If a retailer gives away merchandise for free as a promotion — like a shirt to the first ten customers, or a prize in a drawing — or sells items on a 'buy one get one free' basis, how is Texas sales tax handled?

Plain-English summary

A retailer wrote in asking about the Comptroller's policy on the taxability of promotional sales. The Comptroller responded with two illustrations that draw a line between discounted sales and true giveaways:

"Buy one get one free" (or two-for-one pricing): If a retailer sells two shirts, or two meals, for the price of one, the retailer only has to collect sales tax on the amount actually charged to the customer. There's no tax owed on the cost of the "free" item, because the customer is essentially paying half price for both items — the retailer received consideration for both.

True giveaways (prizes and gifts with no purchase required): If a retailer gives away a shirt to each of the first ten customers, or holds a drawing where the winner receives $100 worth of merchandise, the retailer owes tax on the cost of the merchandise given away. In this scenario, the customer pays no consideration to the retailer for that item, which is what triggers the retailer's own tax liability on it.

The letter also references a February 1992 Sales Tax Bulletin on restaurants, covering complimentary meals/drinks and two-meals-for-the-price-of-one deals, though that bulletin's contents aren't reproduced in this letter.

What this means for you

Retailers running "buy one get one free" or bundled-price promotions

If you charge one price for two items (or advertise "buy one get one free"), you only need to collect and remit sales tax on what the customer actually pays — not on an imputed value for the "free" half of the deal.

Businesses giving away prizes, gifts, or promotional items with no purchase required

If you give away merchandise — a free item to the first N customers, a prize in a drawing or contest, a gift with no purchase necessary — you (the business) owe sales tax on your cost of that merchandise, because no consideration was paid by the recipient. Budget for this as a cost of the promotion, not something you can pass through to the winner as a taxable sale.

Restaurants specifically

The letter points to a since-referenced (but not reproduced here) February 1992 Sales Tax Bulletin addressing complimentary meals and drinks, and two-meals-for-the-price-of-one deals — restaurant operators running similar promotions should be aware a more detailed bulletin existed on this exact topic.

Common questions

Q: If I run a "buy one, get one free" promotion, do I owe tax on the free item?
A: No. You only collect tax on the amount actually charged to the customer; the "free" item isn't separately taxed because the customer is effectively paying half price for both.

Q: If I give a free shirt to my first ten customers, do I owe sales tax on it?
A: Yes. Because the customer pays no consideration for that item, the retailer owes tax on the cost of the merchandise given away.

Q: I'm holding a drawing where the winner gets $100 of merchandise. Is that taxable?
A: Yes — per this letter, the retailer owes tax on the cost of the merchandise awarded in the drawing, since no consideration was paid by the winner.

Q: What's the legal distinction between the two scenarios?
A: Whether consideration was paid to the retailer. In a two-for-one sale, the customer pays for both items (just at a bundled price), so no additional tax attaches to the "free" one. In a giveaway or drawing, the customer pays nothing, so the retailer — as the party consuming/using the item by giving it away — owes the tax.

Q: Does this letter cite specific Texas statutes or rules?
A: No. The letter states the Comptroller's policy through two illustrative examples and references an internal February 1992 Sales Tax Bulletin on restaurants, but does not cite specific statute or rule numbers.

Q: Can I rely on this letter for my own promotion?
A: No. STAR letters may be relied upon only by the taxpayer to whom they were issued, and this letter doesn't fully detail all facts of the original inquiry. Consult a licensed Texas tax professional about your specific promotion.

Citations and references

No specific statutes or rule numbers were cited in this letter. The letter references an internal February 1992 Sales Tax Bulletin concerning restaurants and the Texas sales tax (covering complimentary meals/drinks and two-meals-for-the-price-of-one deals), but that bulletin's text is not reproduced here.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9206L1187C02

Original ruling text

June 19, 1992

Dear **:

Thank you for your letter regarding our policy on the taxability of promotional
sales by retailers. Hopefully, the following illustrations will clarify our
policy for you on these promotions:

• A retailer selling two shirts or two meals for one price (or "buy one get
  one free") is required to collect tax only on the amount charged to the
  customer. The retailer is not required to pay tax on the cost of the "free"
  item.

• A retailer giving away a shirt to each of the first ten customers, or
  holding a drawing in which the winner gets $100 worth of merchandise, etc.,
  owes tax on the cost of the shirts or merchandise given away.

In the first example, the customer is essentially paying half price for both
shirts or meals. In the second example, no consideration is paid to the
retailer by the customer for the merchandise, therefore giving rise to the tax
liability on the part of the retailer.

I have enclosed a copy of our February 1992 Sales Tax Bulletin, concerning
Restaurants and the Texas Sales Tax. This bulletin sets out our policy on
complimentary meals and drinks and on two meals sold for the price of one.

Please let me know if you have any more questions or need additional
information. I have asked Mike Doyle, Director, Tax Administration Division to
contact you. He can be reached toll-free at 1-800-531-5441 ext. 3-4783. His
direct number is (512) 463-4783.

Sincerely,

JOHN SHARP
Comptroller of Public Accounts