If a Texas printing company splits its printing and fulfillment (storage/shipping) operations into two separate related companies, how does each company charge Texas sales tax, and does the out-of-state shipment exemption still apply?

Plain-English summary

A Texas company printed "point-of-purchase" marketing materials (signs, decals, displays) for multi-location retail chains and also provided fulfillment — storing customers' materials, then pulling, boxing, and shipping them to individual store locations on request. It planned to split into two separate legal entities: Print Company (printing, design, and its own kitting/shipping of freshly printed jobs) and Fulfillment Company (storage, handling, and shipping of materials from its warehouse — whether printed by Print Company or a competitor). It asked how each company should charge Texas sales tax after the split.

The Comptroller ruled the two sides land very differently. Print Company must charge tax on everything that's part of its sale of printed materials — the printing itself, plus design, database/technology services, "kitting" (handling), and account management, since all of those are "part of the sales price" under § 151.007. That includes printed material it ships in-state, and — notably — printed material it hands off to a Texas fulfillment house (its own new sister company or a competitor) for storage before eventual shipment, even if that shipment ultimately goes out of state. The out-of-state shipment exemption only survives if Print Company itself ships directly out of state under shipping instructions received at or before the print order — storing goods in Texas first before shipping defeats the exemption regardless of final destination. Fulfillment Company's charges, by contrast, are not taxable at all, because storage, handling, and freight provided on a standalone basis (not bundled into a sale of tangible personal property) aren't taxable services in Texas — as long as the split reflects real economic substance: separate employees, separate arm's-length contracts, and no bundled discounts for customers who buy from both companies.

What this means for you

Printers, marketing-materials companies, and fulfillment/logistics providers

Whether your storage and shipping charges are taxable often turns on who is providing them and how the charge is bundled. Charges for transportation, handling, or storage that are part of the same transaction as a sale of tangible personal property are taxable; the same services billed standalone, by a separate provider unrelated to that sale, are not. If you're considering restructuring a combined print-and-fulfillment business into separate entities to change this tax treatment, this ruling shows the Comptroller will scrutinize whether the split is real (separate staff, arm's-length pricing, no packaged discounts) or just a paper reorganization.

Businesses relying on the out-of-state shipment exemption

Don't assume goods eventually leaving Texas are automatically exempt. This ruling draws a hard line: if a taxable item is stored in Texas by a fulfillment provider before being shipped — even to an out-of-state destination later — the exemption under § 151.330(a) does not apply. Only shipment directly out of state by the seller (via its own facilities, a common carrier, or a forwarding agent), under instructions given at or before the order, preserves the exemption.

Accountants and tax professionals

The key statutory hook is § 151.007(a)(2)-(3): charges for "other expenses" and services "that are a part of the sale" are folded into the taxable sales price. STAR Accession Nos. 200503294L (2005, standalone storage) and 9911847L (1999, standalone fulfillment charges) are the cited authorities for why unbundled fulfillment escapes tax — worth pulling for any client considering a similar restructuring.

Common questions

Q: If printed materials eventually ship out of state, is the sale always exempt?
A: No. The exemption requires the seller to ship directly out of state (by its own facilities, common carrier, or forwarding agent) under instructions given at or before the order. If the goods are stored in Texas first — even briefly, by any fulfillment provider — before eventual shipment, the sale is taxable regardless of the final destination.

Q: Are storage and shipping charges always taxable?
A: Not if they're billed standalone by a provider that isn't also selling you the underlying tangible personal property. Storage, handling, and freight charged separately from a sale of goods are not taxable services in Texas (subject to a few exceptions like motor vehicle storage).

Q: Does splitting a business into two related companies automatically change the tax result?
A: Only if the split has real economic substance — separate employees and operations, arm's-length contract pricing, and no manipulation of pricing between the two companies to shift revenue away from tax. A split that's economically real can separate taxable printing charges from non-taxable fulfillment charges.

