Who made the taxable sale when customers redeemed seven cheese labels for a free dish fulfilled by a Texas company?

Plain-English summary

Customers accumulated seven cheese labels and sent them to a Texas fulfillment company for a free dish. The Comptroller treated the labels as proofs of purchase, not coupons under Rule 3.301(e).

The dish was a gift to the customer, so there was no sale to that customer. Instead, the fulfillment company's transaction was a sale to the cheese company. Tax was due on dishes shipped to customers in Texas, measured by the dish cost plus shipping and handling charged to the cheese company.

What this means for you

The historical letter placed the taxable sale between the fulfillment company and the sponsor, not between the fulfillment company and the consumer receiving the gift. Texas destination and the sponsor's full fulfillment charge determined the tax described.

Common questions

Were the seven labels coupons? No. The letter called them proofs of purchase.

Was the free dish sold to the customer? No; it was a gift.

Who bought the dish for tax purposes? The cheese company.

What amount was taxed for Texas shipments? The dish cost plus shipping and handling.

Citations and references

• Texas Comptroller Rule 3.301(e), coupon definition distinguished by 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/8709L0838G01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

September 8, 1987

Dear ***:

Thank you for your letter regarding the applicability of sales tax to the
facts presented below:

An unrelated third party (i.e., the Cheese Company) is approached by a
Dish Company to put on the cheese products a coupon offering a free
dish. The Cheese Company sells it product to a grocer who sells its
product to a customer. The customer may be located anywhere in the
United States, including Texas.

Once the customer accumulates seven labels, they can remit these labels
to my client to receive a free dish. The Dish Company has notified my
client, who is located in Texas, of the anticipated sales volume for the
year and ship said inventory to my client and issues an invoice. My
client pays the invoice and provides a Texas resale certificate to the
Dish Company.

When the labels are received, my client ships the dishes to the customer
at Anywhere, USA, and subsequently bills the Cheese Company for the cost
of the dish, plus shipping and handling. The Cheese Company remits to
my client.

You indicated in a telephone conversation that the coupons are in fact
labels
which are accumulated and then sent in by customers to obtain a free
dish.
The labels are "proofs of purchase" rather than coupons as defined in
section(e) of Rule 3.301, which is enclosed for your reference.

Please find your questions with answers to follow below.

Question #1. Is this a sale to the customer at anywhere, USA?

Answer: No, the dishes are given to the customer.

Question #2. Is this a sale to the cheese company in Texas?

Answer: Yes, tax is due on all shipments to customers in Texas. Tax
would be collected by your client on the cost plus shipping and handling.

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
512/563-4600. You may write me at the Tax Policy Division.

Sincerely,
Julie Pesl
Tax Policy Division