What certificates and shipping records did a Texas seller need for offshore-use and export sales-tax exemptions?

Plain-English summary

For goods covered by Tex. Tax Code § 151.324, the seller could accept a complete exemption certificate in good faith from a company exploring for or producing minerals exclusively in international waters or a foreign country when the goods would be removed from Texas immediately. If the seller delivered the goods to the customer in Texas without obtaining a certificate, the seller incurred tax liability. If the seller delivered outside Texas using its own vehicle or a common carrier, its shipping records were sufficient.

The same exemption-certificate approach applied when the seller's vendor shipped directly to the customer. Vendor delivery did not destroy the exemption, but the letter said the exemption did not cover use of the materials within the United States.

For other property—such as film strips, toilet tissue, and towels—the seller could give its supplier a resale certificate when it did not yet know whether the goods would be sold domestically or exported. At the later sale, however, export had to be established or tax collected. The letter listed the proofs allowed under Rule 3.323(c)(1), including qualifying carrier bills of lading, certification from a licensed U.S. customs broker, destination-country entry documents, or specified carrier and freight-forwarder records. It also said the rule was to be revised to accept a motor-freight bill of lading combined with a freight forwarder's receipt; delivery to a forwarder by a carrier was acceptable in the described scenario, while delivery by the seller's or customer's truck was not.

Generic statements such as “oil production equipment” or “offshore use” were not enough. The exemption claim had to state that the property would be removed from Texas immediately for offshore mineral exploration or production outside the state. A purchase order could replace a separate certificate only if it contained the same statements and signature. Without the required exemption language, statements, and signature, the seller had to collect tax.

Common questions

Was a certificate required when the seller delivered qualifying goods to the customer in Texas? Yes. Without it, the seller incurred tax liability.

Did direct delivery by the seller's vendor eliminate the offshore exemption? No, if the qualifying goods were for exclusive use in international waters or a foreign country and were removed from Texas immediately.

Was “offshore use” sufficient exemption language? No.

Could a purchase order serve as the exemption certificate? Yes, only if it contained the same required statements and signature.

Did § 151.324 cover use elsewhere in the United States? No, according to the letter.

Citations and references

• Tex. Tax Code § 151.324 — offshore mineral-exploration and production exemption discussed throughout the letter.
• Texas Comptroller Rule 3.323(c)(1) — proof-of-export documentation for other property.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8602L0694F06

Original ruling text

February 5, 1986

Dear ***:

Thank you for your recent letter. Your various situations are restated
with responses below.

Situation 1. *** sells (i) drill pipe, casing, tubing and other
pipe used for the exploration or production of oil, gas, sulphur or other
minerals offshore not in this state and (ii) tangible personal property
exclusively used for the exploration for or production of oil, gas, sulphur
or other minerals offshore not in this state. ** may order these
items from its suppliers and hold the items in its inventory. In that
situation,* gives its supplier a resale certificate. When
**** receives an order for the goods in question, it then ships
the goods to its customer by means of either:

a) ***'s delivery vehicle:

b) common or contract carrier; or

c) the customer's vehicle

Please confirm that *** may rely on the exemption provided by
Texas Tax Code Section 151.324. What type of exemption certificate, if any,
is ** required to obtain from its customer? What type of
additional documentation, if any, is * required to obtain? In some
circumstances, foreign purchasers are not aware of or are not concerned with
the requirements of Texas sales tax law and fail to provide exemption certificates.
In that case, what type of documentation is sufficient for **** to prove
that the sales in question were exempt sales under Section 151.324?

Response: You may accept an exemption certificate in good faith from a
company exploring for or producing minerals exclusively international
waters or in a foreign country if the goods are to be removed from
Texas forthwith. No other documentation is necessary but their statement
must contain the information called for in the attached certificate.

You will incur a tax liability if you deliver the material to the customer in
Texas without obtaining a certificate.

If you deliver the goods out of state either by your vehicle or by a common
carrier, your shipping records will be sufficient to establish exemption.

