Were freight charges taxable when a separately operated common-carrier subsidiary billed the construction-material customer directly?

Plain-English summary

The construction-material seller used a wholly owned transportation subsidiary as well as independent carriers. The subsidiary was a separate legal entity, operated solely as a transportation company, functioned as a common carrier, and delivered for both its parent and outside companies.

When that subsidiary billed the customer directly for freight, entirely separate from the parent's materials bill, the Comptroller said the delivery charge was nontaxable.

What this means for you

The historical result depended on more than affiliate ownership. The carrier's separate legal and operating status, common-carrier business, service to outside companies, and independent direct billing were all part of the stated facts.

Common questions

Were the direct freight charges taxable? No, under the described arrangement.

Did common ownership make them taxable? Not on these facts. The carrier was separately incorporated and operated independently.

Did billing matter? Yes. The carrier billed the customer directly and separately from the materials invoice.

Did the carrier serve only its parent? No. It delivered for the parent and outside companies.

Citations and references

• No statute or administrative rule is cited in the letter text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8712L0853C09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS Comptroller
AUSTIN, 78774

December 7, 1987

Dear **:

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

Situation

CORP ABC makes sales of construction materials to customers located in
Texas and surrounding states. These sales are delivered by a wholly owned
subsidiary,
CORP DEF, as well as independent third party carriers.

CORP DEF operates solely as a transportation company delivering material
for CORP ABC as well as other companies. CORP DEF has been in operation as a
common carrier since 1986. The company was incorporatedJanuary 24, 1985.

Question:

If CORP ABC makes taxable sales of materials which are delivered through
CORP DEF and CORP DEF bills the customer direct for freight charges, totally
independent from the material billing, will tax be due on these freight
charges?

In answering this question, please keep in mind that CORP DEF is a legal
entity separate from CORP ABC. CORP DEF's business is operated separately from
that of CORP ABC and CORP DEF will deliver material for both taxable and
non-taxable jobs for both CORP ABC and outside companies. CORP DEF is a common
carrier transportation company that happens to be owned by CORP ABC and was not
set up specifically becausethe sales tax law changed.

Response:

The delivery charge made and billed in the manner you mention is not
subject to sales tax. 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 Policy Division.

Sincerely,
Al Van Allen
Tax Policy Division