When a gift basket bundles nontaxable food with taxable items (like candy or gift items), how is Texas sales tax applied to the package's price?

Plain-English summary

A gift-package retailer asked the Comptroller about the taxability of gift packages combining food and non-food items. First, the Comptroller sorted the food items themselves: among the food items listed, only candy, chocolates, soda pops, chocolate powder drinks, and chewing gum are taxable — all the other food items listed are nontaxable.

For the mixed packages, taxability turns on the essential character of the complete package. If the taxable items (non-food gift items, plus any taxable food like candy) are the primary component, and there's a single price for the whole package, the ENTIRE sales price is taxable — though the retailer can buy the taxable components tax-free for resale by issuing a resale certificate to its suppliers. If instead the nontaxable food items are the primary component, the entire sale is exempt UNLESS the retailer separately charges for the taxable items — in which case only that separate charge is taxable. Notably, when a single bundled charge covers both nontaxable food and taxable items (nontaxable-primary scenario), the taxable items are not treated as purchased for resale, so the retailer must pay tax to ITS OWN suppliers on those taxable components instead.

What this means for you

Gift basket and specialty food retailers

Figure out which food items in your baskets are actually taxable (candy, chocolate, soda, chocolate drink powders, gum) versus nontaxable (most other food), then determine whether taxable or nontaxable items form the "primary" character of each basket design. That determines whether you charge tax on the whole basket, charge tax only on a separately stated taxable component, or owe use tax yourself on wholesale purchases of the taxable pieces.

Accountants and tax professionals

The resale-certificate mechanics flip depending on which side wins the essential-character test: taxable-primary baskets let you buy the taxable components for resale tax-free (since the whole bundled sale is taxed); nontaxable-primary baskets with a single bundled price mean you can't treat the taxable components as resold, so you pay tax on them yourself at purchase.

Common questions

Q: Are all food items in a gift basket nontaxable?
A: No — candy, chocolates, soda pops, chocolate powder drinks, and chewing gum are taxable even as "food"; other food items are generally nontaxable.

Q: How is a basket taxed if it mixes taxable and nontaxable items under one price?
A: It depends on which is the primary component — taxable-primary means the whole price is taxed; nontaxable-primary means the whole price is exempt (unless taxable items are separately charged).

Q: If nontaxable food is the primary component but I separately charge for a taxable item, what happens?
A: Only that separate charge is taxable; the rest of the bundled price stays exempt.

Q: Can another retailer rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9709761L

Original ruling text

September 17, 1997

Dear Ms. *****

Thank you for your letter of September 4, 1997. You asked that we address the
taxability of gift packages you will sell.

All of the items, except some of the food items, you will include in the gift
package are taxable items. Of the food items listed in Section H of your
letter, only candy, chocolates, soda pops, chocolate powder drinks, and chewing
gum are taxable. The remaining food items are not taxable.

When a package contains both nontaxable food products and taxable items the
application of the tax on the selling price of the package depends upon the
essential character of the complete package. For example, if the taxable items
are the primary component of the package and a single charge is made for the
gift package, the entire sales price of the package is taxable. You may issue
a resale certificate, in lieu of paying tax, to the vendors supplying you with
the taxable items. You must collect tax on the selling price of the gift
package.

If the nontaxable food items are the primary component of the package, the
entire sale is exempt unless you make a separate charge the taxable items. If
you do make a separate charge for the taxable items, the separate charge is
subject to tax. In cases where a single charge is made for both the nontaxable
food items and the taxable items, the taxable items may be not purchased for
resale. You should pay tax to the vendors supplying the taxable items.

This opinion is 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. 5-0037. The direct line is
512/475-0037. You also may write to Sales Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Lindey Osborne
Sales Tax Policy Division