Does an out-of-state manufacturer owe Texas use tax on free sample tobacco products delivered to Texas distributors?

Plain-English summary

An out-of-state manufacturer asked the Comptroller whether Texas use tax applies to sample tobacco products it delivers free of charge to Texas distributors, and if so, what the tax should be based on.

The Comptroller's answer turns on whether the manufacturer is "engaged in business" in Texas under Rule 3.286. A seller is "engaged in business" in Texas if it does any of the things listed in Section (a)(1)(A-E) and (G) of that rule — for example, leasing tangible personal property in Texas, delivering products into Texas in its own vehicles, or having representatives in Texas who promote its products. If a seller's only contact with Texas is by out-of-state phone or mail, it is not "engaged in business" here.

• If the manufacturer is engaged in business in Texas, use tax is due on the cost of the sample tobacco products delivered into Texas.
• If the manufacturer is not engaged in business in Texas, no use tax is due on the samples at all.

When use tax is due, it is based only on the manufacturer's cost of the taxable tangible personal property that becomes a component of the finished sample — for tobacco samples, things like the processed tobacco and the wrapping paper. The manufacturer's own labor costs to make the samples are not taxed.

What this means for you

Out-of-state manufacturers distributing free samples into Texas

Whether you owe use tax on free samples sent into Texas hinges entirely on your level of contact with the state. Simply mailing or phoning into Texas, without leasing property here, delivering in your own trucks, or having in-state representatives promote your products, keeps you outside "engaged in business" status and outside use tax on the samples. If you do have that level of presence, budget for use tax on your cost of the materials (not labor) in the samples you send in.

Accountants and tax professionals

This letter is a useful illustration of how the Comptroller applies the "engaged in business" nexus test in Rule 3.286 to free sample giveaways, and it confirms the tax base for self-produced samples is the manufacturer's material cost, excluding labor.

Common questions

Q: Is use tax always due on free samples sent into Texas?
A: No. Use tax is due only if the manufacturer sending the samples is "engaged in business" in Texas under Rule 3.286. If the manufacturer's only Texas contact is by out-of-state phone or mail, no use tax is due on the samples.

Q: What makes a seller "engaged in business" in Texas?
A: Under Rule 3.286, Section (a)(1)(A-E) and (G), examples include leasing tangible personal property in Texas, delivering products into Texas in the seller's own vehicles, or having representatives in Texas who promote the seller's products.

Q: If use tax is due, what is it based on?
A: The manufacturer's cost of the tangible personal property that becomes a component of the finished sample product — for example, the processed tobacco and the wrapping paper — not the manufacturer's labor cost to produce the samples.

Q: Does this ruling apply to any manufacturer sending samples into Texas?
A: This letter was issued to a specific taxpayer based on the facts presented, and the Comptroller notes the opinion may change if the facts are different. Other taxpayers can't rely on it directly, but it illustrates how the Comptroller applies Rule 3.286 to sample giveaways.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.286, Section (a)(1)(A-E) and (G) (Seller's and Purchaser's Responsibilities — "engaged in business" test)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9303992L

Original ruling text

March 23, 1993

Dear **:

Thank you for your letter concerning use tax on sample tobacco products
delivered into Texas.

You asked whether Texas use tax is due on the cost of sample tobacco products
that are delivered free of charge to Texas distributors if the sample
manufacturer is not "engaged in business" in Texas. If Texas use tax is due on
the cost of the samples, you asked on what portion of the cost should use tax
be based on.

The use tax on the samples, if due, is based on the cost of the tangible
personal property purchased to make up the sample product. A manufacturer does
not owe tax on his or her own labor costs to manufacture the samples. Use tax,
if any, is due on the manufacturer's cost of processed tobacco, the paper used
to wrap the product, and any other tangible personal property that becomes a
component of the final product delivered into Texas.

A seller is "engaged in business" in Texas if any of the activities described
in Section (a)(l)(A-E) and (G) of the enclosed Rule 3.286 Seller's and
Purchaser's Responsibilities occur in Texas. For example, you are "engaged in
business" in this state, if you lease tangible personal property in Texas, or
deliver products into Texas in your own vehicles, or you have representatives
in Texas who promote products. If contact with Texas is only by out-of-state
phone and/or mail, the seller is not "engaged in business" in this state.

If you are "engaged-in business" in Texas, Texas use tax is due on the cost of
sample tobacco products delivered into Texas. No use tax is due on the samples
if you are not "engaged in business" in this state.

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