Is a business that prints and mails advertising coupons directly to consumers on behalf of retailers providing a taxable sale, or a nontaxable advertising service, under Texas sales and use tax law?

Plain-English summary

The Texas Comptroller's Tax Policy Division responded to a business that contacts retailers and offers to print and mail coupons for them as a form of advertising. The coupons are printed at a location outside Texas and mailed directly to recipients in specific zip codes; the retailers never take possession of the coupons before they go out to potential customers.

The Comptroller confirmed that this type of service has been ruled a nontaxable service. Because the business is not selling coupons to the retailers — it is providing advertising — no sales tax applies to the charge for the service itself. However, because the business is not making a taxable sale of the coupons, it must pay Texas use tax to its supplier on all the materials used to print the coupons, such as paper and printing charges. The letter cites the U.S. Supreme Court's decision in D. H. Holmes Co. v. McNamara, 486 U.S. 24 (1988), as supporting this treatment.

What this means for you

Advertising and direct-mail businesses printing coupons for retailers

If your business prints coupons or similar advertising material outside Texas and mails them directly to consumers — without the retailer client ever taking possession of the printed pieces — the Comptroller treats what you're selling as an advertising service, not a sale of tangible coupons. That means you don't collect sales tax from the retailer on your service charge.

Materials and supplies used to produce the coupons

Even though the service itself isn't taxable, you are the end consumer of the paper and printing used to make the coupons. You owe Texas use tax to your supplier on those materials, since you aren't reselling the coupons as tangible personal property.

Retailers who hire coupon-mailing services

If you're a retailer paying someone else to print and mail coupons directly to consumers on your behalf, this letter indicates that charge is treated as a nontaxable advertising service rather than a taxable purchase of printed materials, at least under the facts described here.

Common questions

Q: Is printing and mailing coupons for retailers a taxable sale in Texas?
A: According to this letter, no — it's treated as a nontaxable advertising service because the business isn't selling coupons to the retailer, it's providing advertising.

Q: Does it matter that the retailer never takes possession of the coupons?
A: Yes. The letter specifically notes that the retailers do not take possession of the coupons prior to their distribution to potential customers, which supports treating the arrangement as an advertising service rather than a sale of goods.

Q: If the service isn't taxable, does the business owe any tax at all?
A: Yes. The business must pay Texas use tax to its supplier on the materials used in printing the coupons, such as paper and printing charges, because it is the end consumer of those materials.

Q: What legal authority supports this position?
A: The letter cites the U.S. Supreme Court case D. H. Holmes Co. v. McNamara, 486 U.S. 24 (1988), as supporting the position that the printer/mailer owes use tax on its materials rather than the retailer owing sales tax on a purchase of coupons.

Q: Can another business rely on this letter?
A: No. The letter states this opinion is rendered based on the facts submitted, and other facts, though similar, may yield different results. STAR letters generally may be relied on only by the taxpayer to whom they were issued.

Citations and references

Case law:

• D. H. Holmes Co. v. McNamara, 486 U.S. 24 (1988) (U.S. Supreme Court)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9508L1366G08

Original ruling text

August 23, 1995

Dear ***:

Thank you for your recent letter requesting information on the
sales and use tax law as it applies to your business.

In our phone conversation, you explained that you contact
retailers and offer to print and mail coupons for them as an
advertising service. The coupons are printed at a point outside
Texas and mailed directly to recipients in specific zip codes. The
retailers do not take possession of the coupons prior to their
distribution to potential customers. The type of service you provide
has been ruled to be a nontaxable service. You are not selling
coupons to retailers; you are providing a form of advertising.

Because you are not selling the coupons, you will pay Texas use tax
to your supplier on all materials used in printing the coupons
(paper, printing charges, etc.). The U.S. Supreme Court supported
this position in the case of D. H. Holmes Co. v. McNamara, 486 U.S.
24 (1988).

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 Policy
Division, Comptroller of Public Accounts.

Sincerely,

Al Van Allen
Tax Policy Division

NOTE: Previous Accession Number 9508423L