Can a retailer avoid collecting and later refunding Texas sales tax on items sold for export to Mexico by routing delivery through a customs broker at the border?

Subject

Retailer — Export Sales — Procedures For Collecting And Subsequently Refunding Tax

Plain-English summary

This letter responds to a retailer who had asked, among other things, about changing its accounting method, and who had already discussed by phone how to stop collecting sales tax on export sales and then having to refund it later.

On the accounting-method question, the Comptroller confirmed that retailers may use a cash basis, an accrual basis, or any other generally recognized accounting basis that correctly reflects their business, for reporting both gross sales and taxable sales. A retailer's general books and records can be kept on an accrual basis even while sales tax is reported on a cash basis. The retailer's specific proposal was acceptable as long as tax was reported consistently, in a way that accurately reflects both revenue receipts and the retailer's export documentation.

The letter then lays out a procedure to avoid collecting and then refunding tax on items sold for export to Mexico:

1. Arrange for a licensed customs broker at the border to receive items shipped by the retailer and deliver them to the retailer's customers.
2. When the retailer sells an item for export to Mexico, ship the item to the broker in the city where the customer plans to cross into Mexico, instead of handing the item to the customer at the retailer's place of business.
3. Instruct the broker to deliver the item to the customer as the customer enters Mexico, at a point where the item is irrevocably committed to the stream of export.

The Comptroller explained why this works: a sale is not complete until the customer receives title to or possession of the taxable item. Under this procedure, the customer does not take possession until the item is already irrevocably committed to the stream of export, and the retailer avoids the problem of obtaining valid export documentation because it pays the broker directly (rather than relying on the customer to produce that documentation after taking possession in Texas).

As with other letters of this type, the Comptroller notes the opinion is based on the facts presented and may change if the facts are different.

What this means for you

Retailers selling to customers who plan to export goods to Mexico

If your customers regularly cross the border into Mexico with purchases, you may be able to avoid the administrative burden of charging sales tax at checkout and then processing a refund once export documentation comes in. Routing delivery through a licensed customs broker at the crossing point, so that the customer only takes possession once the item is irrevocably committed to export, can mean the sale is not "complete" for tax purposes until that point.

Accountants and tax professionals

This letter separately confirms flexibility in accounting method: a retailer's general books can be on the accrual basis while sales tax reporting uses the cash basis, or any other generally recognized method, as long as it is applied consistently and accurately reflects revenue and export documentation. Note that the specific broker-delivery procedure described here was accepted for this retailer's facts; the letter does not establish a universal rule and expressly says the opinion could change on different facts.

Businesses that currently collect tax at sale and then seek a refund on export sales

If your current process involves collecting tax up front and then refunding it once you obtain export proof, this letter describes an alternative that avoids that cycle altogether by changing where and when the customer takes possession of the item -- moving that point of possession across the border via a customs broker so it is not a completed taxable sale in Texas.

Common questions

Q: Why does using a customs broker at the border avoid the need to collect and later refund sales tax?
A: Because a sale is not complete until the customer receives title to or possession of the item. If the broker delivers the item to the customer only as the customer enters Mexico -- at a point where it is irrevocably committed to the stream of export -- possession never occurs in a way that completes a taxable retail sale in Texas.

Q: What steps does the procedure involve?
A: The retailer arranges with a licensed customs broker at the border to receive shipped items; ships the sold item to the broker in the city where the customer plans to cross into Mexico (rather than giving the customer possession at the retailer's store); and has the broker deliver the item to the customer as the customer crosses into Mexico.

Q: Does this also help with getting export documentation?
A: Yes. The letter notes the retailer has no problem obtaining valid export documents under this procedure because it compensates the broker directly.

Q: Can a retailer use the cash basis for sales tax reporting even if its books are kept on an accrual basis?
A: Yes. The letter confirms retailers may use a cash basis, an accrual basis, or any other generally recognized accounting basis that correctly reflects their business, and general books may be accrual-based while sales tax reporting uses the cash basis.

Q: Could this answer change under different facts?
A: Yes -- the letter states the opinion is rendered based on the facts presented and may change if there are additional or different facts.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1436A10

Original ruling text

September 9, 1996

Dear ***:

This is in response to your letter of August 12, 1996
requesting permission to change accounting methods. I received your letter
this afternoon and would like to apologize for the delay in responding to your
question.

Retailers may use a cash basis, an accrual basis, or
any generally recognized accounting basis which correctly reflects the
operation of their business for reporting gross sales and taxable sales.
General books and records may be set upon the accrual basis of accounting, but
for sales tax reporting the cash basis of accounting may be used.

Your proposal is also acceptable as long as tax is
reported in a consistent manner which accurately reflects receipts of revenue
and export documentation.

As we discussed in our telephone conversation, your
firm can avoid the problems involved with collecting and then refunding sales
tax by following this procedure:

Make arrangements with licensed customs brokers along
the border to act on behalf of your firm receiving items you ship them and
delivering them to your customers.

When your firm sells an item for export to Mexico, ship
the item to the broker in the city where the customer plans to cross into
Mexico rather than giving the customer possession of the item at your place of
business.

Instruct the broker to deliver the item to the customer
as they enter Mexico and at a point where the item is irrevocably committed to
the stream of export.

This procedure works because a sale is not complete
until a customer receives title to or possession of a taxable item. In this
case, the customer does not take possession of the item until it is irrevocably
committed to the stream of export and your firm has no problem obtaining valid
export documents because they compensate the broker directly.

This opinion is rendered 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. 3-4680. The direct line is
512/463-4680. You may also write to Tax Policy, Comptroller of Public
Accounts. My Internet address is [email protected].

Sincerely,

Al Van Allen
Tax Policy Division

NOTE: Previous Accession Number 9609680L