Situation 2) Assume the same facts as in Situation No. 1, except that
*** purchases from its supplier and has its supplier deliver the
materials in question directly to **'s customer, what documentation
does * provide to its vendor and what documentation is ****
required to obtain from its customer?

In both Situations No. 1 and 2, please confirm as correct ***'
understanding that the sale of any of the goods described in Section 151.324 is
exempt if they are sold for use outside of this state whether for marine operations
or land operations.

Response: Again an exemption certificate would be appropriate if the
goods were to be used exclusively in international waters or a foreign
country and were removed from Texas forthwith. The fact that a vendor
delivered the goods would not void the exemption. However, this exemption
does not include the use of this material within the United States.

Situation 3) *** sells tangible personal property other than that
described in Section 151.324, for example, film strips, toilet tissue, towels,
etc. ** purchases these goods from its suppliers and places them in
its inventory. Please confirm as correct that* should give
**** resale certificate to its vendor.

When *** sells these products to a purchaser who will be using them
outside the United States, either on offshore rigs or in foreign land operations,
***** will deliver such tangible personal property to its customer by means of:

a) *** delivery truck:

b) a common or contract carrier; or

c) the customer's truck.

Please confirm as correct that in situations b) and c), *** will
discharge its sales tax obligations by obtaining from the carrier a receipt
indicating pickup and delivery to the freight forwarder or export packer.
Please confirm as correct that if the goods are shipped pursuant to a) above,
the signed receipt of the freight forwarder or export packer will be sufficient.

Response: *** may give its supplier a resale certificate if it does
not know at the time of purchase if the goods will be sold in the United States
or exported.

When these items are sold, the export must be established or tax must be
collected. In this situation rule 3.323(c)(1) would be relevant.

Proof of export may be shown only by:

A) a copy of a bill of lading issued by licensed and certificated carrier of
persons or property as defined by subsection (a)(3) of this rule which shows
the seller as consignor, the buyer as consignee, and a delivery point outside the
territorial lims of the United States;

B) documentation ;provided by a licensed United States Customs Broker certifying
that delivery was made to a point outside the territorial lims of the United States;

C) formal entry documents from the country of destination showing that the property
was imported into a country other than the United States.

D) a copy of the original airway, ocean or railroad bill of lading issued by a
licensed and certificated carrier as defined in subsection (a)(3) of this rule
which describes the items being exported and a copy of the freight forwarder's
receipt if the freight forwarder takes possession of the property in Texas.

Paragraph (D) above is to be revised to allow a combination of a bill of lading
from a motor freight company and a freight forwarders receipt to prove export.
Therefore (b) would be acceptable if delivery were to a freight forwarder while
(a) & (c) would not.

Situation 4) Assume the same facts as Situation No. 3 except that the goods are
delivered directly from ***' vendor to the freight forwarder or export
packer. Since ** does not have direct contact with the shipper or the
freight forwarder what documentation must **** obtain in order to satisfy
its sales tax obligations?

Response: Same as 3 above.

In a general sense, if a purchaser is claiming that a transaction is exempt from
tax pursuant to Section 151.324, will the language on an exemption certificate
"oil production equipment" or "offshore use" or similar language be sufficient to
enable *** to accept the exemption certificate? Please confirm as
correct that if a purchaser includes such exemption language on **
purchase order instead of an exemption certificate, such language is acceptable
to discharge *' sales tax liability. Please also confirm as correct
that if a customer provides neither an exemption certificate nor language on
* purchase order, **** may in its confirmation or invoice use
confirmatory language to establish the tax free nature of the transaction

Response: The statements you mention "oil production equipment" or "offshore
use" are not sufficient to validate an exemption claimed under section
151.324.The language should make it clear that the property is to be removed
forthwith offshore not in this state for the exploration for or production of
oil, gas, sulphur or other minerals.

If a customers purchase order contains the same statements and signature as an
exemption certificate, another certificate is not necessary. However if the
exemption certificate language, statements and signature are not received, the
exemption from Sec. 151.324 has not been claimed and tax should be collected.

I am enclosing appropriate rules and copy of the statute for your use.

This opinion is based upon the facts you presented. If there are additional or
different facts, this 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
Tax Administration