Do retailers owe Texas sales tax on the paper, ribbons, boxes, and bags they buy to provide gift-wrapping services to customers?

Plain-English summary

A retailer under audit asked the Comptroller for a grace period on back taxes related to gift-wrapping supplies, arguing that the rule governing gift wrap (Rule 3.314) had been unclear before July 1992 and that competitors were not collecting tax on the same items (tote bags, tissue, boxes, bags, etc.). The Comptroller's Tax Administration Division declined to grant a general waiver but restated the policy clearly.

Under the applicable section of Rule 3.314, sales tax is due on the purchase price of gift-wrapping supplies used by anyone providing a gift-wrapping service — the retailer must pay tax on the cost of those supplies whether or not it sold the item being wrapped. Separately, if the retailer providing the gift-wrapping service also sold the item being wrapped, it must collect sales tax on any charge made to the customer for the wrapping. The letter draws a timeline: the requirement that retailers pay tax on the purchase price of gift-wrapping supplies (subsection (d)(1)) applies from July 2, 1992 forward, based on a July 2, 1992 letter to the Texas Retailers Association; the requirement to collect tax on gift-wrapping charges tied to a sale (subsection (d)(2)) reflects long-standing Comptroller policy and is retroactive. Before July 2, 1992, retailers could buy gift-wrapping supplies tax free. The letter also clarifies that decorated boxes, bags, etc. (bearing a store logo or seasonal theme) given to customers free of charge are not treated as resale-exempt gift-wrapping supplies and have been taxable since October 1, 1991. Retailers may still issue resale certificates for gift wrap and packaging materials that they will resell to customers.

What this means for you

Retailers offering gift wrapping

You owe sales tax on the purchase price of paper, ribbon, boxes, bags, tissue, and similar gift-wrapping supplies you buy to wrap items for customers, regardless of whether you sold the item being wrapped. If you also sold the item being gift wrapped, you must additionally collect sales tax from the customer on any separate charge for the wrapping service.

Retailers giving away branded/decorated packaging

Decorated boxes, bags, or similar items bearing your store logo or a seasonal theme that you hand out to customers free of charge are not exempt gift-wrapping supplies eligible for resale treatment — they have been taxable to you since October 1, 1991.

Retailers reselling wrap and packaging materials

If you sell gift wrap or packaging materials that customers themselves purchase and take with them (rather than supplies you consume providing a wrapping service), you may continue to buy those items tax free using a resale certificate.

Common questions

Q: Do I owe tax on gift-wrapping supplies even if I didn't sell the item being wrapped?
A: Yes. Rule 3.314(d)(1) requires the person providing the gift-wrapping service to pay tax on the purchase price of the supplies regardless of who sold the item being wrapped.

Q: When do I have to collect tax on a gift-wrapping charge from a customer?
A: When you provided the gift-wrapping service and you also sold the item being wrapped, per Rule 3.314(d)(2).

Q: Since when has this rule applied?
A: The requirement to pay tax on gift-wrapping supply purchases (subsection (d)(1)) applies from July 2, 1992 forward. The requirement to collect tax on wrapping charges tied to a sale (subsection (d)(2)) reflects longstanding policy and is retroactive. Decorated giveaway boxes/bags have been taxable since October 1, 1991.

Q: Can I still buy gift wrap tax free with a resale certificate?
A: Only for gift wrap and packaging materials that you resell to customers — not for supplies you consume while providing a gift-wrapping service.

Citations and references

• 34 Tex. Admin. Code § 3.314 (Wrapping, Packing, Packaging Supplies, Containers, Labels, Tags, and Export Packers)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9406L1305E08

Original ruling text

June 8, 1994

Dear ***:

This is to clarify and restate my letter of March 9, 1994,
with regard to decorated (i.e., with store logo or seasonal
theme) boxes, bags, etc. given to customers. Your letter
requested a grace period on the application of the law
changes to Rule 3.314 - Wrapping, Packing, Packaging
Supplies, Containers, Labels, Tags, and Export Packers, has
been assigned to me for response.

Your company is currently under audit and the auditor
suggested that you write in to request this waiver.
Reporting errors regarding this law change were found
only in periods between October 1991, and July 1992, after
the rule was published. You had difficulty getting a clear
understanding of this law change before July 1992 and on
occasion received completely different interpretations
regarding the same question. Your basic question at that
time was "whether to charge a retailer tax on gift wrap if
they in turn charge their customer." In addition,
competitors of yours are not now collecting tax on these
wrapping supplies (tote bags, tissue, boxes, bags, etc.).
For these reasons you are requesting this waiver.

RESPONSE: You previously had spoken to a Mr. Kevin Koller,
in our section of Tax Administration. You provided Mr.
Koller a listing of competitors that were not now collecting
tax on sales of gift wrap. Mr. Koller has forwarded a copy
of this list to our Audit Division for appropriate action.

The applicable section(s) of the current Rule 3.314,
provide:

(d) Gift wrapping supplies. Sales tax is due on the
purchase price of gift wrapping supplies used by persons
providing gift wrapping services.

(1) Tax must be paid on the cost of gift wrapping by
the person providing the service whether or not the item
being gift wrapped was sold by the person providing the
service.

(2) Tax must be collected on a charge for gift
wrapping if the person providing the gift wrapping service
sold the item being wrapped

** , now retired from this office, set out
our current policy in this area in her letter to the Texas
Retailer's Association, dated July 2, 1992. The policy with
regard to subsection (d)(1), requiring retailers to pay
sales tax on the purchase price of gift wrapping, is that
this subsection is being applied from July 2, 1992, forward.
Subsection (d)(2) reflects long standing policy of
the Comptroller's department (i.e., a service in connection
with the sale of an item) and is retroactive. A copy of that
letter is attached for your reference.

Therefore, in response to your specific question, for sales
on or after July 2,1992, you must collect tax on gift
wrapping supplies sold to retailers and others who provide a
gift wrapping service, without consideration to whether the
item being wrapped was sold by the gift wrapping service
provider. Prior July 2,1992, retailers could purchase these
gift wrapping supplies tax free.

Retailers may continue to issue resale certificates on gift
wrap and packaging materials that the retailer will sell to
customers. Decorated (i.e. with store logo or seasonal
theme) boxes, bags, etc., that a retailer gives to customers
free of charge are not considered gift wrapping supplies and
are taxable effective October 1, 1991.

This opinion is based on the facts presented. Other facts
though similar may provide a different result.

If you have other questions or need more information, you
may call me at 1-800-531-5441, extension 3-4502. The regular
number is 512/463-4502. You may also write to Tax
Administration Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division

NOTE: Previous Accession Number 9406416L