If a Texas seller with Texas nexus sells to an out-of-state buyer who has no Texas nexus, and the buyer resells to a third party, does the Texas seller need to collect Texas tax, and what documentation does it need from the buyer?

Subject

Oos Retailer/Customer — Purchases For Resale — Customer Takes Possession In Or Outside Texas — Also Documentation

Plain-English summary

This 1996 letter answers a multistate survey (the same set of questions was apparently sent to several states) about a three-party sales chain: a "Seller Corporation" that has Texas nexus, a "Buyer Corporation" that has no nexus with Texas and is not registered there, and an "Other Corporation" that buys from Buyer Corporation. The Comptroller walks through ten scenario questions about whether Texas tax must be collected on the Seller-to-Buyer sale and what proof is needed.

The core holding: the Seller-to-Buyer sale is a valid sale for resale, exempt from Texas tax, as long as Buyer Corporation gives Seller Corporation a properly completed Texas resale certificate showing Buyer is a bona fide retailer reselling the item in the United States or Mexico in the normal course of business. That conclusion does not change based on:

• Whether Seller Corporation delivers in its own trucks or by common carrier;
• The FOB terms of the sale;
• Whether Seller Corporation ships from a Texas inventory pool or an out-of-state inventory pool;

-- because Seller Corporation already has established nexus with Texas in each case.

The letter also addresses documentation substitutes that do not work: an out-of-state direct pay permit from Buyer Corporation does not relieve Seller Corporation of its duty to collect Texas tax (a Texas direct pay permit cannot be used for resale items anyway -- only a resale certificate works), and an affidavit from the downstream "Other Corporation" cannot substitute for a resale certificate from Buyer Corporation, because proof of exemption must come from the actual buyer in each transaction, not a third party. Separately, if Other Corporation installs the goods under a construction contract with a Texas tax-exempt entity, Other Corporation may accept an exemption certificate from that exempt entity for its own sale -- but that's a separate transaction from the Seller-to-Buyer sale, since Texas sales tax is judged transaction by transaction.

Finally, if the Seller-to-Buyer sale were not covered by the resale exemption, the tax would be measured by the price Buyer Corporation actually paid Seller Corporation -- not by whatever price the downstream Other Corporation later paid Buyer Corporation.

What this means for you

Out-of-state buyers purchasing from a Texas-nexus seller

You can buy for resale without paying Texas tax, even with no Texas registration or nexus of your own, by giving the Texas seller a valid resale certificate. The certificate must show your signature and address, the state where the property will be taken for resale, your sales tax permit number (or your home state's registration number), and -- if you're a Mexican retailer -- your Federal Taxpayers Registry (RFC) number plus a copy of your Mexican registration form. Attach an invoice showing the item and the address it will be resold from, and state your type of business and the items you sell.

Texas sellers shipping to out-of-state resale customers

Get the resale certificate regardless of how you ship (your own trucks or common carrier), the FOB terms, or which warehouse/inventory pool you ship from -- none of that changes your collection obligation once you have Texas nexus. You can accept a resale certificate from a bona fide out-of-state retailer even if you ship the goods directly to a recipient located inside Texas. Don't accept an out-of-state direct pay permit or a third party's affidavit as a substitute -- only a resale certificate from your actual buyer protects you.

Accountants and tax professionals advising multistate supply chains

Each leg of a drop-ship or resale chain is its own transaction for Texas sales tax purposes. A downstream party's tax status (e.g., installing goods for a Texas tax-exempt entity) does not flow back up the chain to exempt an earlier sale -- each buyer must independently provide its own proof of exemption to its own seller.

Common questions

Q: Does the out-of-state buyer need a Texas sales tax permit to issue a valid resale certificate?
A: No -- the certificate can show the sales tax permit number "if any," or the registration number the buyer's home state assigned it.

Q: Can a Texas seller accept an out-of-state direct pay permit instead of a resale certificate?
A: No. Accepting another state's direct pay exemption certificate does not relieve the seller of collecting Texas tax, and a Texas direct pay certificate cannot be issued for items being resold in the first place -- a resale certificate is required.

Q: If my customer resells to yet another company that then installs the goods for a tax-exempt government agency, does that exemption cover my original sale?
A: No. Texas sales tax is a transaction tax, and each transaction is judged independently -- the exempt-agency installation only affects the sale to that installer, not your earlier sale for resale.

Citations and references

Statutes (Texas Tax Code):

• § 151.006, § 151.052, § 151.054, § 151.151 (basis for resale-exemption answers on delivery method and inventory pool location)
• § 151.330 (FOB terms question)
• § 151.103 (inventory pool question)
• § 151.417 (direct pay certificate question)
• § 151.101, § 151.102, § 151.104, § 151.105 (third-party affidavit / reselling vs. consuming question)
• § 151.311 (construction contract with exempt agency)
• § 151.005, § 151.007 (tax basis/price question)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9604234L

Original ruling text

April 15, 1996

Dear **:

Thank you for your letter of March 25, 1996. You asked that we respond to the
following survey questions.

