Can a direct payment permit holder accrue local or MTA use tax based on where an item is first used, instead of where it was first stored?

Subject

MTA Tax And Direct Payment Permits — Local Tax Cannot Be Accrued Based On Location Of First Use

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1269D03

Plain-English Summary

A direct payment permit holder asked the Comptroller how local tax (city, county, MTA/CTD) should be sourced when taxable items are purchased tax-free under a direct payment exemption certificate and later stored before use. The letter explains that Rule 3.377(c)(1) governs which city's tax is due, and Rule 3.377(c)(5) governs the timing of reporting when it isn't known at the time of storage whether items will be used in or removed from Texas. If it is known the items will be used in Texas, the tax must be reported when the items are first stored, used, or otherwise consumed.

On sourcing, the letter states that local tax is due based on the location where the items are first removed from storage, or, if the items are not stored, where they are first used or consumed after transportation. Critically, local taxes on items removed from storage for use in Texas are due based on the location of the taxpayer's storage facility, regardless of whether the items are ultimately used inside or outside a local taxing jurisdiction.

The taxpayer asked four specific questions, and the Comptroller answered each directly:

1. Can a direct payment holder accrue local tax based on the location of first use, under Rule 3.377(c)(5)? Response: No.
2. Can a direct payment holder accrue MTA tax based on the location of first use, under Rule 3.425(b)(5)? Response: No.
3. If a direct payment holder currently accrues tax based on first storage, can they switch to a first-use method, as long as they apply it consistently going forward? Response: Yes.
4. What is the procedure for making that switch? Response: The client does not have to apply to the Comptroller's Office for permission to elect the alternative method, but must meet the requirements of Rule 3.377(c)(5). The letter also notes that when changing from first use to first storage, the taxpayer will have inventory/stored items that had not been taxed become reportable at the time the election is made.

What This Means For You

If you hold a direct payment permit and use storage facilities: Your local (city, county, MTA/CTD) tax obligation is tied to the location of your storage facility when items are removed from storage for use in Texas — not to wherever the item ends up being used. This is true even if the item is ultimately used or consumed outside that local jurisdiction.

If you're deciding between a "first storage" and "first use" accrual method: This letter confirms you can switch between those methods without applying for permission from the Comptroller's Office, but (a) you must meet the requirements of Rule 3.377(c)(5), (b) you must apply whichever method you choose consistently over time, and (c) making the switch can trigger a one-time reporting event for previously untaxed stored/inventory items.

If you're unsure which items were already taxed: Because switching accrual methods causes previously untaxed stored items to become reportable at the time of the election, track your inventory carefully around the time of any method change to avoid under- or double-reporting.

Q&A

Q: Can a direct payment permit holder accrue local tax based on the location where an item is first used, rather than where it was first stored?
A: No. The letter's Response to this exact question is "No" — local tax is due based on the location where items are first removed from storage, or, if not stored, where first used or consumed after transportation.

Q: Does the same rule apply to MTA (Metropolitan Transit Authority) tax?
A: Yes. The letter states the Response to whether Rule 3.425(b)(5) allows accruing MTA tax based on location of first use is also "No."

Q: Can a direct payment holder switch from a "first storage" method to a "first use" method for accruing tax?
A: Yes, according to the letter, as long as the direct payment holder applies the new procedure consistently over time.

Q: Does a direct payment holder need Comptroller approval to change their accrual method?
A: No. The letter states the client does not have to apply to the Comptroller's Office for permission to elect an alternative method, but must meet the requirements stated in Rule 3.377(c)(5).

Q: What happens to previously untaxed inventory when a taxpayer changes their accrual method?
A: Per the letter, when changing from first use to first storage, the taxpayer will have inventory/stored items that have not been taxed that would become reportable at the time the election is made.

Original ruling text

October 27,1993

Dear *:

Thank you for your letter of October 7, 1993, concerning direct payment
procedures for state and local use tax.

Rule 3.377 (c)(1) states how to determine which city tax is due when
taxable items are initially purchased tax free under a direct payment exemption
certificate. Section (c)(5) discusses the timing associated with reporting the
tax when storage facilities are used and it is not known at the time of storage
whether items will be used in or removed from Texas. If it is known that
taxable items will be used in Texas, the tax must be reported when the items
are first stored, used or otherwise consumed.

The local tax (city, county, MTA/CTD, etc.) is due based on the location where
the items are first removed from storage, or if not stored, where the items are
first used or consumed after transportation. The local taxes on items
removed from storage for use in Texas are due based on the location of your
storage facility whether the items are used inside or outside a local taxing
jurisdiction.

You asked the following questions:

1) Does Rule 3.377(c)(5) allow a direct payment holder the ability to accrue
local tax based on the location of first use?

Response. No.

2) Does Rule 3.425(b)(5) allow a direct payment holder the ability to accrue
MTA based on the location of first use?

Response. No.

3) If a direct payment holder accrues tax based on first storage, can they
change to first use, as long as they apply the new procedure consistently
over time?

Response. Yes.

4) What is the procedure for a direct payment holder to change their
method of accruing use tax from first storage to first use?

Response. Your client does not have to apply to the Comptroller's Office for
permission to elect an alternative method. The client, however, must
meet the requirements stated in-Rule 3.377(c)(5) and discussed above. When
changing from first use to first storage, the taxpayer will have
inventory/stored items that have not been taxed that would become reportable at
the time the election is made.

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. 5-0613. The direct
line is 512/475-0613. You may also write to Tax Administration Division,
Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division

NOTE: Previous Accession Number 9311041L.3 and/or 9311041L