Are retailers required to collect sales tax when they gift wrap a product for a customer, and can retailers buy gift wrapping supplies (paper, ribbons, boxes, bows) tax-exempt for resale?

Plain-English summary

This STAR entry actually bundles three separate pieces of correspondence about the same subject — gift wrapping in Texas retail — from 1991 and 1992:

1. The Comptroller's July 2, 1992 response to a trade association. The Comptroller declined the association's request to change its position: gift wrapping is, and has long been, a "service connected with the sale." That classification did not change when H.B. 11 passed. A retailer who sells a product and charges extra to gift wrap it for the customer must collect sales tax on that charge, because Tax Code Subsection 151.007(a)(2) makes no distinction between services performed before a sale and services performed after a sale. The letter also transmits Rule 3.314 (sent to the Texas Register that day): subsection (d)(1), requiring retailers to pay sales tax on the purchase price of gift wrapping supplies, applies prospectively from July 2, 1992; subsection (d)(2) simply restates the Comptroller's longstanding policy and applies retroactively.

2. The association's April 14, 1992 comment letter objecting to proposed Rule 3.314. The association argued the proposed rule was unfair: it would require a retailer to pay tax when buying gift wrap supplies and then collect tax again when reselling the wrapping to the customer, while a stand-alone gift wrapping business (not connected to the sale of the product) would not have to collect tax on its wrapping service at all. The association called this discriminatory and a competitive disadvantage for retailers who offer on-site gift wrapping as a customer convenience, and asked the Comptroller to either let retailers buy gift wrap supplies tax-exempt or let retailer gift-wrap services be exempt. The July 1992 letter above shows the Comptroller rejected this request.

3. Mike Doyle's November 22, 1991 letter answering specific questions about what counts as "gift wrapping." Three scenarios were addressed:

• Decorated gift boxes that don't require additional wrapping, given free with a purchased product: not considered gift wrapping, so they may not be purchased tax-exempt.
• The same decorated box, but with a bow or other gift-type decoration affixed at the time of purchase: this does qualify as gift wrapping, so (as of that letter, for the upcoming Christmas season) the box, bows, and other gift-type decorations could be purchased tax-free — though the Comptroller stated it intended to promulgate a rule ending this treatment, to apply prospectively.
• The same type of boxes given to a customer unwrapped (not used in an actual gift-wrapping process): those are taxable wrapping/packaging materials, not exempt gift wrap. Where exempt and taxable boxes are intermingled, the Comptroller presumes all items are taxable unless the retailer can show which items were actually used for gift wrapping; retailers are expected to keep adequate records (e.g., a separate gift-wrap department or area) to support any exempt treatment.

What this means for you

Retailers that offer gift wrapping as a service

If you sell a product and charge your customer extra to gift wrap it, the Comptroller treats that charge as part of a taxable service connected with the sale — you must collect sales tax on it, regardless of whether the wrapping happens before or after the sale is rung up. This is distinct (per the association's 1992 objection) from a truly independent gift-wrapping business unconnected to the sale of the underlying product.

Businesses purchasing gift wrap, ribbon, boxes, and decorations

Under Rule 3.314 as described in this letter, retailers generally must pay tax on their purchase of wrapping and packaging supplies (and then collect tax again when that wrapping is resold to the customer as part of a gift-wrap charge). A narrow exception existed at the time: boxes, bows, and other gift-type decorations actually used to gift wrap a product could still be purchased tax-free — but the Comptroller signaled that treatment was going away prospectively, so do not assume it still applies without checking current STAR guidance or the current text of Rule 3.314.

Retailers giving away decorated boxes unwrapped

Plain decorated boxes handed to a customer in an unwrapped state are taxable wrapping/packaging materials, not exempt gift wrap — even if the box itself looks festive. If you intermingle boxes used for actual gift wrapping with boxes given out unwrapped, keep records (e.g., a dedicated gift-wrap counter or department) showing which boxes went where, because the Comptroller's default presumption is that all of them are taxable absent that proof.

Accountants and tax professionals

This letter is useful for explaining the "service connected with the sale" theory under Tax Code Subsection 151.007(a)(2) to clients, and for flagging that the tax-exempt purchase of gift-wrap decorations described here was already slated for prospective elimination as of mid-1992 — current clients should be checked against the current Rule 3.314 rather than relying on the 1991 answer.

