An industrial supply company runs a customer's tool crib inside the customer's manufacturing plant and charges shared-savings fees, start-up fees, transaction management fees, and contract labor reimbursement, plus sells products. Does it have to collect Texas sales tax on these charges?

Plain-English summary

An industrial supply company contracted with a customer to run the customer's "tool crib" inside the customer's manufacturing or processing facility, staffing it with the supply company's own employees. It asked the Comptroller how five different types of charges to the customer should be taxed:

1. Shared Savings fee — a one-time fee equal to half the difference between the customer's old procurement cost and the new anticipated cost under the arrangement.
2. Start-up fee — reimbursement of labor and travel to set up the tool crib operation (system setup, equipment, report programming, data conversion, catalogs, bar-coding equipment, etc.), passed through at cost with no markup.
3. Transaction Management fee — covers day-to-day operation of the tool crib: customized reporting, on-site transmission services, a dedicated rep, materials handling, on-site management, payroll taxes/maintenance, inventory carrying costs, and a flat 3.4% of material volume.
4. Contract Labor Reimbursement — a pass-through of the direct labor cost of the employees who staff the tool crib.
5. Product — the maintenance, repair, and operations (MRO) materials themselves, some passed through at cost and some marked up, whose taxability depends on the item and any exemption/direct-payment certificate the customer provides.

The Comptroller's answer: presuming the industrial supply company is a retailer of everything sold through the tool crib (and not acting merely as the customer's purchasing agent), all of the additional charges — shared savings, transaction management fees, and contract labor reimbursement — are taxable, because they are services performed in connection with a sale under Tax Code § 151.007(b).

The start-up fee is treated a little differently: if the equipment, software, and other items that make it up stay the supply company's own property (title never transfers to the customer), it's taxed the same as the other fees above. But if those items do become the customer's property, they're treated as a sale of tangible personal property — the supply company can buy them tax-free from its own vendors using a resale certificate and then collect tax from the customer on the sales price (with related services/travel folded into that taxable sales price).

Finally, if the underlying MRO products sold through the tool crib are themselves nontaxable (exempt), the services connected to those nontaxable sales are also nontaxable — and the Comptroller said it will allow prorata tax treatment where a charge relates to both taxable and nontaxable product sales.

What this means for you

Industrial supply / procurement-outsourcing companies

If you operate a customer's tool crib or similar on-site procurement/inventory-management arrangement, don't assume management-style fees (shared savings, transaction management, labor reimbursement) are non-taxable "services" separate from the goods you sell — Texas treats them as taxable charges connected to your sales unless you're purely acting as your customer's purchasing agent. Track which fees relate to taxable versus exempt product sales so you can apply tax proportionately.

Companies handling start-up costs (equipment, software, bar-coding gear)

Whether you owe tax on start-up-fee components turns on who ends up owning the equipment/software. If title stays with your company, it's just another taxable service fee. If title passes to the customer, you can use a resale certificate on your own purchases and instead collect tax from the customer based on the sales price of those items.

Accountants and tax professionals

This letter is a useful illustration of Tax Code § 151.007(b): once a company is treated as the retailer of tangible personal property (not an agent), essentially all connected charges — setup, management, labor, handling — get folded into the taxable "sales price," except to the extent they can be traced to genuinely exempt product sales, in which case prorata treatment is allowed.

Common questions

Q: Does the industrial supply company have to collect Texas sales tax on the shared savings fee?
A: Yes, presuming it's a retailer of the tool crib sales and not acting as the customer's purchasing agent — the fee is a service performed in connection with a sale under Tax Code § 151.007(b).

Q: What about the start-up fee?
A: It's generally taxable the same way, unless title to the equipment/software that makes up the fee transfers to the customer. If it does transfer, the company can use a resale certificate on its own purchases and instead collect tax from the customer on the sales price of those items (with related services and travel included in that price).

Q: Is the transaction management fee taxable, even though it includes things like payroll taxes and inventory carrying costs?
A: Yes. The Comptroller noted that including materials handling and inventory carrying costs — which are normal components of any seller's pricing — actually reinforces that these are services performed in connection with a sale.

Q: Is the contract labor reimbursement (a pass-through of employee labor costs) taxable?
A: Yes, for the same reason as the shared savings fee — it's treated the same way.

