How should a seller document tax-free class-ring sales to a university bookstore, and when could it accept the bookstore's claimed university exemption?

Plain-English summary

Whether a bookstore was legally part of a state university depended on its relationship with the school. A seller could investigate a questionable claim, including contacting the university.

A properly completed and signed exemption certificate asserting university status protected a seller that accepted it in good faith without actual knowledge of invalidity. If the claim later proved wrong, the Comptroller would pursue the purchaser for tax, penalty, and interest. But if the seller investigated and learned the claim was invalid, it could no longer accept the certificate in good faith.

For class rings bought for resale to students, the bookstore had to give a resale certificate, not a government exemption certificate. The university's own-use exemption did not apply to resale inventory. Government purchase vouchers under Rule 3.322(f)(3) likewise proved exemption only for an entity's own use, not resale.

A bookstore that was part of a university still had the ordinary seller responsibilities when making taxable sales, including holding a permit and issuing the correct resale or exemption certificates for its tax-free purchases.

What this means for you

Sellers should match the certificate to the transaction. Governmental status may support own-use exemption, while inventory bought for sale to students requires resale documentation.

Common questions

Was every university bookstore legally part of the school? No. Could a seller rely on a completed exemption certificate? Yes in good faith without contrary knowledge. Which certificate applied to class rings for student resale? A resale certificate. Did university status eliminate seller duties? No.

Citations and references

• 34 Tex. Admin. Code Rule 3.322(f)(3)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9111L1142C08

Original ruling text

November 4, 1991

Dear **:

Thank you for your recent follow-up to our previous correspondence.
Your questions are set out below, followed by answers:

1. Is a Texas State University Bookstore considered part of the
   university?

Answer: Some university bookstores may be and others may not be. It
depends on the legal relationship between the store and the school.
As a seller with a duty to either collect tax or properly document
an exemption, your company would be within its rights to investigate
a purchaser's claimed exemption to a certain point, if you had reason
to believe it might be invalid. For example, it might be worthwhile
to contact the university in question to establish whether the
bookstore is really part of the university.

For purposes of protecting yourself as a seller, however, you should
know that if a bookstore presents you with an exemption certificate
that asserts that the bookstore is a part of a particular state
university, and the certificate is properly completed and signed, and
you accept it in good faith (without actual knowledge that the claimed
exemption is invalid), then the certificate will be sufficient excuse
for not collecting the tax. If the claimed exemption later proved
to be invalid, this agency would proceed against the purchaser for
any applicable tax, penalty, and interest.

If you took additional steps toward verification, such as contacting
the university, and discovered that the claimed exemption was invalid,
then you could not accept the certificate in good faith.

2. If so, can the bookstore make a purchase of class rings for resale
   to students, submitting an Exemption Certificate claiming exemption
   because it is a state agency?

Answer: A bookstore that purchases class rings for resale to students
should present a resale certificate, and not an exemption certificate,
in order to avoid paying the tax. Although the effect is the same (no
tax is paid), the two certificates represent completely different
exemptions.

In your example, the transaction between your company and the book-
store is exempt as a "sale for resale". The resale certificate is,
therefore, the proper documentation of the exemption. The tax
exemption for a state university that applies to certain items it purchases
for its own use does not apply to purchases of items for resale. This
makes an exemption certificate inappropriate documentation of the
exemption the bookstore is claiming. (Note: Governmental entities'
official purchase vouchers are also deemed sufficient proof of exemption
under Rule 3.322 [f][3], but again this applies only to an exemption
claimed on a purchase for the entity's own use, and not for resale.)

3. When purchasing for resale, are State Universities ever required to
   issue a Resale Certificate?

Answer: See the answer to question 2, above. Assuming for the moment
that the bookstore in question is part of a state university,
governmental entities that make sales of items or services that are
subject to Texas tax are held to the same standards as other "sellers"
who are not governmental entities. This includes the responsibilities
of holding a Texas sales and use tax permit and issuing the appropriate
certificates, resale or exemption, for tax-free purchases.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers. If you have further
questions, feel free to write or call me at 1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration Division