Could a shipping business avoid Texas tax on packaging supplies delivered to Texas customers for use in interstate shipments?

Plain-English summary

A shipping business bought packaging materials outside Texas and supplied them without a separate charge to customers in Texas. The materials included shipping containers and documents designed and printed for use with the business's shipping service. The requester argued that the supplies were only temporarily stored in Texas before entering interstate commerce.

The Comptroller disagreed. Whether customers picked up the supplies or received delivery did not matter because the business gave up possession in Texas. The supplies were purchased for use in the business, and delivery to Texas customers put them to the exact use for which they were designed. They therefore were not merely being stored for shipment outside Texas.

The result would have been the same if the shipping business had packaged the items itself. The letter said tax would still be owed because the packaging supplies were used in Texas. The requester's claim that the supplies remained the business's property also failed for lack of proof that the business retained control or meaningful property rights after delivery.

What this means for you

Shipping and mail-order businesses

An interstate destination does not by itself make packaging supplies tax free. This letter focused on where the supplies were first put to their intended use: Texas customers received and used them in Texas to prepare shipments.

Accountants and tax professionals

The temporary-storage argument failed because the facts showed use, not passive storage. The requester cited Tax Code § 151.011(f)(1), but the Comptroller concluded that the supplies had already been put to their designed business purpose in Texas.

Common questions

Did it matter whether the customer picked up the packaging or the shipping business delivered it? No. The letter said either method meant the business gave up possession in Texas.

Were the supplies exempt because they immediately entered interstate commerce? No. The Comptroller found that they were first used in Texas for their intended purpose.

What if the shipping business kept ownership of the supplies? The letter found no proof of retained control or enforceable property rights after delivery and therefore assumed the business lost its rights to the supplies.

Would the answer change if the shipping business packaged the goods itself? No. The letter said tax would still be owed because the supplies would be used in Texas rather than temporarily stored.

Citations and references

• Tex. Tax Code § 151.011(f)(1) (temporary-storage provision cited by the requester)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9203116L

Original ruling text

March 5, 1992

Dear Mr. **:

Thank you for inquiring further concerning your client. In your March 2, 1992,
letter, you expressed the opinion that the packaging supplies should be exempt
because they were only stored temporarily in Texas. You added additional facts
and corrected one misunderstanding. However, the additional information does
not change my opinion that the supplies are taxable.

In your letter, you state that the client generally delivers the supplies to
the customer at the customer's location. Whether the customer picks up the
packaging supplies at your client's location or has them delivered is
immaterial; your client gives up possession of the supplies in Texas.

You also reason that because supplies are intended for use as shipping
containers and/or documents, are identified as such, are provided to the client
at no cost and remain the property of the client, and immediately enter the
stream of interstate commerce, they are exempt.

My response is that the packaging supplies are purchased for use in carrying on
your client's business in Texas. The fact they are clearly marked and designed
for this purpose reinforces this proposition. When the supplies are delivered
to clients in Texas, they are put to the use for which they were designed and
are not simply held in storage for shipment outside Texas.

As to the supplies remaining the property of the client, the customer is given
the supplies without any apparent restriction as far as I can tell. For
instance, if the customer ruined the supplies, would your client have the right
to collect damages for destroying its property? In the absence of proof to the
contrary, I must assume that once the supplies are delivered, your client loses
all control and rights to the property.

Finally, even if your client did not deliver the packaging supplies to its
customers but packaged the items itself, tax would be owed on the supplies. Our
exemption is for temporary storage. In the case described, the packaging
supplies are put to their intended use in Texas.

I hope this satisfactorily answers your questions.

Sincerely,

Michael D. Doyle
Director
Tax Administration

cc: Lucy Glover, Manager, Tax Administration Division

March 2, 1992

Mr. Michael D. Doyle
Director of Tax Administration
LBJ State Office Building
Austin, Texas 78774

Re: Packaging Material Stored in Texas

Dear Mr. Doyle:

Thank you for your letter dated February 24, 1992, convenience copy enclosed,
which was in response to my inquiry of February 18, 1992. Because of the
multitude of possible exemptions represented in this issue, a common carrier
and/or public utility causing packaging material to be temporarily stored in
the state for shipment out-of- state in interstate commerce, I obviously was
surprised when you indicated that our client would be subject to tax on this
transaction. The reason for this letter is to see if you can clarify some of
lingering questions that still remain.

The packaging materials in question consist of various sizes and types and
include the type of package and air waybill in which this letter is being
delivered to you. As stated in your letter "...., the customer (shipper) picks
up the materials at either your client's warehouse or terminals in Texas and
uses them in packaging its property". While this could he true, generally the
shipper will request one or more types of shipping material from our client
which is subsequently delivered to him at his Texas location, either directly
from one of the client's Texas locations or from the client's out-of-state
warehouse.

You are correct when you say that the materials are not resold by our client;
however, I have a problem where you say that they are used by our client in
Texas in such a manner as to render them subject to tax. My reasoning being the
fact that (1) the packaging materials in question are clearly designed and
intended to serve as shipping containers and/or documents, (2) the packaging
materials are elaborately identified (printed) so as to render them useless for
any functional use other than as shipping containers/documents, (3) since the
packaging material provided by our client is of no value to the shipper for any
purpose, member of THE ** GROUP of companies other than as a means
for the shipper to ship merchandise via our client, this packing material, in
essence, remains the property of our client even when held by a shipper, and
(4) the packaging materials immediately enters into the stream of interstate
commerce.

Consequently, I am of the belief that this type of packaging material, which is
purchased outside of Texas and temporarily stored in Texas prior to shipment in
interstate commerce, would qualify for exemption under Texas sales and use tax
laws. It would seem that if there is any "use" in Texas it is either in the
course of interstate commerce or of the nature that clearly would fall under
the exemption granted under Sec. 151.011(f)(1) or elsewhere under the Texas
Codified Sales and Use Tax Law.

Your second thoughts on this matter would be appreciated.

Very truly yours,

Director, Client Services