Can a flooring/cabinet manufacturer buy display systems and promotional materials tax-free with a resale certificate when it sells them to its distributors along with its products?

Subject

Display Systems/Promotional Materials Sold To Distributors Along With Flooring/Cabinets — Resale Certificates Allowed Only For Items Actually Resold

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9311L1270G06

Plain-English Summary

This 1993 letter answers a question about a manufacturer of hardwood flooring and cabinets that sells its products to distributors nationwide, who in turn sell to retailers. Along with its flooring and cabinet products, the manufacturer provides marketing support — promotional materials, displays, and samples — which it sells to the distributors at slightly above its own cost. The distributors then sell that same material on to their retailers.

The Comptroller's office concluded that because the manufacturer is purchasing the display systems and promotional materials solely to resell them (to the distributors), the manufacturer may issue a resale certificate to its own vendors for those purchases, avoiding sales tax at that point in the chain. However, if the manufacturer instead uses any of that promotional material in its own promotions, or simply gives it away to distributors rather than selling it, the manufacturer owes sales or use tax on the cost of those items — because at that point it is the end user, not a reseller.

The same resale logic then flows one step further down the chain: the manufacturer may accept resale certificates from its distributors for the promotional materials the distributors will resell to retailers. But a distributor should not issue a resale certificate for promotional materials it plans to keep and use itself, or give away to retailers rather than sell. The letter also specifies a mechanical requirement: the resale certificate the manufacturer accepts from a distributor should explicitly state that it covers the promotional items and displays, in addition to covering the "flooring materials" or "cabinets" themselves.

What This Means For You

If you are a manufacturer providing marketing displays/promotional materials to your distributors as part of a sale: You can buy those display materials tax-free using a resale certificate, as long as you are truly reselling them (even at a small markup) to your distributors rather than using or giving them away. Track which promotional items are sold on to distributors versus which are used internally or given away — the tax treatment differs for each.

If you are a distributor receiving promotional materials from a manufacturer: You can give the manufacturer a resale certificate only for the portion of promotional material you intend to resell to your retailers. Anything you keep to use yourself, or give away to retailers instead of selling, is not covered by a resale certificate — tax applies to that portion.

If you're drafting or reviewing a resale certificate in this kind of supply chain: Per this letter, make sure the certificate language explicitly identifies the promotional items and displays as covered, separate from (in addition to) the underlying product (here, flooring materials or cabinets) — a generic certificate covering only the core product may not clearly extend to the marketing materials.

Note on scope: This letter does not cite any specific statute or administrative rule; it applies general resale-certificate reasoning to this particular fact pattern. It also notes a prior related accession number (9311073L.4 and/or 9311073L), suggesting this letter builds on or restates an earlier ruling not reproduced here.

Q&A

Q: Can the manufacturer buy the display systems and promotional materials tax-free?
A: Yes — because it is purchasing them solely for resale to its distributors, the manufacturer may issue a resale certificate to the vendors it buys the promotional materials from.

Q: What if the manufacturer keeps some promotional materials for its own use, or gives them away to distributors instead of selling them?
A: Then the manufacturer owes sales or use tax on the cost of those items, since a resale certificate only covers purchases genuinely intended for resale.

Q: Can a distributor give the manufacturer a resale certificate for all the promotional materials it receives?
A: No — only for the portion the distributor will actually resell to retailers. The distributor should not issue a resale certificate for materials it will use itself or give away to retailers.

Q: Does the resale certificate need to say anything special to cover the promotional items?
A: Yes. The letter states the certificate accepted by the taxpayer (the manufacturer) should state that the distributor is issuing it for the promotional items and displays, in addition to the "flooring materials" or "cabinets."

Original ruling text

Date: November 15, 1993

TO: DAVID ROGERS, AUDITOR, DALLAS WEST AUDIT OFFICE

FROM: KEVIN KOLLER TAX ADMINISTRATION DIVISION

SUBJECT:** TAXPAYER NO. ****

The taxpayer is a manufacturer of hardwood flooring and cabinets. The
taxpayer sells to distributors throughout the United States who in
turn sells to retailers. The taxpayer provides marketing support in
the form of promotional materials, displays, samples, and other
related items. All such material is sold to the distributors slightly
above cost. The distributors sell this material to their retailers.

The taxpayer is purchasing the display systems and promotional
materials solely for resale and may issue a resale certificate to the
vendors. The taxpayer would have to pay sales and use taxes on the
cost of any promotional materials that are used in their own
promotions or given away to distributors.

The taxpayer may accept resale certificates from the distributors in
lieu of tax for promotional materials that the distributor will
resell. The distributor should not issue a resale certificate for
promotional materials that they will use themselves or give away to
retailers. The resale certificate accepted by the taxpayer should
state that the distributor is issuing the resale certificate for these
promotional items and displays in addition to the "flooring materials"
or "cabinets".

NOTE: Previous Accession Number 9311073L.4 and/or 9311073L