If I remitted sales tax by 'backing it out' of my total ticket receipts instead of adding it on top, can I get a refund of that tax directly?

Subject

Tax Backed Out Vs. Paid On Gross Receipts Or Absorbed

Plain-English summary

A company (referred to in the letter as "Company A") asked the Comptroller's office for a refund of sales tax it said it remitted in error on ticket sales for 1994 and 1995. The company believed the 8.25% sales tax was never actually collected from ticket purchasers. But its own numbers told a different story: it had calculated its tax remittance by dividing total ticket sales by 1.0825 and treating the difference as the sales tax -- a method the Comptroller calls "backing out" the tax from gross receipts.

The letter draws a key distinction that determines who gets the refund:

• If a seller "absorbed" the tax -- meaning it paid tax on its gross receipts without separately collecting tax from customers (tickets/invoices didn't state tax separately or say the price included tax) -- then the seller itself may be refunded the tax it remitted.
• If a seller "backed out" the tax from its gross receipts (as this company apparently did), the seller is treated, as a matter of longstanding Comptroller policy, as having collected that tax from its customers. In that case, the tax must first be refunded to the customers who paid it before the seller can recover the amount remitted to the Comptroller.

Based on the facts described, it appeared Company A had backed out the tax rather than absorbed it, meaning any refund would need to flow to the ticket purchasers first, not directly to the company.

What this means for you

Businesses seeking a sales tax refund

How you calculated and reported the tax matters as much as what you actually collected. If your remittance was computed by "backing out" tax from total receipts (dividing by 1.0825 and treating the difference as tax), the Comptroller will treat that as proof you collected the tax from customers -- even if you believe you didn't actually add it to the price. That determination controls who is entitled to the refund.

Ticket sellers, venues, and other gross-receipts sellers

Keep clear records showing whether tax was separately stated to customers or included in the price. If you truly absorbed the tax (never collected it, invoices don't mention tax), document that clearly, since it is the basis for a seller-direct refund.

Accountants and tax professionals

When evaluating a client's sales tax refund claim, first determine whether the client's remittance methodology "absorbed" the tax (paid on gross receipts, not separately collected) or "backed it out" (treated as collected from customers). This threshold question decides whether the refund goes to the seller or must be routed to the seller's customers first.

Common questions

Q: My customers never saw a separate sales tax line item -- does that mean I absorbed the tax?
A: Potentially, per this letter, if your tickets or invoices did not separately state the tax or say the price included tax, and your records show tax was paid on gross receipts, that supports a finding that you absorbed the tax and may be refunded directly.

Q: I "backed out" the tax mathematically when reporting to the Comptroller -- am I automatically treated as having collected it from customers?
A: Yes, per this letter, this is described as "longstanding Comptroller policy": backing out the tax from reported receipts is treated as evidence the customer, not the seller, paid the tax.

Q: If my customers paid the tax, can I still get the refund?
A: Not directly, per this letter -- the tax must first be refunded to the customers who paid it before the amount remitted to the Comptroller may be refunded to the seller.

Citations and references

No specific statutes or administrative rules are cited in the body of this letter; it describes "longstanding Comptroller policy" on the absorbed-versus-backed-out tax distinction.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9605L1412G10

Original ruling text

May 8, 1996

Dear *****:

Thank you for your April 30th letter requesting a
refund of sales tax remitted in error for 1994 and 1995. The request for
refund by COMPANY A has been forwarded to Credit Verifications in our Revenue
Accounting Division. Please be aware that although you believe the 8.25% sales
tax was not collected from the ticket purchasers, it appears from your letter
that the tax was reported to the state by dividing the the total ticket sales
by 1.0825, subtracting the result from total ticket sales, and calling the
difference sales tax. This procedure "backed out" the tax from the gross
receipts.

In order for Credit Verifications to consider a refund
request as tax paid in error by a seller rather than tax collected in error
from customers, it must be determined whether the seller absorbed the tax or
backed out the tax from the gross receipts. If a seller remitted the tax on
gross receipts and did not collect tax from customers (e.g., tickets or other
invoices to the customer did not separately state the tax or state that the
price includes tax), then the seller absorbed the tax. If a seller's records
show that the tax was paid on gross receipts and not collected from customers,
the tax remitted to the Comptroller's office may be refunded to the seller.

On the other hand, if a seller backed the tax out of
the receipts reported to the Comptroller's office, then the seller is
considered to have collected the tax from the customers. If tax was collected
from customers, the tax must be refunded to those customers before the tax
remitted to the Comptroller's office may be refunded to the seller.

I realize that the distinction between whether tax was
"absorbed" or "backed out" by a seller may not seem important, but it is
longstanding Comptroller policy that if a seller "backed out" tax from the
receipts, then the customer paid that tax rather than the seller.

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 9605258L