Q: Can another printing or fulfillment company rely on this ruling?
A: No. It binds the Comptroller only for the taxpayer (and its named successor entities) and the facts presented; a different corporate structure or bundled pricing arrangement could be treated differently.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.010 (taxable item); § 151.051 (sales tax imposed); § 151.007(a)(2)-(3) (sales price includes services/expenses part of the sale)
• Tex. Tax Code § 151.330(a) (interstate shipment exemption); § 151.302 (sales for resale)
• 34 Tex. Admin. Code § 3.303(b)-(c) (transportation and delivery charges); § 3.315 (standalone storage exception for motor vehicles)

Cited prior guidance:

• STAR Accession No. 200503294L (Mar. 8, 2005) — standalone storage not taxable
• STAR Accession No. 9911847L (Nov. 1, 1999) — standalone fulfillment charges not taxable

Source

• Landing page (STAR search): https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201912013L

Original ruling text

December 12, 2019

RE: Private Letter Ruling No. PLR20191025163056

** Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[ENDNOTE: (1)] We are responding to your initial inquiry dated Oct. 23, 2019, as well as clarifications you provided on Nov. 4, 2019. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights. The detrimental reliance is also extended to ** and COMPANY, the two of which will succeed ** in conducting the activities at issue.

Taxpayer requested guidance on the division of the business activities of **, which is currently providing printing and fulfillment. Going forward, the two related but separate entities will each provide one of the activities. Taxpayer wishes to know the tax responsibilities for each.

Facts Presented

** (Taxpayer) is a company located in CITY, Texas. As relevant to this request, Taxpayer undertakes two activities, both of which relate to point-of-purchase marketing. Point-of-purchase marketing means the placement of promotional signs or advertisements at locations where consumers pay for products and services (such as gas station pumps and counters and the windows at a drive-through restaurant). It also includes the provision of give-away items to consumers to generate brand recognition or to promote a particular product or service.

Taxpayer prints and sells point-of-purchase marketing materials. Taxpayer’s customers are typically large, multi-unit companies predominantly within the retail gasoline, convenience store, or fast casual dining industries. Thus, a single corporate customer’s point-of-purchase marketing needs typically span a host of individual store locations.

Taxpayer also provides fulfillment services for point-of-purchase marketing materials. Taxpayer’s fulfillment service consists of: (1) leasing storage space within Taxpayer’s facility for a customer to store its advertising materials; (2) handling (i.e., retrieving customer-selected items from the customer’s leased storage space and packing them into boxes); and (3) shipping the customer’s boxed items as instructed by the customer.

Taxpayer prints custom marketing materials for which unrelated third-parties provide fulfillment services, and Taxpayer provides fulfillment services for items printed or produced by unrelated third-parties.

Taxpayer currently provides both printing and fulfillment services through a single legal entity. Taxpayer intends to divide its print and fulfillment operations into two separate legal entities.

Taxpayer intends to accomplish the separation as follows. Taxpayer would transfer its fulfillment activity to an existing, but not previously used, entity. The current entity (Taxpayer) would then serve as Print Company, providing the point-of-purchase management detailed above. It will invoice its customers only for the work it performs, including creative advertising design services, technology services (e.g., maintenance of a database containing customer store information), production of the printed materials, distribution (handling and/or freight), and account management. Handling charges will be reflected as “kitting” charges on Print Company’s invoices consistent with industry terminology.

The new, separate entity, Fulfillment Company, will provide fulfillment services for items, produced both by Print Company and unrelated entities. Fulfillment Company will invoice its customers only for the work it performs (storage, handling, and/or freight). Fulfillment Company may also begin charging a receiving fee, as done by many fulfillment houses, to receive items into its warehouse and place them into customer inventory.

As part of the division of the print and fulfillment activities into Print Company and Fulfillment Company, customer contracts would be amended and created. Specifically, to the extent that there are shared customers between print and fulfillment within the current, single entity, Print Company would amend these customer contracts to exclude the provision of fulfillment services but otherwise maintain the pricing and other terms previously negotiated with customers. Then, Fulfillment Company would enter into its own contracts with these customers.

