Is artwork and packaging material sold to manufacturers (for their packaging, containers, labels, and displays) exempt from Texas sales tax, and how can a client get a refund for tax already paid?

Plain-English summary

A design firm serving two manufacturer clients creates artwork for packaging, containers, displays, and labels, sometimes just supplying the design (with a printer doing the printing) and sometimes handling the printing itself. The firm believed (citing Rule 3.314(b)(1) and Rule 3.300(d)(5)-(6)) that manufacturers shouldn't pay sales tax on the design/artwork production or on the resulting printed packaging/containers/labels/displays, and asked the Comptroller to confirm.

The Comptroller's answer confirms most of this but draws a line at displays: sellers should accept a manufacturer's exemption certificate in lieu of tax when selling wrapping/packaging materials. A manufacturer creating its own wrapping, packaging, inserts, or product-use brochures is treated as "printing or imprinting tangible personal property for sale," and may issue an exemption certificate for production artwork that's necessary and essential to that printing process, under Tex. Tax Code § 151.318(t). But displays or racks are generally taxable -- the firm hadn't explained enough about how the displays were used for the Comptroller to extend the exemption there.

The letter also answers a refund-mechanics question: if tax was previously paid in error on qualifying artwork/packaging, the seller has two options -- assign its right to a refund to the customer (via a Vendor's Request for Refund and Assignment of Right to Refund form, letting the customer deal with the Comptroller directly), or, thanks to a brand-new law (Senate Bill 1319, effective October 1, 1999), a permitted customer can simply take credit for the tax paid in error directly on its own sales and use tax return.

What this means for you

Design firms and printers serving manufacturer clients

Artwork and printing for a manufacturer's own packaging, containers, and labels can be sold/produced tax-free with an exemption certificate -- but don't extend that same assumption to display racks or similar promotional fixtures without more specific facts, since those are generally taxable.

Manufacturers correcting past tax overpayments on packaging artwork

As of October 1, 1999 (Senate Bill 1319), you can take credit for tax paid in error directly on your own sales tax return -- you don't need to route every refund claim through your vendor.

Accountants and tax professionals

This letter distinguishes packaging/container/label artwork (exempt under § 151.318(t)) from display/rack artwork (generally taxable) -- a useful line to apply when a client's packaging vendor also supplies point-of-sale displays.

Common questions

Q: Is artwork for a manufacturer's packaging or labels exempt from sales tax?
A: Yes, per this letter, under Tex. Tax Code § 151.318(t) via a manufacturer's exemption certificate.

Q: Are point-of-sale displays or racks covered by the same exemption?
A: Generally no, per this letter -- displays/racks are taxable absent more specific facts showing otherwise.

Q: How can a manufacturer recover sales tax paid in error on exempt packaging artwork?
A: Either have the vendor assign its refund right to the manufacturer (via a Vendor's Request for Refund and Assignment of Right to Refund form), or -- since October 1, 1999 -- take credit directly on the manufacturer's own sales tax return under Senate Bill 1319.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.318(t) (production artwork exemption)
• 34 Tex. Admin. Code Rule 3.314(b)(1) (packaging materials exemption)
• 34 Tex. Admin. Code Rule 3.300(d)(5)-(6) (printers/imprinters)
• Senate Bill 1319, eff. 10/01/1999 (credit for tax paid in error on the taxpayer's own return)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911870L

Original ruling text

November 7, 1999

Dear **:

Thank you for your recent letter in regard to artwork and packaging materials
sold to manufacturers.

You have two clients who are manufacturers. You design the artwork that goes on
the manufacturer's packaging, containers, displays and labels. You give the
manufacturers a disk that contains this artwork, and they have the art that was
designed printed on the packaging by a printer. Sometimes you not only design
the artwork, but also handle the actual printing of the packaging.

It is your understanding that, according to Section 3.314 (b)(1)) and Section
3.300 (d)(5-6)), the manufacturers should not pay sales tax on the production
of any design or artwork that is used on their packaging or on the resulting
printed packaging, containers, labels or displays that have this artwork
printed on them.

Response. You should obtain an exemption certificate in lieu of tax when
selling wrapping and packaging materials to manufacturers. You did not explain
the use of displays. Generally speaking, displays or racks are taxable. A
manufacturer that creates their own wrapping and packaging materials, inserts,
or brochures concerning the use of their product being sold is considered to be
printing or imprinting tangible personal property for sale. As such, they may
issue an exemption certificate in lieu of tax for production art work that is
necessary and essential to and used in connection with the printing process.
See Texas Tax Code 151.318 (t).

You also ask if there is any way to have the clients request the refund
directly from the Comptroller's office, without your firm having to get
involved. There are actually two methods. You can assign your right to a
refund to the customers and they can request the refund from our office
directly. Obtain a right to a Vendors Request for Refund and Assignment of
Right to Refund form at:
. If your client
is permitted for Texas tax collection, they may take credit for taxes paid in
error directly on their own sales and use tax return. This is due to recent
legislation (Senate Bill 1319) effective October 1, 1999.

This opinion is based on the facts presented. Different facts though similar,
may result in different answers. If you have any questions or need more
information, you may call me toll free at 1-800-531-5441, extension 5-0613.
You may also write to Tax Policy Division, Comptroller of Public Accounts, Post
Office Box 13528, Austin, Texas 78711.

Sincerely,

Kevin Koller
Tax Policy Division