If a customer gives a seller a resale certificate on a rental, but never actually re-rents the item, is the seller liable for the uncollected tax?

Plain-English summary

This December 21, 1992 letter is from Michael D. Doyle, Director of Tax Administration at the Texas Comptroller's office, to a trade association (identity redacted) whose members had been raising concerns about enforcing the new contractor provisions of HB 11. Doyle writes that he sympathizes with sellers who go the "extra mile" to try to correctly collect tax on invoices, but who sometimes run into a purchaser or renter who flatly refuses to pay the tax or simply deducts it from the invoice — even when the seller knows the tax is legally owed.

Doyle's answer is a practical audit policy, not a hard legal rule: on a case-by-case basis, if a seller is audited and the Comptroller's office reviews the seller's documentation and determines the seller made a good-faith effort to collect the tax (for example, by relying on a resale certificate issued by the purchaser/renter, even where the rented item was never actually re-rented), the agency will not assess the tax against the seller in that audit. Instead, it will use the seller's documentation to open an audit against the purchaser/renter to pursue the tax from them directly.

Doyle is candid that this doesn't give sellers a guaranteed safe harbor: "the issue of 'good faith' can only be resolved on a case by case review." No bright-line test or specific statute is cited in the letter itself.

What this means for you

Sellers and lessors who accept resale certificates on rentals

If you accept a resale certificate in good faith from a purchaser or renter, and that person never actually re-rents (or resells) the item as the certificate implies, you are not automatically on the hook for the uncollected tax. On audit, the Comptroller's office says it will look at your documentation and, if it shows a good-faith collection effort, will not assess the tax against you — it will instead go after the purchaser/renter who misused the certificate.

Trade associations and members dealing with HB 11 contractor provisions

This letter was prompted by association members' frustration enforcing HB 11's new contractor provisions, where customers sometimes refuse to pay tax the seller knows is due. The Comptroller acknowledges the problem but offers only a case-by-case audit accommodation, not a categorical rule members can rely on in advance.

Accountants and tax professionals

Because "good faith" is evaluated case by case and no statute or rule is cited in the letter, this is informal audit-policy guidance rather than a citable legal standard. Document your client's certificate-acceptance practices (verifying the certificate is properly completed, retaining it on file, etc.) since that documentation is exactly what the Comptroller says it will review.

Common questions

Q: If my customer gives me a resale certificate on a rental and never re-rents the item, will I owe the tax?
A: Not automatically. This letter says the Comptroller will review your documentation on audit, and if you made a good-faith effort to collect the tax, it will not assess the tax against you in that audit.

Q: What happens to the unpaid tax if the seller isn't assessed?
A: The letter states the Comptroller will use the information from the seller's documentation to generate an audit on the purchaser or renter who issued the certificate.

Q: Is there a specific test for "good faith" I can rely on?
A: No. The letter explicitly says the issue "can only be resolved on a case by case review" — it does not lay out a fixed checklist or cite a statute.

Q: Does this letter bind the Comptroller in my specific situation?
A: No. This is a general policy letter addressed to a trade association, not a taxpayer-specific ruling on your facts. See the disclaimer below on reliance.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9212L1257F13

Original ruling text

December 21, 1992

Dear *****:

I enjoyed talking with you the other day concerning the problems your
members are having enforcing the new contractor provisions of HB 11.
I found the conversation most enlightening and I certainly sympathize
with their position.

I appreciate the "extra mile" that your members are going in an
attempt to make sure that their customers are correctly paying the tax
on their invoices. I wish there was an easy solution to the problem of
when a purchaser flatly refuses to pay the tax or deducts it from
their invoice, even when your member knows that they should be paying
the tax.

With regard to our position concerning a possible audit of one of your
members, I will go so far as to say that on a case by case basis, we
will review the documentation on file, and if we determine that the
seller made a good faith effort to collect the tax, we will not assess
the tax in the audit. I can tell you that we will then use the
information to generate an audit on the purchaser.

I wish I could give you an answer that would provide a greater level
of comfort to your members, but the issue of "good faith" can only be
resolved on a case by case review.

If I can be of further assistance, please contact me.

Sincerely,

Michael D. Doyle
Director
Tax Administration

NOTE: Previous Accession Number 93070163.2 and/or 9307163L