Does a company owe Texas sales or use tax on loose product samples and sample binders or books that it produces or buys to help its sales representatives solicit customers?

Subject

Loose Samples/Sample Binders Or Books — Used To Assist In Solicitation Of Sales Activities

Plain-English summary

A company (referred to as "Company Z" in the letter) prepares two kinds of product samples to help its sales force solicit customers: loose samples (larger individual product samples) and sample binders or books (collections of smaller samples bound together for customers to browse and select from). Company Z said these samples have no economic value on their own — their only purpose is to represent the products they demonstrate. Most sample binders were produced in Texas but shipped to Company Z's customers outside the state; loose samples were sent to customers in a given sales territory on request.

Company Z had received conflicting advice — at one point a Comptroller's office employee had said the manufacturing-cost portion of sample binders was exempt except for binders given to Texas customers — and asked the Comptroller to clear up whether the samples and binders were taxable.

The Comptroller ruled they are taxable. Under 34 Tex. Admin. Code Rule 3.300(b)(4), because the sole use of a sample is to demonstrate the other items it represents (not to be sold itself), the materials used to make the sample are subject to sales or use tax regardless of whether the sample itself is ever sold. Applying that rule:

• If Company Z produces the samples, books, or binders itself, it owes use tax on the cost of materials used to make the ones distributed in Texas. No tax is due on the labor Company Z performs for itself.
• If Company Z buys finished binders from a Texas third party and takes possession in Texas, it owes sales tax on the total purchase cost.
• If Company Z buys finished binders from an out-of-state third party and takes possession in Texas, it owes use tax on the total purchase cost.
• In either purchase scenario, Company Z cannot use a resale or exemption certificate, because the binders are given away to customers rather than resold.
• If binders are produced in Texas and then some are shipped out of state to customers, Company Z still owes tax on the entire shipment produced (governed by the same purchase/production analysis above), not just the portion kept in Texas.

The letter closes with the Comptroller's standard caveat that the opinion is based on the facts presented and that different facts could change the result.

What this means for you

Manufacturers and marketers who distribute product samples

If you make or buy loose samples, sample binders, or sample books to help your sales team solicit business, expect them to be taxable in Texas. Whether it's sales tax or use tax — and who owes it — depends on whether you made the item yourself or bought it, and whether you took possession in Texas or out of state.

Companies buying finished sample binders from vendors

You cannot give your vendor a resale or exemption certificate for sample binders that you plan to give away rather than sell. If you take possession of the binders in Texas, expect to pay sales tax (Texas vendor) or use tax (out-of-state vendor) on the full purchase price.

Companies that manufacture their own samples or binders

You owe use tax only on the cost of materials consumed in producing the samples or binders (not on your own labor), for the ones you distribute in Texas — including binders that are later shipped out of state as part of a larger Texas-produced batch.

Common questions

Q: Are loose samples and sample binders taxable in Texas even though they're never sold to anyone?
A: Yes. Because their only purpose is to demonstrate other products, the materials used to make them are taxable regardless of whether the sample itself is ever sold.

Q: Can we use a resale certificate when buying sample binders from a vendor?
A: No. Because the binders are given away to customers rather than resold, the company cannot give the vendor a resale or exemption certificate — sales or use tax applies to the full purchase cost.

Q: If we manufacture the binders ourselves, is our own labor taxed?
A: No. Only the cost of materials used to produce the samples, books, or binders is subject to use tax; labor performed by the company for itself is not taxed.

Q: We produced binders in Texas but shipped some out of state — do we still owe tax on those?
A: Yes. The letter states that if sample binders are produced in Texas and individual binders are later sent to customers outside Texas, the company still owes tax on the entire shipment of binders produced, under the same rules described above.

Q: Could this answer change under different facts?
A: Yes — the letter states the opinion is based on the facts presented and could change if the facts are different.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.300(b)(4) (Manufacturing; Custom Manufacturing; Fabricating; Processing)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9608L1432G02

Original ruling text

August 20, 1996

Dear ***:

This is in response to your request for a ruling on
the taxability of activities performed by your client (company Z). I have
restated your facts below followed by my response.

Company Z prepares two types of samples of its
offerings to assist their solicitation of sales activities - loose samples and
a sample binder or book. Loose samples are larger samples of products used in
the sample book. In either case (loose samples or binders), the samples are
such that they have no economic value except as a representation of product,
and their only use can be the solicitation of sales. In general, most of the
sample binders are produced in Texas but distributed to Company Z's customers
outside of Texas. Customers of Company Z receive sample binders from which
the customers of Company Z can make a product selelction. Loose samples are
sent to customers of Company Z in a given sales territory when requested by
those customers that may not have received a sample binder.

Several years ago, at least one employee of the
Comptroller's office held that the third party manufacturing cost portion of
all sample binders were exempt from Texas sales and use tax except those sample
binders that were given to Company Z's Texas customers, even though the sample
binders were produced in Texas and delivered to Company Z for distribution.
Company Z is now receiving conflicting advice from various parties which brings
into question whether the samples and sample binders are taxable.
Specifically, Company Z desires a ruling on the following questions:

1. Are loose samples and sample binders or books taxable in Texas?

Response: Yes, loose samples and sample binders or books distributed in Texas
are taxable. Subsection (b) (4) of Rule 3.300 - Manufacturing; Custom
Manufacturing; Fabricating; Processing, states the following with regard to
samples:

Since the sole use of such samples is to demonstrate not the sample but the
other items which it represents, the purchase of the raw materials used to
make the sample is subject to the sales or use tax, regardless of the fact
that the sample itself may be ultimately sold.

If Company Z produces the samples, books, and binders, it owes use tax on
the cost of materials used to produce the samples, books and binders that are
distributed in Texas.

2. Are samples of product contained in the sample binders or books taxable?

Response: Yes, see response to 1.

3. Are loose samples of product taxable?

Response: Yes, see response to 1.

4. Are the materials and costs associated with producing samples binders
   (e.g., the binder, production costs, labor, and third party profit) taxable?

a. If performed entirely by a third party company located in Texas?

Response: If Company Z purchased the binders from a third party located in
Texas and took possession of the binders in Texas, it owes sales tax on on
the total cost of these these purchases. Company Z may not give an
exemption or resale certificate on the purchase of binders that are to be
given away to customers.

b. If performed entirely by a third party located outside of Texas?

Response: If Company Z purchased the binders from a third party located
outside of Texas and took possession of the binders in Texas, it owes use
tax on the total cost of these purchases. Company Z may not give an exemption
or resale certificate on the purchase of binders that are to be given away
to customers.

c. If partially or fully performed by Company Z in Texas? Company Z may
prepare the samples suitable for inclusion in the sample binders or prepare
loose samples and consume items that are incorporated or used to produce
the samples.

Response: Company Z would owe tax on the cost of materials, books or binders
that it manufactured and distributed in Texas. Company Z would sales or use
tax on books or binders that it purchased from third party vendors, if it took
possession of the books or binders in Texas. No tax is due on labor performed
by Company Z for itself.

5. If sample binders or books are produced inside Texas and later individual
   sample binders or books are sent to customers located outside of Texas, will
   Company Z owe use tax on the entire shipment of sample binders produced?

Response: Yes. See response to 4.

This opinion is based on the facts presented. Other facts though similar may
provide a different result. You may call me toll-free at 1-800-531-5441,
extension 3-4502. The direct line is 512/463-4502. You may also write to
Tax Policy Division, Comptroller of Public Accounts. My Internet address is:
[email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division

NOTE: Previous Accession Number 9608604L