How was use tax computed when a permit holder withdrew inventory and transferred interests to joint owners?

Plain-English summary

The company bought inventory tax-free with a direct-payment exemption certificate and consistently reported use tax when property was first removed for Texas use. It owned the full interest while the property was stored, then transferred partial interests to joint owners at current market value when the property was withdrawn and first used.

The taxable value was the company's original purchase price, not the current market value charged to the joint owners. The applicable rate was the rate in effect when the item was purchased, even when the rate was higher by the withdrawal date. If the company overpaid by using the wrong value or rate, it could take a credit on future direct-payment returns.

Common questions

Which value controlled? The transferor's purchase price. Which tax rate controlled? The rate in effect when the item was purchased. Could an overpayment be recovered? Yes, by credit on future direct-payment returns under the stated facts.

Citations and references

• 34 Tex. Admin. Code Rules 3.288(g) and 3.346(b)(1)(C) — cited as supporting the company's consistent inventory-withdrawal reporting procedure.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8505L0645D13

Original ruling text

May 23, 1985

Dear ***:

Thank you for your recent letter which is restated with response below.

Our client wishes to have a written response to the following facts and
related questions regarding the application of sales and use tax on
joint ownership transfers of interests in tangible personal property
by Direct Payment Permit holders.

FACTS

The Company maintains an inventory of tangible personal property which
is purchased tax-free by issuing a Direct Payment Exemption Certificate.
It is not known at the time of storage if the property will be used in
Texas. The Company has elected to report the use tax when the property
is first removed from inventory for use in Texas. The tax is reported
in a consistent manner. This procedure is acceptable in accordance with
Rules 3.288 (g) and 3.346 (b)(1)(c).

The Company owns the entire interest in the property when it is in storage.
When the property is removed from storage and first used part ownership is
transferred to joint owners. The joint owners are charged at the Current
Market Value at the time of transfer.

QUESTIONS

1. What is the taxable value of tangible personal property transferred from
   tax-free inventory to a Joint Ownership Account, the purchase price paid by the
   transferor, or the current market value which is used to charge joint interest owners?

Response: The purchase price.

2. What tax rate should be utilized when tangible personal property is purchased
   during a period when the sales tax rate is 4%, but the item is removed from a
   tax-free inventory when the sales tax rate is 4.125%?

Response: The tax rate is in effect when the item is purchased.

3. If tax should be overpaid because the Company used the incorrect taxable value
   and/or the incorrect tax rate, would the Company be able to take a credit on
   future Direct Payment Returns in order to recover the erroneously paid tax?

Response: Yes.

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

If you have any questions or need more information, please call us at
1-800-252-5555 toll free from anywhere in Texas. You may write us at the Tax
Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division