biodegradable materials?

Answer: No distinction is being made between paper products and
packaging materials made from other non-biodegradable materials.

Question. Why would a plastic bag holding a hamburger be exempt
and a paper bag holding a hamburger tax taxable?

Answer: Both paper and plastic bags would be exempt if purchased by
persons making the hamburgers for sale.

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

If you have any questions or need more information, you may call me
toll free at 1-800-252-5555, extension 3-4633. The regular number is
512/463-4633.

Sincerely,

Wanda Hutcheson
Tax Administration Division