(1) Given that Buyer Corporation is not registered in, and has no nexus with,
your state (State B), will your state recognize the sale from Seller
Corporation to Buyer Corporation as a sale for resale not subject to sale or
use tax in your state? ("Yes" or "No?") If the answer is "Yes," what
documentation will your state accept to evidence that the sale from Seller
Corporation to Buyer Corporation is a sale for resale?

Response: Yes. Buyer Corporation may issue a valid resale certificate to Seller
Corporation provided Buyer is a bona fide retailer purchasing the product for
resale in the United States or Mexico during the normal course of business .
The resale certificate must show the signature and address of the purchaser,
the state to which the property is taken for resale, the sales tax permit
number, if any, or the registration number assigned to the purchaser by the
purchaser's home state. Mexican retailers who purchase taxable items for resale
must show their Federal Taxpayers Registry (RFC) identification number for
Mexico on the resale certificate and give a copy of their Mexican Registration
Form to the Texas seller. An invoice describing the taxable item purchased and
showing the exact street address or office address from which the taxable item
will be resold must be attached to the resale certificate. The resale
certificate must also state the type of business engaged in by the purchaser
and the type items sold in the regular course of business. A resale certificate
may be accepted from the bona fide out-of-state retailer even if the Texas
retailer ships or delivers the taxable item directly to a recipient located
inside Texas.

(2) Does it matter if Seller Corporation delivers in its own equipment, rather
than by common carrier?

Response: No, given the fact that Seller Corporation already has established
nexus with Texas.

(3) Do the FOB terms of sale matter in the taxation of this type of
transaction? If so, please explain.

Response: The FOB terms will not change the responses previously given.

(4) Does it matter if Seller Corporation ships from an inventory pool in your
state as opposed to an inventory pool in another state?

Response: No, given the fact that Seller Corporation already has established
nexus with Texas.

(5) What if Seller Corporation has a Direct Pay Certificate from Buyer
Corporation instead of a resale certificate from State A?

Response: The seller is not relieved of responsibility for collecting the Texas
tax by accepting a direct pay exemption certificate authorized by a state other
than Texas. A Texas direct pay exemption certificate may not be issued for
items to be resold. A resale certificate must be used for that purpose.

(6) If Other Corporation is a consumer, would the execution of an affidavit
(see exhibit A) from Other Corporation to Buyer Corporation, furnished to
Seller Corporation, be sufficient to relieve Seller Corporation from further
responsibility or liability for your state's tax?

Response: No, only a resale certificate issued by Buyer Corporation will
relieve Seller Corporation from having to collect tax. Other Corporation cannot
issue or offer proof that exempts the transaction between two other parties,
(i.e., Seller Corporation and Buyer Corporation). On all transactions, except
occasional sales, proof of exemption must be offered by the buyer to the seller
in each transaction.

(7) Does it matter if Other Corporation is reselling as opposed to consuming?

Response: No. Seller Corporation is liable for collecting tax or accepting a
resale certificate only for the transaction with Buyer Corporation. Because
Buyer Corporation is not required to collect Texas tax, the Other Corporation
is solely liable for tax directly to Texas on the sales transaction between it
and Buyer Corporation.

(8) What if Other Corporation is installing the items shipped in the
performance of a construction contract with an exempt agency in your state?

Response: The Texas sales and use tax is a transaction tax. Each transaction is
judged independently. The sales transaction between Seller Corporation and
Buyer Corporation is a sale for resale. Buyer Corporation should issue a valid
resale certificate to Seller Corporation as previously discussed. The Other
Corporation may accept a valid exemption certificate from an exempt entity in
Texas in lieu of collecting tax on the materials installed under a construction
contract.

(9) If Seller Corporation is required to remit or collect and remit the tax, is
the tax measured by the price paid by Buyer Corporation, or by the price paid
by Other Corporation? If measured by the price paid by Other Corporation, what
is the Seller Corporation required to do if it does not know, and has no right
to know, the price paid by Other Corporation?

Response: If Seller Corporation's transaction with Buyer Corporation is not
covered by the sale for resale exemption, the tax basis is the price paid by
Buyer Corporation to Seller Corporation.

(10) What is the code section the state relies on to reach its conclusion in
each answer?

Response: Questions 1 and 2 - Sections 151.006, 151.052, 151.054 and 151.151;
Question 3 - Section 151.330; Question 4 - Sections 151.006, 151.052, 151.054,
151.103, and 151.151; Question 5 - Sections 151.054 and 151.417; Question 6 -
Sections 151.054; Question 7 - Sections 151.101, 151.102, 151.104, and 151.105.
Question 8 - Section 151.311; Question 9 - Sections 151.005, 151.007.

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