A wholesale floor covering distributor asks: is sales/use tax due when it buys carpet samples for its own showrooms, when it later resells those used samples to dealer customers at a discount, when its salespeople swap out a dealer's sample display for free, and can it get a tax refund when it has to discard samples that go out of style?

Plain-English summary

A wholesale floor covering distributor wrote in with four related questions about carpet samples — small, hardboard-mounted (and sometimes full-size) pieces used to show customers different grades or types of carpet. The Comptroller answered each one:

1. Buying samples from vendors for use in its own showrooms. These purchases are taxable at the time of purchase, because the distributor is using the samples in its own business (to demonstrate product), not reselling them right away.

2. Later reselling those same (now "used") samples to dealer customers, at a discount of 50% or more, so the dealers can use them in their own showrooms. Here, the distributor can accept a resale certificate from the dealer instead of charging tax. However, the distributor gets no credit or refund for the tax it already paid when it originally bought the samples — that tax was correctly due on the original taxable use, and reselling the sample afterward doesn't undo that.

3. Free replacement/updating of a dealer's sample display. After the initial sale of samples and display racks to a dealer, the distributor's own salespeople sometimes swap out or refresh the dealer's samples at no charge, using the distributor's own inventory. Since no sale occurs in this situation, no tax is due.

4. Discarding obsolete samples and trying to recoup the tax already paid. Because of style, color, or technology changes, or discontinued product lines, the distributor sometimes has to throw away samples it already paid use tax on when it originally acquired them. The Comptroller's answer: no, that previously paid tax cannot be recouped from the Comptroller's office.

What this means for you

Wholesalers and distributors who use samples in their own showrooms

If you buy samples, display models, or demonstration items to use in your own business (rather than reselling them immediately), tax is due on that purchase — the use in your showroom is itself a taxable use, regardless of whether you later resell or give away the item.

Businesses that later resell used samples or display items

You can accept a resale certificate in lieu of charging tax when you resell a used sample to another dealer/reseller. But don't expect a credit or refund for the tax you paid when you originally bought or used that item — the two transactions are treated separately.

Businesses that swap out or restock a customer's display for free

If no sale takes place — for example, your own staff refreshes a customer's display using your own inventory at no charge — no tax is due on that transaction.

Businesses that must discard outdated inventory or display items

Don't count on recovering sales or use tax already paid on items that later become obsolete, discontinued, or unsellable. This letter confirms the Comptroller will not refund tax already paid in that situation.

Common questions

Q: Is sales/use tax due when a distributor buys samples to use in its own showroom?
A: Yes. Buying samples for use in the business — even if some are later resold — is a taxable purchase at the time of purchase.

Q: If a distributor later resells a used sample to a dealer, does it have to charge sales tax?
A: No — it can accept a resale certificate from the dealer in lieu of charging tax on that resale.

Q: Can the distributor get credit for the tax it already paid on a sample that's later resold?
A: No. No credit is given on the resale for taxes previously paid, because the sample was used (in the distributor's own showroom) before it was resold.

Q: Is tax due when a distributor's salespeople update a dealer's sample display for free?
A: No. Where no sale occurs, no tax is due.

Q: Can a distributor get a refund for use tax paid on samples it later has to throw away due to style or product changes?
A: No. The letter states the tax cannot be recouped from the Comptroller's office.

Q: Can another business rely on this letter for its own situation?
A: No. The letter states it is based on the facts presented, and different facts, though similar, may result in different answers. It is directly binding only on the taxpayer who requested it.

Citations and references

No specific statutes, rules, or case law are cited in the body 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/9601929L

Original ruling text

January 16, 1996

Dear ** :

Thank you for your letter dated January 9, 1996, concerning the taxability of
the situations below relating to a wholesale floor covering distributor.

1. Purchases - samples from product vendors for use in showrooms. Samples are
   miniature and mounted on hardboard, designed to be held in the hand or on
   display racks and are generally not salable as products per se. Some samples
   are full-size. Should they purchase these tax free?

Response: Carpet samples that are used by the seller to demonstrate various
grades or types of carpet are taxable at the time of purchase because they are
for use in the business.

2. Samples in #1 are also sold to customers (dealers) for use in their
   showrooms at a discount of 50% or more. These customers are resellers of
   distributor's product lines. It is necessary for distributor's customers to
   have samples to sell product lines. Samples are not sold to final consumers
   but may be given away to encourage sales. Should sales tax be charged on sales
   to resellers?

Response: A resale certificate may be accepted in lieu of tax when the "used"
samples are resold to another carpet dealer. No credit can be taken on the
resale, for taxes previously paid, because the samples were used before they
were resold.

3. After the initial sale of samples and samples display racks by distributor
   to dealer, salespersons employed by distributor will up-date sample displays
   for dealer at no cost to dealer, using distributor's inventory of samples. Is
   sales tax due?

Response: Where no sale occurred, no tax is due.

4. If tax is payable upon distributor's inventory purchase of samples (use tax)
   what is the result of distributor having to discard significant quantities of
   samples because of technological changes, style and color changes,
   discontinuance's of product lines, and other events. Can tax be recouped from
   the comptroller's office?

Response: No.

This opinion is based on the facts presented and current law. Different facts
though similar, may result in different answers.

You may call or write me for additional information or if you have any
questions. The toll free number is 1-800-531-5441, and my extension is 50330.
The direct line is 512/475-0330. You may also write to Tax Policy Division,
Comptroller of Public Accounts.

Sincerely,

Bettie Peterson
Tax Policy Division