My direct payment permit is being canceled because the Comptroller says I didn't buy $800,000 of taxable items this year, even though I did — I just didn't accrue that much use tax on it. Will my permit be canceled?

Subject

Direct Payment Permit — Requirements And Responsibilities

Plain-English summary

A direct payment permit holder received notice on December 13, 1996 that its permit would be canceled effective December 31, 1996, because the Comptroller's office believed the company did not meet the requirement of purchasing $800,000.00 worth of taxable items annually.

The company pushed back. In a phone conversation and a follow-up letter, it explained that it does purchase $800,000 or more of taxable items every year -- but many of those taxable items are used offshore or in other states, not in Texas, so less Texas use tax gets accrued on them. As an example, the company said it had purchased more than $7.5 million worth of pipe and equipment from Texas vendors that year, including $875,000 worth of special alloy line pipe destined for use in the company's field in Wyoming (i.e., outside Texas, so no Texas use tax applies to that pipe even though it was purchased through a Texas vendor).

The Comptroller agreed with the company. Tax Code Sec. 151.419(b)(3) sets the $800,000 threshold based on the dollar amount of taxable items purchased annually -- not on how much Texas use tax is actually accrued on those purchases. Because the company's purchases exceeded $800,000, it met the statutory requirement even though a portion of the resulting use tax liability fell outside Texas. As a result, the direct payment permit was not canceled.

What this means for you

Direct payment permit holders whose taxable purchases span multiple states

The $800,000 annual threshold under Sec. 151.419(b)(3) is measured by the amount of taxable items you purchase, not by how much Texas use tax you end up accruing. If a meaningful share of your purchased items are used out of state (and therefore don't generate Texas use tax), that doesn't shrink your purchase total for purposes of keeping your permit -- as long as your total taxable purchases still reach $800,000 a year.

Businesses facing a proposed permit cancellation notice

If the Comptroller notifies you that your permit may be canceled for falling short of the $800,000 threshold, check whether the shortfall calculation was based on accrued use tax rather than total taxable purchases. As this letter shows, the two figures are not the same thing, and only the purchase total controls under the statute.

Multi-state or offshore operators (e.g., oil and gas companies)

Purchasing equipment through Texas vendors for use in other states or offshore doesn't disqualify those purchases from counting toward the $800,000 threshold -- the statute looks at what was purchased, not where the resulting use tax liability lands.

Common questions

Q: Does my direct payment permit get canceled if I don't accrue $800,000 of Texas use tax in a year?
A: Not necessarily. Sec. 151.419(b)(3) requires $800,000 of taxable items to be purchased annually -- it does not require $800,000 of Texas use tax to be accrued on those purchases.

Q: What if some of my taxable purchases are used outside Texas?
A: Those purchases can still count toward the $800,000 threshold. The statute measures purchases, not the resulting Texas use tax liability.

Q: Was this company's permit ultimately canceled?
A: No. The letter concludes the permit "will not be canceled" because the company's total taxable purchases exceeded $800,000 annually.

Q: What should I do if I receive a cancellation notice I believe is based on a miscalculation?
A: This taxpayer responded to the Comptroller's cancellation letter by phone and in writing, explaining its actual purchase volume; you can contact the Tax Policy Division similarly if you believe your purchases meet the threshold even though your accrued use tax does not reflect it.

Citations and references

Statutes and rules:

• Tax Code Sec. 151.419(b)(3) (direct payment permit holder must purchase at least $800,000 of taxable items annually; measured by purchases, not accrued use tax)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9612184L

Original ruling text

December 20, 1996

Dear ***:

This is in response to your letter of December 20, 1996, responding to my
letter of December 13, 1996, notifying you of the cancellation of your
company's direct payment permit effective December 31, 1996.

My letter stated that your company did not meet the requirement of purchasing
$800,000.00 worth of taxable items annually. You stated in our telephone
conversation that your company does indeed purchase $800,000.00 or more of
taxable items annually. You went on to state that many of the taxable items
purchased are used offshore outside Texas and in other states.

Your letter states that your company has purchased in excess of $7.5 million
worth of pipe and equipment from Texas vendors this year and currently has
$875,000.00 worth of special alloy line pipe destined for use in the company's
field in Wyoming.

Texas Tax Code Section 151.419(b)(3) requires that $800.000.00 of taxable items
be purchased annually, not that Texas use tax be accrued annually on
$800,000.00 of the purchases. Therefore, direct payment permit account number
*** will not be canceled.

You may call toll free 1-800-531-5441, extension 3-4683 if you have any
questions or need more information. You may write to Tax Policy Division,
Comptroller of Public Accounts.

Sincerely,
Eddie C. Washington
Tax Policy Division