If we sell oil/gas equipment to overseas customers FOB our Texas plant or FOB an export packer, do we owe Texas sales tax, and when do we have to collect it?

Plain-English summary

A Texas company that engineers, fabricates, and constructs oil field refineries and refining equipment asked the Comptroller about the sales-tax treatment of its overseas projects (about 75% of its business, much of it in the Mideast and former Soviet-bloc countries). Its contracts used shipping terms of "FOB destination," "FOB export packer," or "FOB [Texas] plant," and it billed customers on a percentage-of-completion or milestone basis, drawing payments from letters of credit the customer had established.

The Comptroller's answer: Texas sales tax attaches based on where title or possession transfers for consideration, not on where the goods physically end up. Under "FOB plant" or "FOB export packer" terms, title passes in Texas (or to the packer before export), so these are taxable Texas sales. The company should have been collecting tax "all along," and tax is due when the sale is made -- when title/possession transfers and the seller draws on the customer's letter of credit -- not later when a project "milestone" is invoiced or the goods finally leave the country.

The ruling also addressed a related storage issue: equipment sitting more than 30 days at an export packer's warehouse or an overseas shipper's dock is presumed to have been "used" in Texas under Rule 3.323(c)(3), triggering tax. That presumption can be overcome with documentation showing the delay was caused by unavailable ships or unforeseen events like war or hurricanes. A packer or shipping company only counts as a "freight forwarder" for this purpose if it actually holds itself out as one (the term isn't defined in Rule 3.323). Finally, the Comptroller noted the one path to avoid up-front collection: if the shipping terms instead named a licensed customs broker (as defined in Rule 3.360) as the seller's agent to receive and export the goods, and title didn't transfer to the customer until the broker confirmed export, the sale and the export would occur simultaneously, and no Texas sales tax collection would be required.

What this means for you

Manufacturers and equipment sellers shipping overseas from Texas

"FOB" terms in your contract aren't just a shipping/logistics detail -- they determine where and when title passes, which is exactly what determines whether you owe Texas sales tax and when you must collect it. "FOB plant" or "FOB export packer" terms generally mean title passes in Texas, making the sale taxable there regardless of the buyer's foreign location. Collect tax when you transfer title/possession and receive consideration (e.g., when you draw on a letter of credit), not when you later invoice a "milestone."

Businesses trying to structure genuinely tax-exempt export sales

If your goal is to avoid Texas sales tax on an export sale, this ruling shows the narrow path that worked: engage a licensed customs broker as your agent to receive and physically export the goods, and don't transfer title to the customer until the broker confirms the goods were exported. That way the sale and the export happen at the same moment, and the broker's export certification documents it.

Companies with equipment sitting in transit or storage before export

If your goods sit at an export packer's warehouse or a shipper's dock for more than 30 days, expect the Comptroller to presume Texas use (and tax) under Rule 3.323(c)(3) unless you can document that the delay was due to ship unavailability or an unforeseen event such as war or a hurricane.

Common questions

Q: We ship oil/gas equipment overseas FOB our Texas plant. Do we owe Texas sales tax?
A: Generally yes. Because title transfers in Texas under "FOB plant" (or "FOB export packer") terms, these are taxable Texas sales, and the ruling confirms the client "should have been collecting tax all along."

Q: When exactly do we need to collect the tax -- at shipment, or when we invoice a project milestone?
A: At the sale -- when title or possession transfers to the customer for consideration, which in this case meant when the seller drew on the customer's letter of credit, not later when a milestone was invoiced.

Q: Does doing business through overseas joint ventures or partnerships (some with Texas offices or agents) change the answer?
A: No. The ruling states plainly that this fact does not alter the seller's Texas sales tax responsibilities.

Q: Is there any way to structure the sale so we don't have to collect Texas tax up front?
A: Yes, per the ruling: use a licensed customs broker (as defined in Rule 3.360) as your agent to receive and export the goods, and don't transfer title to the customer until the broker confirms export. Then the sale and the export occur simultaneously and no collection is required, and the broker's export certification documents it.

