If a tax-exempt agency like a Private Industry Council or the Texas Rehabilitation Commission pays for a sponsored student's books, tools, and meal tickets at our college bookstore, should we charge sales tax?

Subject

College/University — Purchases Of Student Books/Supplies/Tools Paid For By Scholarship/Funds Provided By Exempt Organizations — Sales Made Directly To Exempt Entities Vs. Students

Plain-English summary

A college asked the Comptroller whether it should charge sales tax on books and tools sold to students who are sponsored by tax-exempt or governmental agencies, such as the JTPA/Private Industry Council (PIC) or the Texas Rehabilitation Commission (TRC). These agencies provide funds for tuition, meal tickets, books, and tools, and the students keep the books, supplies, and tools if they don't drop out.

The Comptroller's answer turns on who is legally the purchaser, not on whose money ultimately pays for the item or who keeps the item:

• Sale to the exempt entity (exempt): If a student is preapproved by a PIC (or similar agency), gets an invoice from the bookstore, turns that invoice in to the PIC for a purchase voucher, and then redeems the voucher at the bookstore -- with the bookstore billing the PIC directly -- the purchase is made by the exempt entity. The Texas Commission for the Blind was described as using a similar procedure, as could a PIC representative who accompanies the student and pays on-site with a PIC purchase voucher or corporate credit card. These sales qualify for exemption because the purchase is made directly by, and is in line with the exempt purpose of, the exempt or governmental entity.
• Sale to the student (taxable): If instead an agency (including some PICs, or funds like Pell Grants) simply reimburses the student or deposits money into the student's account at the college, and the college's internal invoicing debits the student's account for tuition, books, supplies, and tools, then the sale is to the student. There is no exemption for taxable items sold to students even though the underlying funds originated with a governmental, nonprofit, or exempt entity.

The letter instructs the college to document exempt sales with a properly completed exemption certificate from a private exempt entity (like a PIC), or with a written purchase voucher when the payer is a governmental entity.

What this means for you

Colleges, universities, and campus bookstores

Don't decide taxability based on the ultimate source of funds or the fact that a student keeps the books/tools. Look at your own invoicing: if you bill and collect from the exempt/governmental agency directly (e.g., via a purchase voucher redemption process), treat the sale as exempt and keep the exemption certificate or voucher on file. If the money is credited to the student's account and the student's account is what gets debited, charge sales tax -- it doesn't matter that a PIC, TRC, or Pell Grant ultimately funded that account.

Accountants and tax professionals advising educational institutions

The key distinguishing fact is the invoicing/billing chain, not the funding source. Confirm which party appears as the billed purchaser in the institution's records before advising on exemption treatment, and confirm the institution retains the correct supporting document (exemption certificate vs. purchase voucher) for each exempt sale.

Students and sponsoring agencies

This letter doesn't change what students pay out of pocket, but it explains why a bookstore may charge tax on some sponsored purchases and not others depending on how the agency's payment is processed.

Common questions

Q: Does it matter that the student keeps the books and tools after the sale?
A: No. The ruling states the sale to the student is taxed and the sale to an exempt entity is exempt "even though the student will keep the books or tools." Who keeps the item is irrelevant to who is legally the purchaser.

Q: If a PIC or Pell Grant funds a student's account at the college, is that purchase automatically exempt?
A: No. If the funds are deposited to the student's account and the student's account is debited for the purchase, the sale is treated as made to the student and is taxable, even though the money originated with an exempt or governmental source.

Q: What paperwork should the college keep to support an exempt sale to an agency?
A: A properly completed exemption certificate from a private exempt entity (such as a PIC), or a written purchase voucher when the payer is a governmental entity.

Citations and references

No specific statutes or administrative rules were cited in the body of this letter; the Comptroller's answer applies general purchaser-identification principles to the facts presented.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9605L1409B01

Original ruling text

May 7, 1996

Dear ****:

I am responding to your FAX transmittal of April 25 and the internet message
from ***. You stated that your college has various tax-exempt
agencies such as JTPA (Private Industry Council), TRC (Texas Rehabilitation
Commission), etc., that sponsor students who attend **.

These agencies provide funds for the students' tuition, meal tickets, books,
tools, etc. The students ultimately keep the books, supplies, and tools,
assuming the student does not drop out. I called and requested additional
information from you as well as from the Austin/Travis County Private
Industry Council, and from the Texas Commission for the Blind.

You asked, "Should we be charging sales tax on the books and tools sold to
these students?"

Response: The difficulty in this simple questions lies in determining who is
the purchaser of these items. Is it the student or is it the exempt or
governmental agencies? The sale to the students must be taxed and the sales
to the exempt entities qualify for exemption, even though the student will
keep the books or tools.

I have determined that in some circumstances the sale is made directly to
the exempt entity and are exempt. For example, the Austin/Travis County
Private Industry Council (PIC) will approve certain students to receive funds.
The preapproved student will go to the educational institution and/or the
bookstore and receives an invoice for the tuition, meal ticket, books, tools,
etc. The student will turn the invoice over to the PIC who issues a purchase
voucher; with the PIC purchase voucher, the student will return to the
institution or bookstore turn in the purchase voucher and receive credit for
tuition, the meal ticket or the books and tools. The institution or bookstore
will then bill the PIC for the purchases. In this situation, the PIC is the
purchaser, is an exempt entity, and the purchase is inline with the exempt
purpose of the PIC.

The Texas Commission for the Blind has very similar procedures. Other PICs
may operate in a similar manner by having a PIC representative accompany the
student and issue a purchase voucher or make the onsite purchase with a PIC
corporate credit card. These sales are all made directly to the exempt
entity and qualify for exemption.

However, some PICs (and other funds such as Pell Grants) operate in a manner
to reimburse the student for tuition, books, etc., or by depositing moneys
directly into your college for credit to an individual student's account.
The student's account is debited for payment of tuition, books, supplies,
tools, etc. The student may direct the disposition of these moneys and your
internal invoicing shows these sales are made to the individual student.
These sales are taxable; there are no exemptions for sales of taxable
items (meal ticket, books, supplies, or tools) to students even though the
moneys may originate with a governmental, nonprofit, or exempt entity.

In summary, if you receive payment directly from an exempt entity for a
specific purchase on behalf of a student, the sale is considered made directly
to the exempt entity. If the monies are deposited for credit to a student's
account for student's use and sales for taxable items are debited out of this
account, the sales are to the student and should be taxed. To document the
exemption, you should obtain a properly completed exemption certificate from
a private exempt entity such as a PIC, but a written purchase voucher is
sufficient documentation from a governmental entity.

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

Sincerely,

Tax Policy Division

NOTE: Previous Accession Number 9605183L