Q: Does it matter whether the products sold through the tool crib are themselves taxable or exempt?
A: Yes. Services performed in connection with nontaxable sales of tangible personal property are themselves nontaxable. Where a charge can be tied directly to taxable or nontaxable transactions, tax follows accordingly, and the Comptroller allows prorata tax treatment for charges connected to both taxable and nontaxable sales.

Q: Can another company rely on this letter for its own tool-crib arrangement?
A: The letter states its opinion is based on the facts presented, and if there are additional or different facts, the opinion may change — so it applies most directly to the taxpayer it was issued to.

Citations and references

• Tax Code § 151.007(b) (sales price includes services that are part of a sale)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9606L1424A03

Original ruling text

June 21, 1996

Dear**:

Thank you for your letter of June 13, 1996, concerning the taxability of
services provided by an industrial supply company in the operation of a
customer's tool crib.

An industrial supply company has contracted with a customer to operate the
customer's tool crib inside the customer's manufacturing or processing
facility. The tool crib is staffed by employees of the industrial supply
company and the following charges will be made to the customer;

Shared Savings- A one-time fee which is one half of the difference
between the customer's normal cost of procurement and the anticipated
costs of procurement under the arrangement.

Start-up Fee- The actual cost of labor and travel expenses paid by the
industrial supply company for a team to start-up the tool crib operation.
These costs include system setup, system equipment, specialized report
programming, data manipulation services, data downloads, printing of
catalogs, bar coding equipment, item identification, miscellaneous office
equipment, interface procedures development, and supplier data base
conversion process. These costs are treated as reimbursements and are not
marked up.

Transaction Management Fee- This fee covers the expense of day-to-day
operations of managing the tool crib. This includes customized reporting
and summary billing, on site transmission services, a dedicated representative
available 24 hours a day, handling cost associated with materials, on-site
management, payroll taxes and payroll maintenance, inventory carrying costs,
general and administrative account management costs, 3.4% of material volume,
billing consolidation services. Several reports are generated detailing
purchases in several formats and sorts.

Contract Labor Reimbursement- A pass through to its customer of the direct
labor charges it incurs for the employees it hires to operate the tool crib.

Product- The industrial supply company generally supplies its customers
with a wide range of maintenance, repair and operations material. Some
materials will pass through at cost and some will include a mark-up. The
taxability of these products depend on the numerous circumstances but where
exempt, the customer will provide the applicable exemption or direct
payment certificate.

Questions

1. Is the industrial supply company required to collect Texas Sales Taxes
   from its customers on the shared savings fees?

Response. Presuming that your firm is considered a retailer of all sales
through the tool crib and is not acting as a purchasing agent for its
customer, all additional charges stated are taxable as services that are
part of a sale. See Section 151.007(b) of the Tax Code.

2. Is the industrial supply company required to collect Texas Sales Taxes
   from its customers on the start-up fees?

Response. Presuming that the items that make up the start-up fee are used
by your company and title to the equipment, software, etc. are not
transferred to your client's customers, you should refer to Response 1.

However, if these items become property of your client's customer, any tangible
personal; property will be considered sold to the customer. Your client may
issue their vendors resale certificates in lieu of tax on software, equipment,
catalogs, bar coding equipment, etc. and collect tax from their customer on
the sales price of these items to their customers. Services, travel, etc. in
relation to these sales are considered part of the sales price of these
taxable items.

3. Is the industrial supply company required to collect Texas Sales Taxes
   from its customers on the transaction management fees?

Response. See Response 1. The inclusion of materials handling and inventory
carrying costs, which are components of every seller's pricing structure, is
additional proof that these are services performed in connection with a sale.

4. Is the industrial supply company required to collect Texas Sales Taxes
   from its customers on the contract labor reimbursement?

Response. See Response 1.

5. If any or all of the above are subject to Texas Sales Taxes, does the
   taxability of the products supplied affect your response.

Response. Yes. Services performed in connection with non taxable sales of
tangible personal property are non taxable. To the extent that any of the
foregoing charges can be directly tied to taxable or nontaxable transactions,
the tax will be applied accordingly. We have allowed prorata tax treatment
of services that are in connection with both taxable and nontaxable sales of
tangible personal property.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line
is 512/475-0613. You may also write to Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division