Can Texas require the federal government (such as the U.S. Department of Defense running retail surplus stores) to pay Texas sales tax?

Plain-English summary

A taxpayer wrote to the Comptroller's office about retail surplus stores the federal government intended to open in Texas. In response, the Comptroller's office said it would contact the U.S. Department of Defense about these operations, but explained that the federal government cannot be required by state law to pay Texas sales tax.

The letter's reasoning is that Texas sales tax is levied on the gross receipts of vendors, not on purchasers. Vendors are allowed to recoup the tax by adding it onto the sales price of the items they sell, but the legal obligation to pay the tax rests with the vendor. Because the tax is a tax on the vendor, requiring the Department of Defense (as a purchaser) to pay the sales tax would amount to the State of Texas taxing the federal government itself — something the state cannot do.

The letter notes that the Comptroller's office has approached other federal agencies about collecting the tax from the government's purchases. Some agencies voluntarily collect and remit the tax, and some do not; Texas cannot compel any of them to do so. Even when an agency voluntarily collects the tax, it will only remit the amount it actually collected, not necessarily the full amount that would otherwise be owed.

What this means for you

Vendors selling to federal government retail operations (e.g., military surplus stores)

If you sell taxable items to a federal government instrumentality operating in Texas, this letter confirms that the federal government cannot be legally compelled to pay Texas sales tax, because the tax is imposed on the vendor's gross receipts rather than directly on the buyer. Some federal agencies may voluntarily collect and remit tax on your behalf, but that is not guaranteed and Texas cannot force the issue.

Businesses trying to understand who bears sales tax liability

This letter is a reminder that under Texas law, the legal incidence of sales tax falls on the vendor, not the customer. The vendor is permitted to pass the cost along by adding it to the sales price, but the underlying legal obligation to remit the tax to the state belongs to the seller — a distinction that matters when the buyer is an entity, like the federal government, that the state cannot directly tax.

Common questions

Q: Does this mean the federal government is exempt from paying anything related to Texas sales tax?
A: The letter states that the federal government cannot be required by state law to pay the sales tax, because the tax is legally a tax on the vendor's gross receipts. However, the letter also notes that some federal agencies voluntarily collect and remit the tax when they sell items, even though Texas cannot compel them to do so.

Q: If a federal agency voluntarily collects the tax, does Texas get everything it's owed?
A: Not necessarily. The letter states that even where federal agencies collect the tax voluntarily, "they will only remit the amount collected, not necessarily the amount owed."

Q: What did the Comptroller's office say it would do about the retail surplus stores?
A: The letter states that the Comptroller's office would contact the U.S. Department of Defense about these operations, in addition to explaining the legal limits on requiring the federal government to pay the tax.

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/9503168L

Original ruling text

March 23, 1995

Dear Mr. **:

Thank you for letting us know about the retail surplus stores the federal
government intends to open. First, let me say that we will be contacting the
U.S. Department of Defense about these operations. However, I must tell you
that the federal government cannot be required by state law to pay the sales
tax.

As you know, the sales tax is levied on the gross receipts of vendors. Vendors
are then allowed to recoup their tax by adding it onto the sales price of the
items they sell. Because this is a tax on the vendor, it would amount to the
State of Texas taxing the federal government if we required the Department of
Defense to pay the sales tax.

We have approached other federal agencies about collecting our tax. Some will
do so voluntarily, some will not. But, we cannot compel them to do so. Even
where they collect it voluntarily, they will only remit the amount collected,
not necessarily the amount owed.

Once again, thank you for bringing this to our attention.

Sincerely,

Wade Anderson
Assistant Director, Tax Administration

cc: June Zivley
Revenue Opportunities Section