Common questions

Q: Does a retailer have to collect sales tax on a gift-wrapping charge?
A: Yes. The Comptroller treats gift wrapping performed by the seller of a product as a "service connected with the sale," and Tax Code Subsection 151.007(a)(2) does not distinguish between services performed before or after the sale — the retailer must collect tax on the charge.

Q: Can a retailer buy gift wrapping paper, ribbon, and boxes tax-exempt?
A: Generally no under Rule 3.314(d)(1) — retailers must pay tax on the purchase price of gift wrapping supplies (and then collect tax again on resale to the customer via the gift-wrap charge). A narrow tax-free purchase allowance existed for boxes, bows, and gift-type decorations actually used in gift wrapping, but the Comptroller stated it intended to end that treatment prospectively.

Q: Are decorated gift boxes given away free with a purchase, without any additional wrapping, tax-exempt?
A: No. The Comptroller does not consider the use of decorated boxes alone (with no bow or gift-type decoration added) to be gift wrapping, so they may not be purchased tax-exempt.

Q: What if a decorated box also has a bow or gift-type decoration affixed at the time of purchase?
A: At the time of this letter, that combination qualified as gift wrapping, and the box, bow, and decoration could be purchased tax-free for that Christmas season — though the Comptroller signaled a rule change was coming to end this.

Q: What happens if the same boxes are sometimes given to customers unwrapped and sometimes used for gift wrapping?
A: Boxes given to customers unwrapped are taxable wrapping/packaging materials. If exempt and taxable boxes are intermingled, the Comptroller presumes all items are taxable unless the retailer proves which were used for gift wrapping, so retailers should maintain adequate records (e.g., a separate gift-wrap area).

Q: Is an independent gift-wrapping business (not the seller of the underlying product) treated the same as a retailer's own gift-wrap service?
A: The association's 1992 comment letter argued proposed Rule 3.314 treated them differently — taxing the retailer's on-site gift wrap charge but not an independent gift-wrapping service's charge. The Comptroller's July 1992 response declined to change this distinction.

Q: Can I rely on this letter for my own business's gift-wrap tax treatment today?
A: No. This is a 1991-1992 STAR letter; it can be relied on as a detrimental-reliance defense only by the taxpayer/association it was issued to, and the letter itself flags that the tax-exempt treatment of gift-wrap decorations was expected to change. Check current Rule 3.314 and STAR guidance before relying on any of this.

Citations and references

• Tax Code Subsection 151.007(a)(2) — defines "sales price" to include services connected with the sale; cited as the basis for taxing gift-wrap charges regardless of timing.
• 34 Tex. Admin. Code Rule 3.314 — the wrapping and packaging supplies rule discussed throughout, including subsections (d)(1) (prospective from July 2, 1992) and (d)(2) (retroactive, restating longstanding policy).
• Reference is also made to "H.B. 11," a bill whose passage did not change the Comptroller's classification of gift wrapping as a service connected with the sale.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207166L

Original ruling text

July 2, 1992

Dear Mr. **:

I apologize for the delay in responding to the Association's comments on
proposed Rule 3.314 on wrapping and packaging supplies.

Copies of Association's comments on gift wrapping were provided to Mike Doyle,
Wade Anderson, Lucy Glover, and Martin Cherry. After much discussion, it was
decided that we must respectively decline to accept the Association's request.

We have for many years called the gift wrapping service a "service connected
with the sale." This classification did not change with the passage of H.B. 11.
We have no basis for changing our position that tax must be collected by a
retailer who sells a product, and for an additional charge, gift wraps the
product for the retailer's customer. Tax Code Subsection 151.007(a) (2) makes
no distinction between services that occur before a sales and services that
occur after a sale.

Enclosed is a copy of Rule 3.314 that was sent to the Texas Register today.
Subsection (d)(1) requiring retailers to pay sales tax the purchase price of
gift wrapping is being applied from July 2, 1992, forward. Of course,
subsection (d)(2) reflects long standing policy of the Comptroller's department
and is retroactive.

Again, thank you and the Association for your comments.

