Do I have to charge Texas sales tax when I sell to an out-of-state government agency, college, university, or school district?

Plain-English summary

A taxpayer wrote to the Comptroller's Tax Policy Division asking about purchases by state government agencies of other states. The Division's response covers three distinct points:

1. Out-of-state government agencies generally are not exempt. Texas does not currently exempt purchases by the governmental agencies of other states. Texas Tax Code Sec. 151.309 would allow an exemption for a governmental agency of a state that borders Texas (such as Louisiana or Oklahoma) if that state offers a reciprocal exemption to Texas governmental agencies — but at the time of this letter, Texas had no reciprocal agreements in place with any border state. The letter notes that if the taxpayer later obtains an exemption certificate from a bordering state's governmental agency, the Comptroller's office can verify whether a reciprocal agreement exists.

2. Out-of-state colleges, universities, and school districts can be different. Some out-of-state schools have separately applied for and been granted exempt status in Texas as educational organizations. If the taxpayer does business with such a school, it may accept a properly completed exemption certificate from that out-of-state educational organization.

3. The interstate shipment exemption can apply regardless of exempt status. Under Texas Tax Code Sec. 151.330(a), a Texas retailer can sell tax-free to an out-of-state customer — including an out-of-state governmental agency — if the taxable item is shipped directly to a location outside Texas by the retailer's own vehicle or by common carrier. A bill of lading from the common carrier showing the items and an out-of-state destination is sufficient proof. If the out-of-state governmental agency does not take possession of the item in Texas and instead has it shipped out of state, the interstate shipment exemption applies even though the general governmental exemption does not.

What this means for you

Retailers selling to out-of-state government agencies

Don't assume an out-of-state government agency (a state, its cities, or other agencies) is automatically tax-exempt in Texas the way a Texas governmental entity is. Absent a reciprocal agreement with a bordering state, you generally need to charge Texas sales tax on an in-Texas sale to an out-of-state agency — unless the sale qualifies for another exemption, like interstate shipment.

Retailers selling to out-of-state colleges, universities, or school districts

Some out-of-state educational institutions have obtained their own Texas exempt-organization status. If a school gives you a properly completed Texas exemption certificate showing it is an exempt educational organization, you may accept it in good faith.

Any retailer shipping goods out of Texas

Regardless of the customer's exempt status, if you ship the taxable item directly out of Texas using your own vehicle or a common carrier (and keep a bill of lading proving the out-of-state destination), the sale can qualify for the interstate shipment exemption under Sec. 151.330(a) — this applies to sales to out-of-state governmental agencies too, as long as they don't take possession of the item while it's still in Texas.

Common questions

Q: Is a state government agency from another state automatically exempt from Texas sales tax?
A: No. Texas does not currently exempt the governmental agencies of other states, except potentially for a bordering state's agency if that state has a reciprocal exemption agreement with Texas — and no such agreements existed at the time of this letter.

Q: What if my customer is a college, university, or school district from another state?
A: Some out-of-state schools have separately requested and been granted exempt status in Texas as educational organizations. You may accept a properly completed exemption certificate from such a school.

Q: How can I sell tax-free to an out-of-state governmental agency even without an exemption certificate?
A: If the taxable item is shipped directly to a location outside Texas by your own vehicle or by a common carrier, and the agency does not take possession of the item in Texas, the sale can qualify for the interstate shipment exemption under Sec. 151.330(a). A bill of lading showing the items and the out-of-state destination serves as proof.

Q: Can I rely on this letter for my own transactions?
A: STAR letters can generally be relied on only by the taxpayer to whom they were directly issued, and this letter is explicitly based on the facts submitted — other facts, though similar, may yield different results.

Citations and references

Statutes:

• Texas Tax Code Sec. 151.309 (exemption for bordering-state governmental agencies with reciprocal exemption)
• Texas Tax Code Sec. 151.330(a) (interstate shipment exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9512L1381D08

Original ruling text

December 1, 1995

Dear *:

Thank you for your letter concerning purchases by state government agencies of
other states.

Texas does not currently exempt the government agencies of other states. There
is a provision in Texas Tax Code Sec. 151.309 that would allow an exemption for
a governmental agency of a state bordering Texas (Louisiana, Oklahoma, etc.) if
that state provides a reciprocal exemption for Texas governmental agencies.
Currently, we do not have any reciprocal agreements with these border states.
In the future, if you do get an exemption certificate from a governmental agency
of a state that borders Texas, we can verify whether that border state and Texas
have a reciprocal agreement for exemption.

If you do business with colleges, universities, and school districts in other
states, please be aware that some of these out-of-state schools have requested
and have been granted exempt status in Texas as educational organizations.
Therefore, you may accept properly completed exemption certificates from
out-of-state educational organizations that are exempt.

There is an interstate shipment exemption in Texas Tax Code Sec. 151.330(a)
that allows a retailer in Texas to sell tax free to an out-of-state customer if
the taxable item is shipped directly to a location outside Texas by means of the
retailer's vehicles or by common carrier. A bill of lading from the common
carrier showing the taxable items and a destination point to another state would
be sufficient proof of an interstate shipment exemption. If an out-of-state
governmental agency does not take possession of the taxable item in Texas and
has the taxable item shipped to an out-of-state location, then the exemption in
Sec. 151.330(a) would exempt interstate shipments to governmental agencies of
other states.

This opinion is 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. 5-0030. The direct line is
512 475-0030. You may also write to Tax Policy, Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Policy Division

NOTE: Previous Accession Number 9512708L