Does a Texas broker owe sales tax on the fees earned brokering animal fat and byproducts sold to Mexican buyers, or on the underlying sales themselves?

Plain-English summary

The taxpayer in this 1992 Texas Comptroller letter ruling was a broker who arranged sales of animal fat and byproducts between a seller (with facilities in Oklahoma and Texas) and buyers in Mexico. The product moved from those facilities to a bulk facility in Texas, where the Mexican purchasers' own trucks picked it up. No product was sold to U.S. firms.

The Comptroller confirmed two things. First, the underlying sales of the animal fat and byproducts were exempt from Texas sales tax, because the Mexican purchasers were agricultural operations that either (a) used the product as a component of feed fed to their own livestock, which falls under the agricultural exemption in Rule 3.296, or (b) used it as a raw material in a feed product they manufacture and hold for resale, which falls under the resale/manufacturing exemption in Rule 3.300. In either case, the broker was told to collect a resale or exemption certificate from the purchaser instead of charging tax.

Second, and the point highlighted in the letter's subject line, the broker's own fees — charged to both the buyer and the seller for arranging the transaction — are not subject to Texas sales tax at all. Brokering a sale is a service of connecting buyer and seller; it is not itself a taxable sale of tangible personal property, so the fee income sits outside the sales tax base regardless of how the underlying goods are taxed.

What this means for you

Brokers and trading intermediaries

If you earn a fee for arranging sales between a seller and a buyer — without taking title to the goods yourself — that brokerage fee is not treated as taxable receipts for Texas sales tax purposes. This applies whether or not the underlying goods sale is taxable.

Sellers of agricultural inputs and animal feed components

If your product ends up as feed (or a feed ingredient) used by an agricultural operation for its own livestock, or as a raw material a feed manufacturer uses to make products it resells, the sale can be exempt under Rule 3.296 or Rule 3.300. The seller (or broker acting for the seller) needs to collect a resale or exemption certificate from the purchaser to document the exemption instead of collecting tax.

Anyone selling to Mexican or other out-of-state/out-of-country buyers

This ruling deals with agricultural/resale exemptions, not an export exemption as such — the exemption here turns on how the Mexican buyer used the goods (own-use livestock feed vs. resale as a manufactured feed product), not simply on the fact that the buyer was in Mexico.

Common questions

Q: Does this mean all brokerage fees are exempt from Texas sales tax?
A: This ruling addresses brokerage fees tied to this specific transaction — arranging sales of animal fat and byproducts to Mexican agricultural buyers. It reflects the general principle that a broker's arrangement fee is a service fee, not a taxable sale of goods, but it was issued to one taxpayer based on the facts presented and cannot be relied on by other taxpayers.

Q: Why were the underlying product sales also exempt?
A: Because the Mexican purchasers were agricultural operations using the animal fat and byproducts either as feed for their own livestock (Rule 3.296) or as a raw material for a feed product they manufacture and hold for resale (Rule 3.300). Both uses qualify for an exemption when supported by a proper certificate.

Q: What paperwork does the seller/broker need to support the exemption?
A: An exemption certificate (or resale certificate, depending on which exemption applies) taken from the purchaser in lieu of collecting tax, as the letter instructs.

Q: Can I rely on this letter for my own brokerage business?
A: Not directly. Under Texas rules, a STAR letter ruling like this one can only be relied on by the taxpayer it was issued to, and only for the facts presented. Other brokers should request their own ruling or consult a Texas tax professional, especially since STAR letters can become outdated even without being marked superseded.

Citations and references

• 34 Tex. Admin. Code § 3.296 (agricultural exemption for feed fed to a purchaser's own livestock)
• 34 Tex. Admin. Code § 3.300 (exemption for raw materials used in manufacturing products held for resale)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207L1184G11

Original ruling text

ALERT: This document may be affected by changes to the Tax Code which was amended by H.B. 268, 82nd Reg. Legislative Session, 2011. The amendment required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a registration number issued by the Comptroller, effective 01/01/2012.

July 30, 1992

Dear **:

Thank you for your recent letter regarding your brokerage of industrial
ingredients to Mexican customers. Based on your letter, our telephone
conversation and my telephone conversation with the Texas ** of
****, Oklahoma, I'd like to restate the following facts.

You broker animal fat and byproducts to manufacturers in Mexico. No products
are sold to U.S. firms.

The manufacturers may be agricultural operations producing stock feed for their
own use or for resale in Mexico.

The animal fat and byproducts are shipped from ** facilities in both
Oklahoma and Texas to a bulk facility in Texas where the Mexican purchasers'
trucks pick them up.

The sale of animal fat and byproducts to agricultural operations producing
stock feed for their own use or for resale in Mexico is exempt from sales tax.
In either case, you will take an exemption certificate (enclosed) from the
purchaser in lieu of tax.

If you are broke ring the product to a Mexican agribusiness to be used as a
component of feed to be fed to its own livestock, the exemption falls under
Rule 3.296.

If you are brokering the product to a Mexican feed manufacturer to be used as
a raw material for its product held for sale in the regular course of business,
the exemption falls under Rule 3.300.

Your brokerage fees to both the buyer and seller are not subject to sales tax.

This opinion is based on the facts you presented. Other facts, though similar,
may yield different results.

If you have questions or need more information, please call or write. You may
reach me by calling toll free, (800) 531-5441. My direct line number is (512)
463-4680. The number for FAX transmissions is (512) 475-0900. You may write to
me in care of Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division