Can a direct pay permit holder resell repair parts or supplies to another company without losing its direct pay permit, if it didn't know at the time of purchase that the items would be resold?

Plain-English summary

A company (referred to in the letter as ABC CO) held a direct pay permit and asked the Comptroller's office whether it could sell certain repair parts and supplies, on an as-needed basis, to a neighboring plant (XYZ) that was also a direct pay permit holder. ABC CO couldn't identify in advance which specific items from its inventory might end up being sold to XYZ, so it had no way to issue a resale certificate for those items at the time it originally bought them. The company was worried that making these occasional resales could cost it its direct pay permit.

The Comptroller's office, after consulting with its tax policy and audit staff, assured the company that it would not lose its direct pay permit under these circumstances. The key distinction is timing and knowledge: a direct pay permit holder may not purchase items under its permit that it already knows, at the time of purchase, will be resold — those purchases should instead be made under a resale certificate. But if the company did not know at the time of purchase that a particular item would later be resold, it may still resell that item to another party without jeopardizing its direct pay permit.

What this means for you

Businesses holding a direct pay permit

If you hold a Texas direct pay permit and occasionally resell inventory items to another company (including a related or neighboring business) that you did not know at the time of purchase you would resell, you do not put your direct pay permit at risk by doing so. The permit is only at risk if you knowingly buy items under the permit that you already intend to resell.

Purchasing and inventory managers

Keep the distinction in mind when deciding whether to buy an item under a direct pay permit or a resale certificate: if you know in advance an item is being purchased for resale, use a resale certificate. If you cannot predict which items from general inventory or supplies will later be resold, buying them under the direct pay permit and later reselling them (once the resale need arises) does not disqualify the permit.

Accountants and tax professionals

This letter is a useful precedent for clients running direct pay permits who make occasional, unplanned resales out of inventory purchased for their own use. The Comptroller's office draws the line based on the purchaser's knowledge and intent at the time of purchase, not on whether a resale later occurs.

Common questions

Q: Does reselling an item purchased under a direct pay permit automatically void the permit?
A: No. A direct pay permit holder does not lose its permit merely because it later resells an item, as long as it did not know at the time of purchase that the item would be resold.

Q: When should a direct pay permit holder use a resale certificate instead of the direct pay permit?
A: When it already knows, at the time of purchase, that the item will be resold. Items purchased under the direct pay permit should not be items the purchaser already intends to resell.

Q: Does this apply to sales between related or neighboring companies?
A: Yes. In this letter, the sales in question were from one direct pay permit holder to a neighboring plant that was also a direct pay permit holder, and the same rule applied.

Citations and references

No specific statutes or administrative rules are cited in the text of this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9411L1327E11

Original ruling text

November 9, 1994

Dear **:

Recently, you asked if ABC CO, Inc., could sell certain repair parts
and supplies on an as needed basis to the neighboring XYZ plant.
ABC COand XYZ are direct pay permit holders. You did not wish to risk
ABC CO losing its direct pay permit by making these sales. The company
cannot identify items that might be sold to XYZ in advance and thus
issue a resale certificate to purchase them.

After consulting with our tax policy specialists and audit, I can
assure you that ABC CO will not lose its direct pay permit under these
circumstances. While a direct pay permit holder may not purchase items
under the permit which it knows will be resold, it may resell items
which it did not know at the time of purchase would be resold.

I hope this satisfactorily answers your concerns. Should you have
any further questions, please write me at 111 E. 17th, Austin, Texas
78774, or call me at 1-800-531-5441, extension 3-4004.

Sincerely,

Wade Anderson
Assistant Director
Tax Administration

NOTE: Previous Accession Number 9411772L