Taxpayer states that, as with all closely-held, related entities, Print Company and Fulfillment Company will have some degree of overlapping use of employees and assets either out of necessity or to achieve efficiency. However, it is neither company’s intention or usual business practice to employ overlapping workers or assets, although it may occur. For example, following the division of Taxpayer’s two activities, the two entities will occupy a single building and share accounting staff. And, there may be some employee cross-over during periods of increased work demands; however, any overlap will be limited by the different skillsets required to perform each company’s work. The entities’ core business activities and day-to-day operations will be performed by separate employees using separate assets that are housed in separate areas of Taxpayer’s building.

Print Company employees will generally work an eight to twelve-hour day, and will be trained to perform pre-press, press, and post-press activities. Print Company’s kitting and freight activities will entail boxing newly printed customer materials and shipping them, by common carrier, to its customer’s pre-selected locations. For example, many of Print Company’s customers will have quarterly advertising promotions for which the company will be hired to print an assortment of point-of-purchase materials (e.g., pump topper signs, check-out counter signs, door decals) to be displayed at the customer’s stores during a specific promotional period. Upon completion of the printing, Print Company’s employees will then pack the appropriate items for each store into a box and ship them by common carrier. Print Company’s distribution (kitting and freight) will usually involve a large volume of shipments due to the number of customer stores needing point-of-purchase materials at the same time. Print Company will not be charging for storage.

In contrast, Fulfillment Company will store and then ship customer inventory upon receipt of orders from individual customer stores. Thus, Fulfillment Company’s employees, who typically work an eight-hour day, will receive customer orders for specific point-of-purchase materials (printed by Print Company or not), which they will then pull from the customer’s rented storage racks, pack into a box, and ship to the location of the store that requested the items.

The operations of Print Company and Fulfillment Company use different types of equipment and employ workers with different skills. As a result, they will hire and pay their own employees, who will receive training for the specific skillset required for their job. In sum, while some minor overlap in the assets and employees may occur, it is not the routine operations or business plans of Print Company and Fulfillment Company to do so.

Taxpayer states that, following its division of activities into Print Company and Fulfillment Company, each entity’s contracts will be negotiated at arm’s-length. Both Print Company and Fulfillment company will negotiate with their third-party customers pricing that appropriately reflects the scope and volume of work, regardless of whether the customer contracts for one or both of the companies’ services. The entities have no present plans to offer common customers discounts based upon their purchase of multiple services and Taxpayer states it is not common industry practice. Neither entity intends to alter its pricing structures to decrease print revenue and increase fulfillment revenue so that it may reduce the revenue subject to tax.

Questions, Rulings, and Analyses

Our restatement of Taxpayer’s questions is shown below, followed by our responses and analyses.

Question One: After restructuring, how should Print Company charge or remit Texas sales and use tax on in-house printing and other charges that are part of the sale?

Ruling: Print Company must collect tax on all in-house printing and charges that are part of the sale, absent applicable exemption. Charges that are part of the sale include charges for creative advertising design services, technology services (e.g., maintenance of a database containing customer store information), transportation, handling (i.e., “kitting”), and account management.

Print Company must collect tax on in-house printing that is shipped in-state and all in- house printing that is stored in Texas by Fulfillment Company or a different Texas fulfillment house, regardless of whether the ultimate shipping destination is later determined to be in-state or out-of-state.

Analysis: Texas imposes a sales tax on each sale of a taxable item, which includes tangible personal property and taxable services, in this state. Sections 151.010 (Taxable Item) and 151.051 (Sales Tax Imposed). The total amount for which a taxable item is sold includes “labor or services employed, other expenses, and a service that is a part of the sale,” as well as “transportation or installation of tangible personal property.” Sections 151.007(a)(2) and (a)(3) (“Sales Price” or “Receipts”), respectively.

