If an advertising agency processes phone/mail orders and ships merchandise for an out-of-state manufacturer, who owes Texas sales tax, and what proof is needed that out-of-state shipments are tax-free?

Subject

Out-of-state shipments — manufacturer's order-processing agent, sales tax responsibility, and shipping documentation

Plain-English summary

A small Texas advertising and public relations agency was going to process phone and mail orders on behalf of a manufacturer located elsewhere in Texas. The agency would answer customer inquiries, accept credit card payments, and ship merchandise from its own place of business, in exchange for a flat fee. The manufacturer's own advertising listed the agency's phone number and address for placing orders. Importantly, the agency never bought the merchandise from the manufacturer — it acted purely as the manufacturer's agent.

The Comptroller ruled that because the agency was acting as the manufacturer's agent (not buying and reselling the goods itself), the agency was not responsible for collecting or remitting sales tax on these transactions, and could not report the tax on its own sales tax return. Instead, the manufacturer remains responsible for collecting and remitting the 6.25% state sales tax and the 1% city sales tax on all sales made from the agency's Texas location. To do this properly, the manufacturer needed to register the agency's address with the Comptroller's office as an "outlet" location.

On the out-of-state question: sales shipped to customers outside Texas are not subject to Texas sales tax. However, the manufacturer must keep proof that the goods actually left the state — such as bills of lading, shipping receipts, or postal receipts — to support treating those sales as tax-free.

What this means for you

Businesses using a fulfillment or order-processing agent

If you hire another business to process orders, take payments, and ship your products (even from that other business's location), you — not the agent — remain the seller responsible for state and local sales tax, as long as the arrangement is truly an agency relationship (the agent never purchases the goods for resale). You should register the agent's location as an outlet with the Comptroller and collect tax at the rates applicable there.

Advertising, fulfillment, or answering-service agencies

If you're compensated with a flat fee for processing orders on behalf of a client — rather than buying and reselling the client's goods — you are generally not the party liable for sales tax on those sales, and you should not report that tax on your own return. The underlying seller remains liable.

Anyone shipping goods out of state

Sales delivered to customers outside Texas are exempt from Texas sales tax, but only if you can document it. Keep bills of lading, shipping receipts, or postal receipts showing the merchandise was shipped out of state; without that documentation, the exemption can be challenged.

Common questions

Q: Who has to collect Texas sales tax when an agency processes orders for a manufacturer?
A: The manufacturer does, because the agency is acting merely as the manufacturer's agent and never takes ownership of the goods for resale. The agency should not remit tax on its own sales tax return for these transactions.

Q: Does the manufacturer need to do anything special because orders are processed from the agency's location?
A: Yes — the manufacturer should contact the Comptroller's office to set up an outlet location for the agency's address, and then collect the state tax plus the applicable city tax on sales made from that location.

Q: Are sales shipped to customers outside Texas taxed?
A: No. Sales shipped outside of Texas are not subject to Texas tax.

Q: What proof is needed to support tax-free treatment of an out-of-state shipment?
A: Documentation such as bills of lading, shipping receipts, or postal receipts showing the merchandise was shipped out of state.

Q: Would the answer change if the agency bought the merchandise and resold it?
A: This ruling addresses only the facts presented, where the agency acted strictly as the manufacturer's agent for a flat fee and never purchased the goods. The Comptroller noted the opinion could change with different facts.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9210L1198G09

Original ruling text

September 2, 1992

Dear **:

Thank you for your letter of September 2, 1992, concerning your sales and use
tax responsibilities for processing orders for a manufacturer.

As I understand it, a small advertising and public relations agency located in
**, Texas will process phone and mail orders for a manufacturer
located in *, Texas. In addition, the advertising agency will be
answering inquiries, accepting credit card payments, and shipping merchandise
from its place of business. The manufacturer purchases advertising that lists
the telephone number and address of the agency to place orders. The agency
does not purchase the merchandise from the manufacturer, but rather acts as the
manufacturer's agent. The agency receives a flat fee for providing this
service. You question whether the State tax and City of *** tax
applies to these sales. Also, you asked for confirmation that sales made to
out-of-state customers are not subject to Texas tax.

As agent to the manufacturer, the agency is not responsible for the sales tax
on these sales and cannot remit the tax on the agency's sales tax return. The
manufacturer is responsible for remitting the sales or use tax on sales
transactions from the ** location. The manufacturer should contact
this office to set up an outlet location for the agency's address in
*. The manufacturer would be responsible for collecting the 6.25%
State tax and l% City of *** tax on all sales in Texas. Sales shipped
outside of Texas are not subject to Texas tax. The manufacturer must retain
documentation such as bills of lading, shipping receipts, or postal receipts as
proof the merchandise was shipped out of state.

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

If you have any questions or need additional information, you may call toll
free 1-800-252-5555, ext. 50037 or the regular Austin number is 512-475-0037.
You also may write to Tax Administration Division.

Sincerely,

Lindey Osborne
Tax Administration Division