Does a publisher that packages its own books together with purchased videotapes into kits owe sales tax on the wrapping and packaging supplies used?

Plain-English summary

A textbook publisher wrote to the Texas Comptroller's Tax Policy Division asking about the taxability of wrapping and packaging supplies used in a specific scenario. The publisher writes, edits, and publishes textbooks. After the books are printed and bound, they are shipped to a distribution center, which uses wrapping and packaging supplies to assemble kits that combine the publisher's books with videotapes and teachers' editions before final delivery to end-consumers such as school districts. The publisher asked whether it owed tax on the wrapping and packaging supplies used to create these kits, given that it had not produced the videotapes included in them.

The Comptroller's answer: tax is not due on the packaging supplies used to package the kits, even though the publisher may not have produced the videotapes sold as part of the kit. The letter points to Section (e) of Rule 3.314, which provides that a business primarily engaged in manufacturing tangible personal property for sale may also purchase tangible personal property manufactured by another entity for resale. If the business is primarily a manufacturer, it may purchase all of its packaging supplies tax-free — even though a portion of those supplies is used to repackage a product it did not itself manufacture.

The letter notes this opinion is based on the facts presented and could change if the facts were different.

What this means for you

Publishers and manufacturers who bundle purchased items with their own products

If your business primarily manufactures tangible personal property for sale (like a publisher producing textbooks), and you also buy finished goods from another company for resale (like videotapes), Rule 3.314(e) allows you to purchase your packaging supplies — wrapping paper, boxes, and similar materials — tax-free as a whole, even when some of that packaging goes toward repackaging or kitting the purchased item together with your own product.

Distribution centers that assemble kits

The facts here involve a distribution center creating kits from books, videotapes, and teachers' editions. The exemption in this letter turns on the publisher being "primarily a manufacturer" of the packaged product — it is not a general exemption for any business that assembles kits, regardless of what it manufactures itself.

Accountants and tax professionals

Note that the exemption described in this letter depends on the business being "primarily a manufacturer." The letter does not define what percentage or threshold makes a business "primarily" a manufacturer, and the opinion is expressly based on the specific facts presented — different facts could yield a different result.

Common questions

Q: Does a manufacturer owe tax on packaging supplies used to package a product it didn't manufacture?
A: Not necessarily. Per this letter and Rule 3.314(e), if the business is primarily a manufacturer, it may purchase all its packaging supplies tax-free, even if some of the packaging is used to repackage a product manufactured by another party.

Q: Does it matter that the videotapes in the kit weren't produced by the publisher?
A: No. The Comptroller specifically stated that tax is not due on the packaging supplies "even though you may not have produced the videotapes sold as part of the kit."

Q: Can any business rely on this exemption for kitting purchased goods?
A: Only if the business is "primarily" a manufacturer of tangible personal property for sale. This letter is also based on the specific facts the taxpayer presented, and the Comptroller notes the opinion may change if the facts differ.

Q: Who else can rely on this letter?
A: STAR letters generally serve as the basis for a detrimental reliance claim only for the taxpayer to whom the letter was directly issued.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.314(e) (packaging supplies used by a manufacturer to repackage purchased-for-resale product)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9509L1378C12

Original ruling text

September 13, 1995

Dear ***:

Thank you for your letter of August 28, 1995. You asked that we address the
taxability of wrapping and packaging supplies under the following scenario.

Your corporation writes, edits, and publishes textbooks. After being printed
and bound, books are shipped to a distribution center for final delivery to the
end-consumer (e.g., school districts). The distribution center uses wrapping
and packaging supplies to create kits containing the books, videotapes and
teachers editions. You question whether your corporation owes tax on wrapping
and packaging supplies used to create the kits.

Response: Tax is not due on the packaging supplies used to package the kits
even though you may not have produced the videotapes sold as part of the kit.
Section (e) of Rule 3.314 states:

A business that primarily manufactures tangible personal property for sale
may also purchase tangible personal property for resale that was
manufactured by another entity. If the business is primarily a
manufacturer, all packaging supplies may be purchased tax free even though
a portion of the packaging supplies are used in repackaging a product.

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct line is
512/475-0037. You also may write to Sales Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Lindey Osborne
Sales Tax Policy Division

NOTE: Previous Accession Number 9509664L