If a direct pay permit holder buys items and has them shipped straight through a central receiving point to plants in other cities without storing them, which city's local use tax is due?

Subject

Items Purchased And Received By Direct Pay Permit Holder At Its Central Warehouse — Immediately (No Storage) Sent To Destination Plants In Different Cities — City Use Tax Due Where Items Used After Transportation

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9307L1249A08

Plain-English Summary

A taxpayer (referred to here as "ABC") wrote to the Comptroller's office asking two related questions about which city's local use tax applies when a company with a Direct Payment Certificate moves purchased materials between a receiving point and plants located in different cities. The taxpayer and the Comptroller's office had already discussed the issue by phone, and the letter restates the questions with the Comptroller's responses.

Question 1 — items stored in a central warehouse, then pulled as needed. If materials are purchased and stored in a central warehouse in City A, then removed from storage as needed and used in Cities A, B, and C, the Comptroller responded that city tax would be due to City A — but only if City A is a "taxing city" (imposes a local sales/use tax). If City A does not impose city sales tax, no city tax would be due at all on those items.

Question 2 — items received at a central point but immediately forwarded, with no storage. If items are purchased and received at a central receiving point in City A, and then immediately sent on to the individual units where they were originally ordered in Cities B and C (without being stored in City A), the Comptroller responded that city tax is due to the cities where the items are first removed from storage. But since these items were not stored prior to use, city use tax is instead due to the city where the items were actually used or consumed after transportation — i.e., Cities B and C, not City A. The letter also confirms it makes no difference whether the taxpayer's own vehicle or the vendor's vehicle transports the materials from the central receiving point to the destination plant.

The Comptroller added a practical instruction: ABC should keep records that clearly show the goods were not stored prior to their delivery to Cities B and C, presumably to support the position that use tax is owed to the destination cities rather than the central receiving city.

As with other letters of this type, the response closes by noting it is based on the facts submitted, and that other facts, though similar, may yield different results.

What This Means For You

Storage location controls local tax, unless there is no storage. This letter illustrates a key distinction in Texas local (city) use tax: when a direct pay permit holder stores purchased items in a central warehouse before distributing them, the city where the warehouse sits (if it's a taxing city) is where local tax is due — even though the items end up being used elsewhere. But when items pass through a central point with no storage at all, that "pass-through" city gets no local tax; instead, tax is due to the city where the items are ultimately used or consumed.

Documentation matters for direct pay permit holders. The Comptroller specifically told the taxpayer to keep records clearly showing goods were not stored before delivery to the destination cities. If you operate under a Direct Payment Certificate and route purchases through a central receiving point before sending them on to other locations, this letter is a reminder that your ability to source local use tax to the destination city (rather than the receiving city) may depend on being able to document that no storage occurred at the receiving point.

The mode of final delivery doesn't matter. Whether your own company vehicle or the vendor's vehicle makes the final delivery from the central receiving point to the destination plant has no bearing on which city's use tax applies, according to this letter.

Multi-city, multi-plant operations should map their supply chain. If your business operates plants or units in multiple Texas cities and routes purchases through a central point, this letter's two side-by-side scenarios (storage vs. no storage) are worth comparing against your own logistics to determine which city or cities may be owed local use tax.

Q&A

Q: If a direct pay permit holder buys and stores materials in a central warehouse in City A, then later uses some of those materials in Cities B and C, which city gets the local use tax?
A: According to the letter, city tax would be due to City A (the city where the warehouse is located and where the items were removed from storage), assuming City A is a taxing city. No city tax is due at all if City A does not impose a city sales tax.

Q: What if the items are never stored in City A — just received there and sent straight on to Cities B and C?
A: The letter states that if the items were not stored prior to use, city use tax is due to the city where they were used or consumed after transportation — meaning Cities B and C, not the central receiving city.

Q: Does it matter whether the purchaser's own vehicle or the vendor's vehicle delivers the goods from the central receiving point to the destination plant?
A: No. The letter explicitly states it would not matter if the final delivery were made in the vendor's or the purchaser's vehicle.

Q: What should a taxpayer do to support the position that goods were not stored before delivery?
A: The letter advises that the taxpayer (ABC) should retain records that clearly show the goods were not stored prior to their delivery to Cities B and C.

Q: Does this letter assume any particular tax certificate is in use?
A: Yes. The letter's questions are answered "assum[ing] that a Direct Payment Certificate is used for all purchases."

Q: Can this taxpayer's specific answer be relied on by other companies with similar warehouse or distribution setups?
A: Not directly. The letter states this opinion is rendered based on the facts submitted, and that other facts, though similar, may yield different results.

Original ruling text

July 12, 1993

VIA FAX

Dear ****:

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

Per our phone conversation, please give me the answers to the following
questions. Assume that a Direct Payment Certificate is used for all purchases.

1 ) If materials were purchased and stored in a central warehouse in city
A and then removed from storage as needed and used in cities A, B and C, where
would the city tax be due for the items used in cities B and C? Please respond
assuming city A is a taxing city and again assuming city A is a nontaxing city

Response: City tax would be due for city A in the event city A were a
taxing city. No city tax would be due in the event city A did not impose city
sales tax.

2) If items were purchased and received in a central receiving point in
city A and then immediately sent to the individual units where they were
originally ordered in cities B and C, where would the city tax be due? Does it
matter if a ABC vehicle or the vendor's vehicle transported the materials from
the central receiving point to the destination plant?

Response: City tax is due for the cities where the items are first
removed from storage. If the items were not stored prior to use, city use tax
is due the city where they were used or consumed after transportation. It would
not matter if the final delivery were made in the vendor's or purchaser's
vehicle.

ABC should retain records that clearly show that the goods were not stored prior
to their delivery to cities B and C.

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

NOTE: Previous Accession Number 9308046L.3 and/or 9308046L