If I trade gift baskets to a radio station in exchange for a free radio ad (a tradeout), do I owe Texas sales tax on the baskets?

Subject

Exchange Of Nontaxable Advertising Services For Taxable Tpp — Not A Barter

Plain-English summary

This is a short correction letter. The Comptroller had previously answered a business's questions about gift baskets filled with breads, cookies, and candies (60% breads/cookies, 15% candies, 20% basket, 5% miscellaneous items). One of those answers -- to Question 3, about "tradeout" gift baskets traded for radio advertising time (e.g., 5 gift baskets for 1 radio spot) -- turned out to be incorrect, so the Comptroller issued this follow-up letter to fix it.

The corrected answer treats a tradeout the same way as any other transfer of a mixed package of taxable and nontaxable items: the tax result turns on which part of the package is the primary component, not on the fact that the taxpayer received advertising services (a nontaxable service) instead of cash.

• If the taxable items (the basket itself and miscellaneous non-food items) are the primary component of the package and a single charge is billed for the basket, the entire sales price of the package is taxable. The business may buy the taxable components tax-free with a resale certificate, but must then accrue tax on the normal sales price of the baskets used in the trade.
• If the taxable items are not the primary component (i.e., food items predominate), the entire sales price of the package used in the trade is exempt. However, the business still must pay tax on the taxable components of the basket at the time of purchase, or accrue tax on those components if they were bought tax-free.

The original April 15, 1996 letter (reproduced below along with the May 21, 1996 correction) also addressed related questions: general taxability of the gift baskets when sold, complimentary/promotional giveaways, and a supplier's failure to charge sales tax on basket purchases.

What this means for you

Businesses that barter or "tradeout" merchandise for advertising

Exchanging goods for services (like radio ad time) instead of cash does not make the goods exempt. You still analyze the transaction the same way you would a sale or a giveaway: identify whether the taxable items (packaging, non-food add-ons) or the nontaxable items (food) make up the primary component of what you're giving away, and tax follows accordingly.

Accountants and tax professionals

The controlling test here is the same "primary component of the package" analysis used for mixed taxable/nontaxable bundles generally (see Question 1's reference to Rule 3.293 in the underlying April 15, 1996 letter). A tradeout for advertising services doesn't change that test -- it's not treated as a special "barter" category with different rules.

Advertising and media businesses receiving tradeout merchandise

This letter is written from the merchandise-provider's side, but it's a reminder that the recipient of tradeout goods (here, a radio station) isn't the one facing tax exposure on the merchandise; the tax responsibility discussed falls on the business supplying the gift baskets.

Common questions

Q: Does trading gift baskets for radio ad time (a "tradeout") avoid sales tax because no cash changes hands?
A: No. Per this letter, the tax treatment is the same as for a complimentary/promotional giveaway of the basket -- it depends on whether the basket's taxable components (basket and miscellaneous items) or its food contents are the primary component of the package.

Q: If the basket and miscellaneous items are the primary component, what tax is owed?
A: The business is responsible for accruing tax based on the normal sales price of the baskets used in the tradeout (having purchased the taxable components tax-free with a resale certificate).

Q: If food items are the primary component, is there any tax due at all?
A: The trade itself is exempt, but the business must still pay or accrue tax on the taxable components (basket, miscellaneous items) that went into the package.

Citations and references

No statutes or administrative rules are cited by name in this correction letter. (The underlying April 15, 1996 letter referenced in this correspondence separately cites "Section (i) of Rule 3.293" regarding mixed taxable/nontaxable packages, but that citation appears in the original letter being corrected, not in this letter's own text on the tradeout 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/9605L1412E11

Original ruling text

May 21, 1996

Dear ****:

Recently, I mailed you a letter concerning your tax responsibilities. One
of the responses I gave you is incorrect. This letter is to correct that
response.

Please refer to Question 3 of your original letter:

You asked "What tax responsibility do we incur on tradeout gift baskets.
For example, we trade 5 gift baskets for one radio spot."

Response: If the taxable items (i.e., basket and miscellaneous items) are
the primary components of the package and a single charge is billed for the
basket, the entire sales price of the package is taxable. You may issue a
resale certificate to your supplier to purchase the taxable components of
the basket tax free. You are then responsible for accruing tax on the
normal sales price of the baskets you use to barter with.

If the taxable items are not the primary component of the package, the entire
sales price of the package used to barter with is exempt. However, you should
pay tax on the taxable components of the basket at the time of purchase or
accrue tax on the taxable components if the items were purchased tax free.

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

April 15, 1996

Dear ****:

Thank you for your letter of March 19, 1996. You asked that we address the
taxability of gift baskets filled with breads, cookies, and candies. The
contents comprise 60% breads and cookies, 15% candies, 20% basket, and 5%
miscellaneous items.

Your questions, with response, follow:

(1) Is sales tax due on our product?

Response: When a package contains both food products and taxable items the
application of the tax depends upon the essential character of the complete
package. If the taxable items (i.e., basket and miscellaneous items) are the
primary components of the package and a single charge is billed for the basket,
the entire sales price of the package is taxable. Under this scenario, you may
issue a resale certificate for the taxable items included in the package. You
should collect and remit tax on the selling price of the package.

If the taxable items are not the primary component of the package, the entire
sales price of the package is exempt. Under this scenario, you should pay tax
on the taxable items at the time of purchase. Or, you may choose to make a
separate charge the taxable items. The separate charge for the taxable items
is taxable. Please refer to Section (i) of Rule 3.293.

(2) What kind of tax responsibility do we incur when we give complimentary
gift baskets?

Response: In cases where no charge is made for the taxable items in the basket,
the package is a promotional item not purchased for resale. You are liable for
tax based upon the cost of the taxable items in the package.

(3) What tax responsibility do we incur on tradeout gift baskets. For example,
we trade 5 gifts baskets for 1 radio spot.

Response: Same response as given to Question 2.

(4) Our gift basket supplier has not been charging us any sales tax on our
basket purchases. Should we pay tax on our baskets? Are we liable? Will we
be held responsible for taxes not paid on baskets we have already purchased?

Response: You stated that you had been collecting sales tax on the baskets
sold from the date you opened until March 1, 1996. If you have collected and
remitted tax on the total selling price of the baskets you sold, you will not
be held liable for any additional taxes on these transactions. You may be
liable for additional tax on baskets given away as promotional items or traded
for radio air time if you did not accrue tax on the taxable items included in
the package that were purchased tax free.

You should begin to pay tax to your basket suppliers and miscellaneous goods
suppliers if the primary components of the package are not taxable. If the
majority of the basket's contents are taxable, you may continue to purchase
the taxable items tax free and collect tax on the selling price of the package.

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 9605248L