Could a retailer use Texas's purchase-ratio sales-tax reporting method, and what records were required for exempt agricultural sales?

Plain-English summary

The Texas Comptroller denied the retailer permission to use the purchase-ratio method. The letter says the method was restricted to retail grocers, retailers with a separate grocery department, and retailers with less than 10% taxable sales that kept the required records. The requester fit none of those categories.

Because all seller receipts were presumed taxable, the retailer needed documents proving each deduction. For items exempt to every purchaser, such as the letter's examples of tomato plants and radish seeds, a dated detailed customer invoice describing the items and prices was sufficient.

For other tax-free sales, the retailer had to obtain at the time of sale and retain a properly completed certificate describing in detail the exempt use. General statements such as “to be used on a farm” or “agricultural use” were not acceptable, and the seller remained liable if the claimed exemption was invalid.

STAR's later alert says a 2011 law change added registration-number requirements for certain agricultural and timber exemptions effective January 1, 2012.

What this means for you

The reporting method was limited by seller type, not available by election to every retailer. The recordkeeping standard also distinguished universally exempt products from use-dependent agricultural claims.

Common questions

Who could use the purchase-ratio method under the letter? Retail grocers, retailers with a separate grocery department, and retailers with less than 10% taxable sales, subject to record requirements.

Could this retailer use it? No.

What proved sales of items exempt to all purchasers? A dated, detailed customer invoice identifying the items and sales prices.

What was needed for use-dependent exemptions? A timely, properly completed certificate describing the exempt use in detail.

Was “agricultural use” enough? No.

What later change does STAR flag? Registration-number requirements effective January 1, 2012 for certain agricultural and timber exemptions.

Citations and references

• H.B. 268, 82nd Texas Legislature, Regular Session (2011) — identified in STAR's alert.
• The enclosed reporting and exemption rules are not numbered in the 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/8703L0804B06

Original ruling text

ALERT: This document may be affected by changes to the Tax Code which was amended by H.B. 268, 82nd Reg. Legislative Session, 2011. The amendment required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a registration number issued by the Comptroller, effective 01/01/2012.

March 27, 1987

Dear **:

Thank you for your recent letter requesting permission to use a special
reporting method for sales of certain product lines.

The procedure you describe is commonly known as the "purchase ratio method."
This is one of the reporting methods allowed for in the sales and use tax
statute, but it is restricted to certain categories of sellers who keep
required records. These are retail grocers, retailers who have a separate
grocery department and any retailer who has less than 10% taxable sales.
Unfortunately, your operations do not come under any of these categories, and
you may not use this method.

All receipts of a seller are presumed taxable. In order to claim a deduction,
all sellers are required to keep documentation to prove why a sale is exempt.
In your case, a dated, detailed invoice made out to the customer, describing
the item(s) sold along with the sales price(s), will be sufficient for items
that are exempt to all purchasers, such as tomato plants and radish seeds. For
the remainder of your tax-free sales, you are also required to get from the
customer at the time of sale, and retain in your records, a properly completed
exemption certificate, describing in detail how the item being purchased will
be used in an exempt manner.

Please keep in mind that not all items used on a farm or ranch are exempt. If
an agricultural exemption does apply, a description like "to be used on a farm"
or "agricultural use" is not acceptable. Also, if the exemption claimed is
invalid, you will be held liable for the tax.

I am enclosing some rules for your reference.

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 me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,

Sandi Skaggs
Tax Policy Section
Tax Administration Division

PC: Dan Martinez
Corpus Christi Audit Office