What documentation does a Texas seller need to prove a sale was shipped out of state and is exempt from Texas sales tax?

Subject

Out-of-State Shipment — Shipped By Retailer/Seller Of Items — Documentation And Guidelines

Plain-English summary

A tax professional wrote in on behalf of a Texas software developer, asking what kind of documentation is acceptable to confirm that a sale was shipped out of state -- and therefore exempt from Texas sales tax. The client sold software to customers outside Texas and delivered it by Federal Express, U.S. Postal Service, and e-mail (i.e., by modem).

The Comptroller explained that Section 151.330(a) of the Texas Tax Code exempts sales of tangible personal property that, under a sales contract, is shipped to a point outside Texas -- as long as the seller does the shipping, either through its own facilities, by delivering to a carrier for shipment to an out-of-state consignee, or by delivering to a forwarding agent for shipment to another state. The seller carries the burden of proving entitlement to the exemption by clear and convincing evidence.

On documentation specifically, the Comptroller drew a clear line:

• Acceptable: shipping documents (a bill of lading, Federal Express receipt, or postal receipt) together with an invoice showing an out-of-state shipping address.
• Not acceptable: the computer database the requester described.
• For modem-delivered software: phone records or computer logs showing an out-of-state area code, together with an invoice, are acceptable proof.

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

What this means for you

Software companies and other out-of-state shippers

If you're relying on the Section 151.330(a) exemption for sales shipped out of Texas, keep actual shipping records -- a bill of lading, FedEx receipt, or postal receipt -- paired with an invoice showing the out-of-state address. According to this ruling, a customer database by itself will not satisfy the Comptroller as proof of an exempt sale.

Sellers delivering digital products by modem or download

For software or other digital deliveries sent electronically (in 1996, "via modem"), the acceptable substitute for a shipping receipt is phone records or computer logs showing an out-of-state area code, combined with an invoice for the sale.

Accountants and tax professionals

Remember that the burden of proof for the out-of-state shipment exemption sits with the seller, and the standard is "clear and convincing evidence." Advise clients to retain carrier receipts and out-of-state invoices as their primary support, since this ruling shows the Comptroller will reject database-only recordkeeping.

Common questions

Q: What documents does the Comptroller accept as proof of an out-of-state sale?
A: Shipping documents -- such as a bill of lading, Federal Express receipt, or postal receipt -- along with an invoice showing an out-of-state shipping address.

Q: Is a customer database enough to prove the sale was shipped out of state?
A: No. The letter specifically says the computer database described by the requester is not acceptable proof of out-of-state sales.

Q: What about software delivered by modem instead of physically shipped?
A: Phone records or computer logs showing an out-of-state area code, together with an invoice, are acceptable proof of an exempt sale.

Q: Who has to prove the sale qualifies for the exemption?
A: The seller. The letter states the seller "carries the burden to prove by clear and convincing evidence that it is entitled to the exemption."

Q: What Texas law creates this exemption?
A: Section 151.330(a) of the Texas Tax Code, which exempts tangible personal property shipped under a sales contract to a point outside Texas when the seller handles the shipment.

Citations and references

Statutes:

• Section 151.330(a) of the Texas Tax Code (exemption for sales shipped by the seller to a point outside Texas)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9611839L

Original ruling text

November 5, 1996

Dear ***:

Thank you for your recent letter. You asked that we specify what type of
documentation is acceptable to confirm out-of-state sales.

As I understand it, you represent a Texas client that
develops software. The client may sell the software to customers outside of
Texas. The client will deliver the software to out-of-state customers via
federal express, U. S. Postal Service, and e-mail.

Section 151.330(a) of the Texas Tax Code exempts sales
of tangible personal property that under a sales contract is shipped to a point
outside this state...if the shipment is made by the seller by means of:

.. the facilities of the seller;

.. delivery by the seller to a carrier for shipment to a consignee at a point
outside this state; or

.. delivery by the seller to a forwarding agent for shipment to a location in
another state of the United States or its territories or possession.

To claim this exemption, your client carries the burden
to prove by clear and convincing evidence that it is entitled to the exemption.

This office recognizes shipping documents, such as a
bill of lading, federal express receipt, or postal receipt, and an invoice with
an out-of-state shipping address as sufficient proof of an out-of-state sale.
The computer database you described is not acceptable proof of out-of-state
sales.

For software sales sent to an out-of-state customer via modem, the phone
records or computer logs showing an out-of-state area code and an invoice
are acceptable proof of an exempt sale.

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

Should you require additional information, please feel free to contact me
toll free at 1-800-531-5441, extension 3-4987, or you may call me directly
at 463-4987.

Sincerely,

Karey Barton, Manager
Tax Policy Division