Can a retailer pay a sales-tax export refund to a customs broker instead of directly to the purchaser who paid the tax?

Plain-English summary

A retailer ("Store") wrote to the Comptroller's office asking it to review a proposal from a customs broker ("Broker"). Under the proposal, a purchaser buys goods at Store and pays sales tax; if the goods are to be exported from the United States, Store refers the purchaser to Broker as its exclusive customs broker. Broker has an exclusive contract with a security firm ("Security") to verify exports at points of exit from the United States. At or near a point of exit, Security checks the purchaser's invoices against the goods and pays the purchaser an amount of money.

The letter clarifies that although Broker calls this a "tax" refund, the Comptroller does not agree with that characterization: the money Security pays the purchaser is really a cash advance in exchange for the purchaser's assignment of the right to a tax refund. The actual, bona fide tax refund is then negotiated between Store and Broker. Equipped with the purchaser's written assignment of the refund right and a signed, stamped export certification form, Broker returns to Store and obtains a refund of the purchaser's sales taxes. Store then recovers that tax from the state by amending prior returns or taking credit against future returns for the amounts it refunded to Broker.

On the refund mechanics, the letter notes that Rule 3.323(e)(1), effective January 1, 1993, prohibits a seller from issuing a tax refund based on export documents received from anyone other than the purchaser shown on the invoice — which appeared to conflict with Broker's proposed procedure, even though the Comptroller's office had previously approved this aspect of the procedure. To resolve the conflict, the Comptroller had proposed an amendment to Rule 3.323(e)(1) (copy enclosed with the letter) that would authorize retailers to accept refund documents from third parties other than the purchaser, and would let retailers pay tax refunds to a third party (such as Broker) who holds the purchaser's written assignment of the refund right (citing proposed (e)(2)).

The proposed rule had not yet been adopted in final form, and some commenters worried the amendments to (e)(1) and (e)(2) could contribute to sales tax fraud by people obtaining refunds under false pretenses with forged documents. Weighing the legislature's intent, the fraud risk, and the benefit of streamlined refunds, the Comptroller decided to adopt the less restrictive procedure for now and enforce it on an interim basis prior to final adoption. As a result, upon receiving properly completed export documentation from any person, the retailer could pay a tax refund to a third party (such as Broker) who has a written refund assignment from the purchaser from whom the tax was originally collected. On the separate question of exclusivity, the letter states that brokers had asked the Comptroller for eighteen months to prohibit exclusive contractual arrangements between a broker and a retailer (arguing it stifles competition), but the Comptroller had declined to regulate such arrangements and took no position for or against Broker's proposal to be the retailer's exclusive customs broker. The letter anticipated the proposed rules would be adopted, likely with some minor changes, during February. An earlier letter in the same file, dated July 7, 1994, from the Comptroller's General Law/Legal Services Division, simply acknowledges the inquiry and states that staff were still reviewing whether the proposed export verification and refund procedures were acceptable under current law and rules.

What this means for you

Retailers selling goods for export

If your customers export purchased goods and use a customs broker to handle export verification and refund paperwork, this letter indicates that — at least on an interim basis while Rule 3.323(e)(1)/(e)(2) amendments were pending — you could accept export documentation from a third party (not just the purchaser) and pay the tax refund to that third party, provided the third party holds the purchaser's written assignment of the refund right and a signed, stamped export certification form. You would then recover the refunded tax from the state by amending prior returns or taking credit on future returns.

Customs brokers offering export tax-refund services

The letter distinguishes between the cash advance a broker's partner (here, a security firm) pays a purchaser in the field in exchange for an assignment of refund rights, and the actual sales tax refund, which is separately negotiated between the broker and the retailer using the assignment and export certification. The Comptroller declined to treat exclusive-dealing arrangements between a broker and a retailer as improper, taking no position for or against such exclusivity.

Businesses and professionals tracking Rule 3.323 changes

This letter describes an interim enforcement position adopted while a specific amendment to Rule 3.323(e)(1) (adding a new (e)(2)) was still working through the adoption process, with the Comptroller anticipating final adoption around February 1995, "probably with some minor changes from the proposed text." Because the letter is explicit that the amended rule "has yet to be adopted in final form," readers should verify the current, final text of Rule 3.323 rather than relying on the interim description here.

Common questions

Q: Could a retailer pay an export tax refund directly to a customs broker instead of the purchaser?
A: Under the interim procedure described in this letter, yes — if the broker held the purchaser's written assignment of the refund right and a signed, stamped export certification form, and the retailer received properly completed export documentation.

Q: Did the Comptroller consider the money paid to purchasers at the export checkpoint to be a "tax refund"?
A: No. The letter states the Comptroller did not agree with the broker's characterization of that payment as a "tax refund"; it viewed it as a cash advance paid in exchange for the purchaser's assignment of the right to a future tax refund, with the actual refund negotiated separately between the broker and the retailer.