As noted, tax is due on transportation and other services and expenses (e.g., “kitting”) that are part of the sale of a taxable item. Transportation includes freight, shipping, delivery, or postage. See Rule 3.303(c) (Transportation and Delivery Charges). However, transportation is not taxable when provided and charged by a third party and not the seller. See Rule 3.303(b).

Similarly, a charge for storage of tangible personal property by the seller before or after the sale is part of the sales price. It is an “other expense” as contemplated in Section 151.007(a)(3). However, a charge for storage of tangible personal property provided on a standalone basis, apart from certain exceptions (e.g., motor vehicle storage), is not taxable. See Rule 3.315 (Motor Vehicle Parking and Storage) and STAR Accession No. 200503294L (March 8, 2005). (“Storage of tangible personal property is not a taxable service when provided on a stand-alone basis and unrelated to the sale or rental of tangible personal property.”)

In addition, charges for fulfillment services, to include receiving inventory, transportation, handling, packaging and other expenses, such as storage, are not taxable so long as they are not part of the sales price of a taxable item. See STAR Accession No. 9911847L (Nov. 1, 1999). (“Charges for fulfillment services are not subject to sales tax . . .. A set-up fee related to . . . fulfillment service is not taxable.”)

Based on the foregoing provisions, Print Company’s sales price for in-house printing will include all expenses and charges that are part of the sale. Section 151.007(a)(2) and (3).

Furthermore, Print Company must collect tax on in-house printing that is shipped in-state and all in-house printing that is stored in Texas by Fulfillment Company or a different Texas fulfillment house, regardless of whether the shipping destination is later determined to be in-state or out-of-state.

Exemptions include the sale of tangible personal property that under the sales contract is shipped to a point outside the state by means of the facilities of the seller, delivery by the seller to a carrier for shipment to a consignee at a point outside the state, or by delivery by the seller to a forwarding agent for a shipment to a location in another state. Section 151.330(a) (Interstate Shipments, Common Carriers, and Services Across State Lines). This exemption applies to the sale of in-house printing and charges that are a part of the sale if Print Company ships the printed material out of state pursuant to shipping instructions received at or before the time of the print order. As noted earlier, the exemption does not apply to the sale of printed material and charges that are a part of the sale if the printed material is shipped in-state or if the printed material is stored in Texas, whether with Fulfillment Company or another Texas fulfillment house, and fulfilled at a later date. This is true regardless of whether the ultimate fulfillment destination is in-state or out-of-state.

Other exemptions include sales for resale. Section 151.302 (Sales for Resale).

Taxpayer states that Print Company will maintain the pricing and other terms previously negotiated with customers for printing and charges that are part of the sales price.

Additionally, “[t]he entities have no present plans to offer common customers discounts based upon their purchase of multiple services,” and also do not intend to alter their print and fulfillment pricing structures to decrease print revenue and increase fulfillment revenue so that they may reduce the revenue subject to Texas sales and use tax. Taxpayer also states that the two companies will hire and pay their own employees, who will receive training for the specific skillset required for their jobs, although there may be occasional overlap. As long as Print Company does not offer common customers discounts based upon their purchase of multiple services in the future, these factors as presented indicate that the two entities will function at arm’s length. Since the division of the two activities appears to exhibit economic substance, charges for Fulfillment Company’s services are separable from Print Company’s sales price for tax purposes.

Question Two: After restructuring, how should Fulfillment Company charge or remit Texas sales and use tax on its charges for fulfillment services (receiving inventory, storage, handling, and/or freight)?

Ruling: Fulfillment Company’s fulfillment services are not taxable.

Analysis: Transportation, storage, and fulfillment services are not taxable services unless they are part of the sale of tangible personal property. Because Fulfillment Company will provide and charge for the fulfillment services on a standalone basis, they are not part of the sale of the printed material by Print Company. See the response to Question One.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20191025163056.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.