When did a direct-payment-permit holder owe use tax on taxable items bought tax-free and stored or used in Texas?

Plain-English summary

The letter addressed taxable items bought tax-free under a direct-payment exemption certificate. If the holder did not know at storage whether the items would be used in Texas, it could consistently report use tax either when items were first stored in Texas or when removed from inventory for Texas use. If Texas use was known, tax had to be reported when the items were first stored, used, or otherwise consumed.

Because the requester operated only in Texas, it had to report its tax-free purchases for the return month when the items were first stored, or first used if they were not stored beforehand. Delivery to the permit holder's location ended transportation and fixed the place for local use-tax assessment; if that location was outside a local taxing city, no city use tax was due.

The letter also stated then-current permit conditions: at least $800,000 of taxable purchases for the entity's own use each calendar year, resale certificates for items bought for resale, and use only by the legal entity holding the permit. Separate subsidiaries or related legal entities were not covered.

What this means for you

Direct-payment permits shifted tax reporting to the purchaser but required consistent timing, location tracking, and strict entity-level controls.

Common questions

What if Texas use was unknown when items entered storage? The holder could consistently report at first Texas storage or first withdrawal for Texas use.

What if Texas use was already known? Tax was due at first storage, use, or consumption.

Where were local use taxes assessed? At the permit holder's delivery location after transportation ended.

Could a subsidiary use the parent's direct-payment permit? No, if it was a separate legal entity.

Citations and references

• 34 Tex. Admin. Code Rule 3.288 — direct-payment procedures and qualifications
• 34 Tex. Admin. Code Rule 3.346 — use tax
• 34 Tex. Admin. Code Rule 3.377(c) — local taxes on direct-payment purchases

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9104L1098A05

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

April 1, 1991

Dear **:

Thank you for your recent letter concerning the use tax responsibilities
of direct payment permit holders.

If storage facilities contain taxable items purchased tax free under a
direct payment exemption certificate and at the time of storage it is not known
whether the items will be used in Texas, then the taxpayer may elect to report
the use taxes either when the taxable items are first stored in Texas or are
first removed from inventory for use in Texas, as long as they are reported in
a consistent manner. If it is known that the taxable items will be used in
Texas, the use taxes must be reported when the items are first stored, used, or
otherwise consumed. As I understand it, your company has only Texas
operations; therefore, it is required to report tax-free purchases during the
return month in which the taxable items are first stored, or first used if not
stored prior to use.

Storage is defined as any keeping or retention of tangible personal
property in Texas for any purpose, except for the sale, lease, or rental in the
regular course of business or for subsequent use solely outside Texas.
Storage, use, or other consumption does not include a temporary delay or
interruption necessary and incidental to the transportation or further
fabrication, processing, or assembling of the property within this state for
delivery to the permit holder. Once the item purchased tax free under a direct
payment exemption certificate is delivered to the permittee's location, the
transportation has ended and that location is the place at which the local use
taxes are assessed. Thus, if this is not within a local taxing city, no city
use tax is due.

I'd also like to point out some other general requirements regarding
direct payment permits. In order to retain its permit, a direct payment permit
holder must purchase each calendar year at least $800,000 worth of taxable
items for the entity's own use and not for resale. A resale certificate must
be given for any taxable item that will be resold. The direct payment permit
is issued to a legal entity for its use only, including all-branches and
divisions purchasing taxable items. Subsidiary or related separate legal
entities are not covered by the direct payment permit and may not use it to
purchase taxable items tax free.

Please refer to the enclosed Rule 3.288 for direct payment procedures and
qualifications, Rule 3.346 concerning use tax, and Rule 3.377, section (c),
regarding how all of the local taxes apply to tax-free purchases made under a
direct payment exemption certificate.

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

You may call me toll free at 1-800-252-5555, ext. 34697. The regular
number is
512/463-4697. You may also write to Tax Administration at the above
address.

Sincerely,
Sandi Skaggs
Tax Administration Division