Q: Did this conflict with any existing rule?
A: Yes. Rule 3.323(e)(1), effective January 1, 1993, prohibited sellers from issuing refunds based on export documents from anyone other than the purchaser on the invoice. The letter explains this appeared to conflict with the broker's proposal, prompting the Comptroller to propose an amendment and, in the meantime, enforce a less restrictive interim procedure.

Q: Did the Comptroller take a position on the broker's exclusive contract with the retailer?
A: No. The letter states the Comptroller had, over the prior eighteen months, declined to regulate exclusive contractual arrangements between brokers and retailers, and took no position for or against the broker's proposal to be the retailer's exclusive customs broker.

Citations and references

• Rule 3.323(e)(1), effective January 1, 1993 (as referenced in the letter; a proposed amendment adding (e)(2) was pending at the time 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/9501L1337E10

Original ruling text

January 25, 1995

Dear **:

Thank you for your fax of May 26, in which you asked us to review a proposal
you had received from **** (Broker). As ****
is no longer employed by the Comptroller, I have been assigned to respond.
We apologize for the lengthy delay, but we have been involved in intensive
review of the customs broker licensing and regulation process. We didn't
want to give you incomplete or incorrect information. I have completed
my review of the proposal, and these are my comments.

Summary of Proposal:

Purchaser buys goods at Store and pays sales tax. If the goods are to be
exported from the United States, Store refers Purchaser to Broker as its
exclusive customs broker. Broker has an exclusive contract with **
(Security) to verify exports at points of exit from the United States. At or
near a point of exit, Security checks Purchaser's invoices against the goods
and then pays an amount of money to Purchaser. *

Although Broker refers to this as a "tax" refund, we don't really agree. The
money Security pays to the purchaser is more in the nature of a simple cash
advance in exchange for the purchaser's assignment of the right of a tax
refund. The bona fide tax refunds are then negotiated between the Store and
Broker.

Equipped with Purchaser's written assignment of the right to a tax refund
and a signed and stamped export certification form, Broker returns to Store
and obtains a refund of Purchaser's sales taxes. Store then recovers the
tax from the State by amending prior tax returns or taking credit against
future returns for amounts refunded to Broker.

Refunds:

Rule 3.323(3)(1), effective January 1, 1993, prohibits a seller from issuing a
tax refund based on export documents received from any person other than the
purchaser shown on the invoice. Broker's proposed procedure appears to run
afoul of (e)(1), although we did in fact approve this aspect of the procedure
sometime ago. To resolve this apparent conflict, we have proposed an amendment
to Rule 3.323(e)(1). The amended rule (copy enclosed), authorizes retailers to
accept refund documents from third parties other than the purchaser. It also
notifies retailers that they may pay tax refunds to a third party, such as
Broker, who obtains the purchaser's written assignment of the right to a
refund. (See (e)(2).

Proposed rule 3.323 has yet to be adopted in final form and several persons
have commented that the proposed amendments to (e)(1) and (e)(2) may contribute
to sales tax fraud committed by persons who could obtain tax refunds under
false pretenses, using forged documents. After carefully considering the
legislature's intent, the purported risks (fraud), and the obvious benefits
(streamlined refunds), we have elected to adopt the less restrictive procedure
for now. We will enforce this portion of the proposed rule on an interim basis,
prior to final adoption. Therefore, upon receipt from any person of properly
completed export documentation, your company may pay a tax refund to a third
party, such as Broker, who has a written refund assignment from the purchaser
from whom you originally collected the tax.

Exclusivity:

Over the past eighteen months, brokers have asked us to prohibit exclusive
contractual arrangements between a broker and a retailer. They feel that this
stifles competition in their industry. to date, we have declined to regulate
such arrangements. Therefore, we take no position for or against Broker's
proposal to be your company's exclusive customs broker.

I anticipate that the enclosed proposed rules will be adopted, probably with
some minor changes from the proposed text, during the month of February. I
will forward copies of the adopted rules, when they become available.

This opinion is rendered based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 3-4680. the direct line is
512/463-4680. You may also write to Tax Administration, Comptroller of Public
Accounts.

Sincerely,

Al Van Allen
Tax Administration Division

July 7, 1994

VIA: Facsimile transmission **

Re: **'s (Broker) service contract with Store

Dear **:

I apologize for not responding sooner to your FAX of May 26. I
haven't forgotten you. I'm still working with my co-workers to
determine whether ** proposed export verification and
refund procedures are acceptable under current law and rules.

I'll let you know immediately after we reach our conclusions.

In the meantime, please call if I may be of further assistance.
My number is 1-800-531-5441, extension 3-3889.

Sincerely,

John Christian
General Law
Legal Services Division

NOTE: Previous Accession Number 9501968L