Is artwork design and printing for a manufacturer's shipping containers exempt from Texas sales tax, including when the container doubles as an in-store display?

Plain-English summary

A design firm creates artwork for two manufacturer clients that gets printed onto shipping containers -- containers that, once the product reaches the retail store, have their tops removed and double as a display holding the product on the shelf. The firm sometimes just designs the artwork (handing off a disk for a separate printer to print) and sometimes both designs and prints the container itself. It asked whether it needed to charge its manufacturer clients sales tax on either the design work or the resulting printed containers.

The Comptroller confirmed the manufacturers can use a manufacturer's exemption certificate to buy the artwork/printing for shipping containers tax-free, even where that same container later functions as an in-store display -- because the item's primary role as a shipping container controls under Rule 3.314(b)(1). But the answer flips for artwork made specifically for a promotional display (not also serving as the shipping container itself): that is taxable when purchased by the manufacturer.

What this means for you

Manufacturers buying packaging/container artwork and printing

You can generally use a manufacturer's exemption certificate for artwork and printing that goes on your shipping containers, even if the container is designed to double as a retail display once opened. But if you're buying artwork purely for a standalone promotional display (not a shipping container), that purchase is taxable.

Design firms and printers serving manufacturer clients

Ask whether the item you're designing/printing is fundamentally a shipping container (even a dual-purpose one) or a pure display piece -- that distinction determines whether you can accept a manufacturer's exemption certificate for the charge.

Accountants and tax professionals

The controlling line here is shipping-container-that-also-displays (exempt) versus display-only (taxable) -- the dual function of a shipping container doesn't disqualify it from the packaging exemption.

Common questions

Q: Is artwork on a shipping container always exempt for a manufacturer?
A: Per this letter, yes -- even if the container later serves as an in-store display once opened, as long as it's fundamentally a shipping container.

Q: What about artwork for a promotional display that isn't also a shipping container?
A: That's taxable when purchased by the manufacturer, per this letter.

Q: Does it matter whether the design firm also does the printing, versus just providing a design disk?
A: Not for the exemption analysis in this letter -- the same shipping-container-vs-display distinction applies whether the design firm designs only or also prints.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.314(b)(1) (packaging materials manufacturing exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911914L

Original ruling text

November 23, 1999

Dear **:

This is in response to your request for a ruling to Mr. Kevin Koller, on the
following fact situation and question.

We have two clients who are manufacturers. We design the artwork that goes on
the shipping containers which are used to ship the product to the retailer.
When the container arrives at the retail outlet, the top is removed from the
shipping container and it then serves as a type of display which holds the
product while in the store.

We usually give the client a disk that contains the artwork, and they have the
art that we have designed printed on the shipping container by a printer.
Sometimes we not only design the artwork, but also handle the actual printing
of the container/packaging.

It is my understanding that, according to Section 3.314(b)(1), we do not need
to charge our clients who are manufacturers sales tax on the production of any
design or artwork that is used on these shipping containers, and we do not need
to charge sales tax on the resulting printed containers that have this artwork
printed on them. Is this correct?

Response: You may accept a manufacturer's exemption certificate for artwork
for shipping containers that can also be used to display the product shipped in
the container. Artwork for a promotional display is taxable when purchased by
a manufacturer.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division