How did Texas tax sold coupons and memberships that provided free video rentals?

Plain-English summary

The October letter corrected the answer to Question 5 in an attached August ruling about video-club memberships and free-rental coupons.

Selling a coupon for a free movie rental was a nontaxable sale of an intangible right. The retailer paid tax on printing the coupon and use tax on the video's fair-market rental value for the period the customer used it. Fair-market rental value was what a customer without a coupon would pay.

The attached ruling also said a membership sold only with free rentals was taxable. If memberships were available with or without rentals at the same price, the membership charge was nontaxable but the retailer still owed fair-market-rental-value tax. A membership without free rentals was nontaxable. Giving away free coupons likewise triggered printing tax and rental-value use tax.

The original August answer had said sold coupons were taxable; the October correction superseded that answer.

What this means for you

The coupon or membership price and the retailer's use of the video inventory were separate tax questions. The corrected treatment moved the tax from the coupon charge to printing and the tape's rental value.

Common questions

Was a sold free-rental coupon taxable? No.

Was coupon printing taxable? Yes to the retailer.

Did the retailer owe tax on the video itself? Use tax on its fair-market rental value for the customer's use period.

Was a video-club membership without rentals taxable? No.

Which answer controls Question 5? The October 11 correction.

Citations and references

• 34 Tex. Admin. Code Rule 3.294(i) (fair-market rental value)
• 34 Tex. Admin. Code Rule 3.294(e)(2)-(3) (installation and transportation charges, as discussed)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9010L1047G10

Original ruling text

October 11, 1990

Dear **:

Upon review of our letter to you dated August 31, 1990, we have determined that
our answer to our fifth question as designated in that letter was in error.
Your inquiry and the corrected response follows.

Question 5

Are free movie rentals taxable if offered by selling coupons or are the coupons
taxable when sold?

Response

The charge for the coupons is not taxable; the sale of the coupon is a sale of
an intangible right. You should pay tax on the purchase of printing of the
coupons. However, you must pay use tax on the fair market rental value of the
video tapes for the period of time used by the customer. The fair market rental
value would be the amount a customer without a coupon would be required to pay.

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 512-0 463-3830 and our FAX number is
512-475-0900.

Sincerely,

Larry Koenig
Taxability Section
Legal Services Division

August 31, 1990

Dear **:

In your letter, you requested information regarding the taxability of movie
rentals and membership fees.

I have restated your questions below with an appropriate response:

Questions 1 and 3

Is membership with free movie rentals included taxable?

Response

The taxability of the membership is as follows:

1. If a membership fee is only charged with the right to free movie rentals,
   the charge is taxable because this is the rental of tangible personal property.

2. If membership is sold with or without free movie rentals, the charge is
   taxable if the charge for membership with free rentals exceeds the charge
   without free rentals. If the charge for membership is the same whether or not
   free rentals are provided, the membership charge isn't taxable [however, the
   seller owes tax on the fair market rental value of the video tapes for the
   period of time used by the customer as indicated in Section (i) of the enclosed
   comptroller's Rule 3.294 (Rental and Lease of Taxable Items)].

Question 2

Is membership without free movie rentals included taxable?

Response

Charges for membership only in a video club aren't taxable.

Question 4

Are free movie rentals taxable if offered by free coupons (i.e., by advertising
in newspapers or handing out flyers)?

Response

The issuance of the coupons isn't taxable. However, you must pay tax on the
purchase or printing of the coupons. In addition, you must pay tax on the fair
market rental value of the video tapes for the period of time used by the
customer as indicated in Rule 3.294(i).

Question 5

Are free movie rentals taxable if offered by selling coupons or are the coupons
taxable when sold?

Response

The charge for the coupons is taxable because this is a charge for the rental
of video tapes. You may issue a resale certificate in lieu of tax on the
purchase or printing of the coupons.

Finally, you should note that subsections (e)(2) and (e)(3) of Rule 3.294 are
being revised to reflect a statutory change (effective October 1, 1987) which
taxes installation charges and all transportation charges billed by a lessor to
a lessee in connection with the rental or lease of tangible personal property.

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

If you have any questions, please contact Tax Correspondence. You may call toll
free 1-800-252-5555, or our regular number is 512/463-4600. My extension is
3-4662. You may write me at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Correspondence