Could a restaurant buy toys tax-free for resale when every taxable children's meal included a toy that could not be bought separately?

Plain-English summary

Every children's meal included a toy, customers knew about the toy from advertising, the meal could not be bought without it, and the toy could not be bought separately. The package of hamburger, fries, soft drink, and toy was sold as one taxable transaction.

The total meal price was only $0.06 more than buying the food items separately, while each toy cost the company about $0.41. Even so, the Comptroller concluded that retailers could set their own package price and that the toy remained part of the taxable sale rather than a free giveaway.

The restaurant correctly collected tax on the children's meal and could buy the toys tax-free for resale by giving suppliers a resale certificate.

Common questions

Did the small price increase make the toy a free giveaway? No.

Did the restaurant collect tax on the package? Yes.

Could it buy the toys for resale? Yes.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9003L1021G06

Original ruling text

March 23, 1990

Dear **:

I have reviewed your response to our letter concerning the
taxability of the toy included in your company's "Kid's Meal"
packages. Your letter referred to the following part of
section (c)(2) of the Comptroller's Rule 3.301: "....when a
taxable item is given as a premium with an additional charge
being made therefor, the premium is purchased for resale and
sales tax should be collected on such additional charge."

Our response to your company' s first letter referred to the
fact that the total price of the Kid's Meal, which included
the toy, was only $0.06 more than the total of the items
(excluding-the toy) in the Kid' s Meal purchased separately.
The toys cost ** approximately $0.41 each. The logic of
our first letter was that the increase of only $0.06 in price
did not represent an increase in price that was attributable
to the inclusion of the toy.

Due to your company's advertisements, it would be safe to say
that your customers are aware that when they purchase a Kid's
Meal a toy will be included with the hamburger, french fries
and soft drink.

It has been the Comptroller's policy that retailers (except
contractors making improvements to realty) can charge whatever
price they desire for their products and charge tax on that
price. Grocery stores are not required to charge tax on the
regular price of items when the prices are reduced, sometimes
drastically, on items to be used as "leader" items. Food
retailers regularly offer a package of items, such as one
containing a hamburger, french fries and soft drink, at a price
below the total of the prices of the individual items.

Another, example is the sale of a package containing a major
league baseball card and a stick of bubble gum. The retailer is
not required to accrue use tax on the baseball card in addition
to the collection of tax on the charge for the package.

The Kid' s Meal can not be purchased without the toy and the toy
can not be purchased separately. Unlike some items that are
given free of charge to customers without any required purchase
by the customer, such as the paper crowns given to children by
one of your competitors, the toy is a part of a sale of taxable
items.

Your company has correctly collected sales tax on the sale of
the Kid' s Meal. Tax is not due on the purchases of the toys
and a resale certificate may be issued to your suppliers.

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

Please write or call if you have any questions. You can call
toll-free at 800-531-5441. Our regular number is 512-463-3830
and our FAX number is 512-475-0900.

Sincerely,

Larry Koenig
Taxability Section
Legal Services Division