If you have any questions or need more information, you may call me at
463-4633. You may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division

April 14, 1992

Ms. Lucy Glover Manager
Tax Administration
Comptroller of Public Accounts
P.O. Box 13528
Austin TX 78711

Dear Lucy:

This is a comment on the proposed new rule 3.314 published in the April 3 Texas
Register. Specifically, we are objecting to (d) (1) (2). The effect of (d) (1)
(2) is to require retailers to pay sales tax on gift wrapping m materials when
they are purchased from a supplier and to collect the sales tax on these same
materials when they are resold to a customer. However, a distinction is made in
(d) between gift wrapping services provided by the seller of a product, i.e. a
retailer, and by a person simply providing a gift wrapping service. In the
latter case, a person simply providing a gift wrapping service is not required
to collect the sales tax. We fail to see the justification for this
distinction.

In most large retail operations that provide a gift wrapping service, the
product is purchased at one location in the store, then taken to another
location in the store for gift wrapping. "Title" to the product passed to the
customer at the point of purchase. The customer then may elect to purchase the
gift wrapping service provided at the store, or the customer may take it to
another gift wrapping service. However, under your proposed rule, the customer
would be required to pay sales tax on the store's gift wrap, but not on that
provided by another gift wrapping service. Not only is this discriminatory
against the retailer who is providing on-site gift wrapping as a convenience to
customers, the rule also places the retailer at a competitive disadvantage.
Retailers must collect sales tax on gift wrap charges, independent gift
wrapping services do not.

Wade Anderson and other have argued that this is consistent with other rules
that create similar situations of "double taxation". Consistency is not the
argument. Indeed, this very rule is inconsistent by applying the sales tax to
one provider of a service but exempting another provider of the same service.

We respectfully request that you reconsider (d) (1) (2) and either permit
retailers to purchase gift wrapping supplies on a tax exempt basis or allow
them to provide gift wrapping service that is exempt from the sales tax. Thanks
for your consideration.

Respectfully,

President

cc: **

November 22, 1991

Dear **:

On October 21, 1991, you asked several questions concerning gift wrapping. I
apologize for taking so long to get back with you concerning the various issues
you raised. Your questions were as follows:

1. For the Christmas season a retailer purchases decorated gift boxes that do
   not require wrapping but are used as a gift-wrapped item. May these boxes be
   purchased tax-exempt if they are used for packaging the retailer's product and
   given to the customer free of charge?

The answer is "no." We do not consider the use of decorated boxes as gift
wrapping.

2. In the same situation as outlined above, in addition to packaging this
   product in the gift box at the time of purchase, the retailer affixes a bow or
   other gift-type decoration to the gift box. Would this qualify the package as
   gift-wrapped and qualify the materials for exempt purchase?

Presently, we treat this as gift wrapping and will allow the box, bows, and
other gift-type decoration to be purchased tax free. During the upcoming
Christmas season, these may be purchased tax free. However, we intend to
promulgate a rule which will not allow the tax free purchase of these type
items. The rule will be applied prospectively.

3. For clarification purposes on question 9 through 12 in Ms. Hutcheson's
   attached letter, we understand that the same boxes used in the gift wrapping
   process, which may be purchased tax-exempt, are taxable when given to the
   customer in an unwrapped condition (Question 12). Is this a correct
   interpretation? What proof will be required of the retailer regarding the
   quantity of boxes used in gift wrapping as compared to the quantity given to
   the customer unwrapped?

Unwrapped boxes given to customers are considered wrapping and packaging
materials and are taxable. Therefore, Ms. Hutcheson's answer to Question 12 was
correct.

As regarding proof, when exempt and non-exempt items are intermingled, we will
presume all the items are taxable in the absence of a showing by the retailer
as to which items were used for gift wrapping. I presume that many stores will
have separate areas set up where customers may bring merchandise for wrapping.
A record should be kept of the items used at these locations. If the company
does not have a separate department that does gift wrapping, it will be the
retailer's responsibility to maintain adequate records to show which item were
used in gift wrapping.

I hope this satisfactorily answers your questions.

Sincerely

Mike Doyle
Director of Tax Administration

cc: Lucy Clover, Manager of Tax Administration