Q: What if our equipment sits in an export packer's warehouse or on a dock for over a month before it ships?
A: Rule 3.323(c)(3) presumes goods held in Texas more than 30 days from purchase have been stored (and thus used) in Texas, which is taxable. You can rebut that presumption by documenting causes like unavailable ships, war, or hurricanes. Whether the packer or shipper counts as a "freight forwarder" (which affects this analysis) depends on whether that firm actually holds itself out as a freight forwarder -- the term isn't defined in Rule 3.323.

Citations and references

Rules cited:

• Rule 3.323 (Imports and Exports / Customs Brokers)
• Rule 3.323(c)(3) (30-day presumption that goods held in Texas were stored/used in Texas)
• Rule 3.360 (definition of licensed customs broker)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9301L1231D12

Original ruling text

January 29, 1991

Dear **:

Thank you for your recent letter which is restated in part with responses
below.

Facts: Our client engineers, fabricates and constructs oil field
refineries and refining equipment. Approximately 75% of their projects
are overseas.

Construction contracts are done on a separated basis.

Large projects are billed on a percentage of completion or other
milestone basis with payments drawn against a letter of credit previously
established by the customer.

In the past, the contract shipping terms for overseas projects were FOB
either "destination, export packer, or CITY A plant. The client prefers
the latter two.

Under the HFOB export packer" terms, the client would either deliver the
skid to the export packer via their own truck or, contract with a common
carrier trucking company to deliver the skid to the export packer.

Under the "FOB CITY A plant terms, the client will notify their customer
as each section of equipment (skid), was ready to be shipped. The customer
will arrange for a common carrier trucking company to pick up the skid in
CITY A and take it to an export packer in CITY B. The client receives a
bill of lading from the trucking company showing the export packer as the
destination.

Question 1: Regarding the HFOB plant" and HFOB export packer overseas
shipments; will the changes in Rule 3.323 relating to Customs Brokers,
effective January 1993, cause our client to be liable for charging Texas
sales tax to their overseas customers? If so, when should our client bill
the Texas sales tax? When the equipment is shipped, or the customer is
invoiced after reaching a project "milestone"? Our client has a number of
overseas projects in progress at this time with contracts that specify
'FOB plant" or "FOB export packer shipping terms.

Will the effects of the ruling change be retroactive or apply to
contracts entered into after January 1993?

Response 1: The change in Rule 3.323 does not affect your client under
the facts you presented. Your client should collect Texas sales tax when
the sale is made (i.e.) when they transfer title or possession to their
customer for a consideration. Your client transfers title to the equipment
based on the FOB terms, unless the contract states other terms, and
receives consideration when it draws on its customer's letter of credit.
The client should have been collecting tax all along.

Question 2: In some cases, overseas destined equipment may sit in the
export packers warehouse or the overseas shipping company's dock, for over
30 days due to lack of available ships or some unforeseen circumstance
(i.e.; war or hurricanes). In this case, are the export packers and
overseas shipping company considered eight forwarders in the context of
Rule 3.323 and as such preclude the 30 day holding clause in Rule 3.323?

Response 2: Rule 3.323(c)(3) presumes that goods in Texas longer than 30
days from the date of purchase have been stored and thus used in Texas.
This presumption can be overcome by documenting the unavailability of
ships, or unforeseen circumstances as you mentioned. The terms freight
forwarder is not defined in Rule 3.323. We would consider property in an
export packer's warehouse or on the dock of an overseas shipping company
to be in the possession of a freight forwarder if the firm held itself
out to be a freight forwarder.

Question 3: A number of entities purchasing overseas destined equipment
from our client are joint ventures and/or partnerships between foreign
countries and domestic corporations (i.e.: **), which may
have offices and/or agents in Texas. Do these facts alter our client's
Texas sales tax responsibilities in regards to the overseas shipment of
equipment to these entities?

Response 3: No.

Question 4: In the future, if the shipping terms of the contract are "FOB
licensed customs broker," will our client be required to collect, remit
and then request a - refund of Texas sales tax on their overseas destined
sales, when the certification of export comes back from the customs
broker?

