If my advertising agency's invoice lumps taxable and nontaxable charges together, can I still use my direct payment permit to self-accrue the tax?

Plain-English summary

The Texas Comptroller's Tax Administration Division answered a direct payment permit holder's question about an advertising agency's invoice. The agency's invoice stated that tax was "included" on taxable items and separately showed a dollar amount of tax, but it did not separately break out which charges were taxable and which were nontaxable.

The Comptroller explained that Rule 3.321(f)(4) lets an advertising agency combine taxable and nontaxable items on one invoice line, as long as the agency notes that tax is included on the taxable items and can document the tax amount from its own internal records — but when an agency invoices this way, it is collecting the tax itself and must remit it to the state. A direct payment permit holder cannot also self-accrue that same tax, and under Rule 3.288(h) a direct payment exemption certificate is only valid if the vendor's invoice separately states the taxable and nontaxable charges. Because this agency's invoice did not separately identify taxable from nontaxable charges (even though it broke out the tax dollar amount), the taxpayer could not validly use a direct payment certificate on this transaction — the tax should instead have been collected and remitted by the advertising agency. The letter also flagged that the invoice showed a total for "employee fabricated" publication materials that was fully taxable, but the tax charged wasn't calculated on that full total.

What this means for you

Direct payment permit holders

You can only issue a valid direct payment exemption certificate to a vendor if that vendor's invoice separately identifies which charges are taxable and which are nontaxable. If a vendor (like an advertising agency using the combined-invoice method under Rule 3.321(f)(4)) simply notes that tax is "included" without breaking out the taxable items, you cannot self-accrue tax on that invoice — the vendor is responsible for collecting and remitting the tax, and your direct payment certificate does not cover it.

Advertising agencies and other vendors billing direct payment customers

Rule 3.321(f)(4) lets you combine taxable and nontaxable items on client invoices without a separate tax due line, as long as you note tax is included and can document the amount internally. But if a client holds a direct payment permit, that combined-invoice approach means you — not the client — must collect and remit the tax, because Rule 3.288(h) requires you to separately state taxable and nontaxable charges before the client's direct payment certificate can apply.

Accountants and tax professionals

This ruling ties together three rules: Rule 3.321(f)(4) (advertising agency invoicing), and Rule 3.288(g)-(h) (direct payment qualifications). The core point is that Rule 3.321(f)(4)'s relaxed invoicing standard and the direct payment program's requirement for separately stated charges are in tension — a vendor invoicing under 3.321(f)(4) without a taxable/nontaxable breakdown effectively takes itself out of the direct payment chain and must collect the tax directly.

Common questions

Q: Can I use my direct payment permit if my vendor's invoice only shows the dollar amount of tax, not which specific items are taxable?
A: No. Showing a tax amount is not the same as separately identifying the taxable and nontaxable charges. Under Rule 3.288(h), the vendor's invoice must separately state which charges are taxable before you can validly apply a direct payment exemption certificate.

Q: If my vendor's invoice doesn't separately break out taxable and nontaxable charges, who is responsible for the tax?
A: The vendor. If a vendor (such as an advertising agency invoicing under Rule 3.321(f)(4)) indicates tax is included without separately stating the taxable items, the vendor is treated as having collected the tax from you and must remit it to the state.

Q: Can a direct payment permit holder issue a certificate to a vendor providing only nontaxable services?
A: No. Rule 3.288(g) says direct payment permit holders may not issue direct payment exemption certificates to persons providing nontaxable services.

Q: What if a vendor sells both taxable items and nontaxable services to a direct payment customer?
A: Under Rule 3.288(h), the direct payment exemption certificate must indicate that it does not cover any nontaxable services the vendor may provide — the taxable and nontaxable pieces have to be distinguished.

Citations and references

Rules cited:

• 34 Tex. Admin. Code Rule 3.321(f)(4) — Advertising Agencies (combined invoicing for taxable/nontaxable items)
• 34 Tex. Admin. Code Rule 3.288(g) — Direct Payment Procedures and Qualifications (no certificates to nontaxable-service providers)
• 34 Tex. Admin. Code Rule 3.288(h) — Direct Payment Procedures and Qualifications (certificate must exclude nontaxable services; charges must be separately stated)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9301740L

Original ruling text

January 11, 1993

Dear *****:

Thank you for your letter concerning Rule 3.321 Advertising Agencies and your
responsibilities as a direct payment permit holder.

Rule 3.321(f)(4) provides that:

Invoices to clients need not show taxable and nontaxable items separately. The
tax due on any invoice need not be shown, but the agency must indicate on the
invoice that tax is included on those items subject to tax and the agency must
be able to document the amount of tax included on that invoice from its
internal records.

Rule 3.288(g) Direct Payment Procedures and Qualifications provides that:

Direct payment permit holders may not issue direct payment exemption
certificates to persons providing nontaxable services.

In addition, Rule 3.288(h) provides that:

When a direct payment permit holder is doing business with a person who may be
selling taxable items as well as nontaxable services, the direct payment
exemption certificate must indicate that it does not cover any nontaxable
services that the servicer may provide.

Therefore, an advertising agency which issues you an invoice that states that
tax is included on those items subject to tax is collecting tax from you. If
the taxable and nontaxable charges are not separately stated by the agency as
allowed in Rule 3.321(f), it is impossible for you to issue a valid direct
payment exemption certificate and correctly accrue the proper amount of tax.

If the advertising agency is invoicing as allowed in Rule 3.321(f), the tax is
considered paid to the advertising agency and the advertising agency must remit
the tax on such a transaction. The advertising agency would have to separately
state the taxable charges and the nontaxable charges to you in order to accept
a direct payment certificate from you.

The invoice you submitted from the advertising agency separately states the
amount of tax, but does not separately identify the taxable charges and the
nontaxable charges, therefore, the tax should have been collected by the
advertising agency and remitted to the state. It would be impossible for our
auditors to verify that a direct payment permit holder accrued the correct
amount of tax if this practice were allowed. For example, the advertising
agency invoice shows the sale of publication materials that appear to be
employee fabricated. The total charges for employee fabricated materials are
subject to tax, but the tax on the invoice is not on the total.

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

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Administration, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Administration Division