I personally paid sales tax when I bought a business's inventory in a rush with my own personal funds, then transferred that inventory to a partnership I formed the next day to run the business. Since there was no real change in ownership, can I get that sales tax refunded even though the partnership (not me personally) has the sales tax permit?

Plain-English summary

Facing a same-day deadline, an individual bought a bankrupt company's inventory of ceiling fans and light fixtures with a personal cashier's check (which included state sales tax) because there wasn't time to set up a business entity first. The very next day, he formed a partnership to hold the inventory going forward, got a Federal EIN, and obtained his own sales tax permit — but that permit was issued in the partnership's name, and he personally owns 90% of the partnership plus is sole owner of the 1%-owning general-partner entity.

He then asked the original seller for a refund of the sales tax he'd personally paid, arguing there had been no real change in ownership of the goods. The seller refused to refund it unless he had a sales tax permit issued in his own name (not the partnership's) — and separately, the seller still had the money and hadn't yet remitted it to the state.

The Comptroller sided with the seller's position, explaining that Texas follows the separate legal entity theory: a partner and a partnership, though related, are separate legal entities in fact and by law, and that separateness cannot be disregarded just to exempt a sale between related parties. Because the inventory was legally sold to him as an individual — not to the partnership — he personally needs his own sales tax permit, must issue the seller a resale certificate under his own permit number, and must request the refund himself. Only after that can he transfer or sell the inventory to the partnership, taking back the partnership's resale certificate instead of collecting tax on that transfer.

What this means for you

Individuals who personally front a business purchase before forming an entity

If you buy inventory personally (even in a rush, with your own funds, intending it for a business you're about to form), Texas treats you as the taxable purchaser in your own right. To recover sales tax you paid, you need your own sales tax permit and must issue the resale certificate yourself — a permit issued later in your new entity's name won't retroactively cover a purchase you made as an individual.

People forming a partnership or company around an existing purchase

Plan your entity formation and permit applications before the purchase whenever possible. If timing forces you to buy personally first, expect to need a personal sales tax permit to claim any resale-based refund, even if you intend to immediately transfer the goods to the entity you're forming.

Accountants and tax professionals

A clean illustration of Texas's separate legal entity theory applied to the common "I bought it personally, meant it for my new entity" fact pattern: ownership and permit status track the actual legal purchaser at the time of sale, and related-party intent afterward doesn't collapse that distinction for tax purposes.

Common questions

Q: I personally paid sales tax on inventory I meant to run through my new partnership — can the partnership's sales tax permit be used to get that tax refunded?
A: No. Since you bought the inventory as an individual, you need your own sales tax permit (not the partnership's) to issue a resale certificate and claim the refund.

Q: Why does it matter that I own most of the partnership?
A: Texas follows the separate legal entity theory — a partner and a partnership are separate legal entities even when closely related by ownership, and that relationship doesn't erase the distinction for sales tax purposes.

Q: How do I ultimately get the inventory into the partnership tax-free?
A: Get your own sales tax permit, issue the original seller a resale certificate and claim your refund, then transfer/sell the inventory to the partnership and take back the partnership's own resale certificate instead of collecting tax from it.

Q: Can I rely on this letter for my own situation?
A: No. This opinion is based on the facts presented; other facts, though similar, may provide a different result.

Citations and references

No Texas Tax Code section or administrative rule is cited by number in the original letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200004177L

Original ruling text

April 5, 2000

Dear **:

Thank you for your recent inquiry. Your fact situation is restated below,
followed by my response.

Last December, I had an opportunity to purchase an inventory (located in Texas)
of ceiling fans, light fixtures, etc., from ** (COMPANY A), which
had placed the owning company in bankruptcy. I had to make the decision to
purchase the inventory within a few hours, because the bank officer was in
** for only that day. I did not have time to set up a new entity to
handle this purchase, I made the purchase with a cashier's check drawn on my
personal funds. The cashier's check to COMPANY A was for $**, which
was $** for the merchandise and $** for state sales
tax.

The next day, I had my attorney to draw up the papers for **
(COMPANY B), the entity would keep track of the inventory, all sales, and pay
sales tax due to your office. As soon as COMPANY B was created, I applied for a
Federal employer ID number, and when I received, I applied for a sales tax
permit and was issued permit **.

I own 90% of COMPANY B and am the sole stockholder of ** (COMPANY
C), the general partner and 1% owner of COMPANY B.

I faxed a request (copy enclosed) to PERSON D, Vice President of COMPANY A
(**), the office from whom I purchased the merchandise, for a
refund of the state sales tax. She informed our office that COMPANY A could not
refund this sales tax unless I had a sales tax permit issued in my name. PERSON
D also advised this office that COMPANY A still had the sales tax money, it had
not been sent your office.

I related the above to Don Dilliard, one of your senior consultants, and he
advised me to write to you for clarification of this matter. I feel entitled to
a sales tax refund, since there was no real change of ownership of the
merchandise.

Response: Our records do not reflect that COMPANY A is permitted to collect
and report Texas sales and use tax. COMPANY A must either remit the tax to
Texas or issue you a refund upon receiving a valid resale certificate. I spoke
with PERSON D, she indicated that COMPANY A would be willing to refund the tax
to you if you provided them with a sales tax permit number issued in your name.
This is because the inventory was sold to you as an individual rather that to
COMPANY B.

Texas subscribes to the separate legal entity theory. It is a fundamental
principal (reflected in the policy of this agency) that a partner and a
partnership, though related, are separate legal entities in fact and by law.
Their separate natures may not be disregarded to exempt sales of taxable items
involving the related entities. Therefore, in order for the inventory to be
exempted from sales tax, you will need to obtain a sales tax permit and issue
the vendor a resale certificate using the sales tax number assigned to you and
requesting a refund of the sales tax paid on the inventory. You may then
transfer or sell the inventory to COMPANY B, taking back COMPANY B's resale
certificate in lieu of collecting sales tax from COMPANY B on the transaction.

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