Were sales of tangible personal property Texas receipts when an affiliated distributor took possession at an out-of-state warehouse before shipment to customers?

Plain-English summary

The sales were not Texas gross receipts because the distributor, through the affiliated finisher, took possession at a warehouse outside Texas.

The taxpayer manufactured semi-finished products and consigned them to an affiliated company for completion at an out-of-state facility. The affiliate stored the finished goods in its warehouse, but the taxpayer retained title until it sold the products to an affiliated distributor.

After the sale, the distributor contracted with the same affiliate to select and package the goods and deliver them to common carriers chosen and paid by the distributor. Those activities were performed under the distributor's supervision and direction.

The Comptroller concluded that, to the extent this arrangement caused the affiliate to take possession on the distributor's behalf at the warehouse, delivery occurred at that out-of-state location. The resulting sales were not Texas gross receipts for franchise-tax apportionment.

Currency note: This response applies the former franchise-tax receipts rules. Texas replaced that tax with the margin tax effective January 1, 2008.

What this means for you

Sellers using affiliated finishers or warehouses

Title and final customer shipment were not the only facts. The Comptroller focused on where the purchaser, through its agent, took possession.

Tax professionals

The answer is conditional. Confirm the agency relationship, control of packaging and shipping, carrier selection, and actual possession before applying the result.

Common questions

Q: Where did title transfer?
A: While the products were stored in the out-of-state warehouse.

Q: Who selected and shipped the products?
A: The affiliated company, acting under the distributor's direction.

Q: Why were the sales non-Texas receipts?
A: Delivery occurred where the distributor's agent took possession outside Texas.

Citations and references

• The letter applies the former Texas franchise-tax tangible-personal-property delivery rule but cites no specific section or rule number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9910269L

Original ruling text

October 18, 1999

Dear **:

Thank you for the information contained in your letter of October 15, 1999
concerning a taxpayer's sales of tangible personal property ("TPP") to an
affiliated distributor ("Distributor"). This response represents the franchise
tax implications of the situation described in the ruling request.

You have indicated that the taxpayer produces semi-finished products and then
ships these items to an affiliated company ("COMPANY A") to complete the
manufacturing process. At the end of the manufacturing process, the products
are stored in a warehouse owned by COMPANY A. This warehouse is located
outside of Texas. The taxpayer consigns the products to COMPANY A for
finishing, but does not transfer title to COMPANY A.

After finishing has been performed by COMPANY A, the taxpayer sells the
products to the Distributor. Title transfers to Distributor while the products
are stored in the warehouse.

The Distributor contracts with COMPANY A to select the finished products needed
to fill the ultimate customer's order, package the products, and ship the
products directly from COMPANY A's facilities to Distributor's customers.
COMPANY A is directed to deliver the packaged product to common carriers
selected by and paid by Distributor. These activities of COMPANY A are under
the supervision and direction of Distributor.

To the extent the Distributor's contractual arrangement with COMPANY A results
in COMPANY A taking possession of the TPP purchased by Distributor at COMPANY
A's warehouse, delivery will be considered to occur at the warehouse. Storage
at the warehouse by COMPANY A on behalf of the Distributor along with the
activities described above would indicate that COMPANY A has taken possession
of the TPP purchased by Distributor. Because delivery occurs at the warehouse
located outside Texas, the sales in question would not be apportioned as Texas
gross receipts for franchise tax purposes.

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

If you have any questions, please call toll-free 1-800-531-5441, extension
3-4496 or (512) 463-4496.

Sincerely,

Jerry Bobbitt
Tax Policy Division