Response 4: If the client contracted with a licensed customs broker as
defined in the enclosed Rule 3.360 to act as its agent for purposes of
receiving and exporting the goods and did not transfer title to its
customer until the broker saw the equipment exported, it would not be
required to collect Texas sales tax. The sale and the export would occur
at the same time and the client would have the broker's export
certification to document the export.

This opinion is rendered based on the facts you submitted. Other facts,
though similar, may yield different results.

If you have questions or need more information, please call or write. You
may reach me by calling toll free, (800) 531-5441 (ext. 34680). My direct
line number is (512) 463-4680. The number for FAX transmissions is (512)
475-0900. You may write to me in care of Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division

December 3, 1992

Mr. Al Van Allen
Tax Policy Section
Comptroller of Public Accounts

Dear Al:

We have a client who engineers, fabricates and constructs oil field
refineries and refining equipment. Approximately 75% of their projects
are overseas in the Mideast and an expanding market of former Soviet bloc
countries. Contracts involving both equipment and installation
(construction), are prepared on a separated contract basis. The value of
these contracts are very, very substantial, as are the potential Texas
tax liabilities if the transactions are not handled "correctly".

Large projects, even those for equipment only, can take from nine to
twelve months or longer to complete and would be invoiced based on a
percentage of completion or other "milestone" event. Such a "milestone"
would be purchase of the major portion of the materials needed to
fabricate the pressure vessels involved in the contract. In most cases
regarding overseas projects, the customer establishes a letter of credit
in either a large domestic or foreign bank and payments to our client are
drawn from these accounts.

Our concerns relate to the shipping and delivery of the overseas destined
equipment. In the past, the contract shipping terms for overseas projects
were either "FOB destination", "FOB export packer or "FOB CITY A plant".
Due to the **, CPA liabilities involved and the wild and
unforeseen price changes in overseas shipping President costs, our client
has preferred the latter two terms. Under the "FOB CITY A plant" terms, our
client will notify their customer as each section of equipment (skid),
** was ready to be shipped. The customer will arrange for
a common carrier Suite 115 trucking company to pick up the skid in CITY A
and take it to an export packer in CITY B. These skids and pressure
vessels weigh tons and some are over sixty CITY A, Texas feet long and must
be crated before loading on board ships. Our client receives a bill of
lading from the trucking company showing the export packer as the 75o30
destination. Under the "FOB export packer" terms, our client would either
** deliver the skid to the export packer via their own truck or,
contract with a common carrier trucking to deliver the skid to the export
packer.

Question 1. Regarding the "FOB plant" and "FOB export packer" overseas
shipments; will the changes in Ruling 3.323 relating to Customs Brokers,
effective January 1993, cause our client to be liable for charging Texas
Sales Tax to their overseas customers? If so, when should our client bill
the Texas Sales Tax? When the equipment is shipped, or the customer is
invoiced after reaching a project "milestone"? Our client has a number of
overseas projects in progress at this time with contracts that specify
"FOB plant" or "FOB export packer" shipping terms. Will the effects of the
ruling change be retroactive or apply to contracts entered into after
January 1993?

Question 2. In some cases, overseas destined equipment may sit in the
export packers warehouse or the overseas shipping company's dock, for
over 30 days due to a lack of available ships or some unforeseen
circumstance (i.e.; war or hurricanes). In this case, are the export
packers and overseas shipping company considered freight forwarders in
the context of Ruling 3.323 and as such preclude the 30 day holding clause
in Ruling 3.323?

Question 3. A number of the entities purchasing overseas destined
equipment from our client are joint ventures and/or partnerships between
foreign countries and domestic corporations (i.e.: **), which
may have offices and/or agents in Texas. Do these facts alter our clients
Texas Sales Tax responsibilities in regards to the overseas shipment of
equipment to these entities?

Question 4. In the future, if the shipping terms of the contract are "FOB
licensed customs broker", will our client be required to collect, remit
and then request a refund of Texas Sales Tax on their overseas destined
sales, when the certification of export comes back from the customs
broker?

Sincerely,