If a direct pay permit holder buys equipment or software, stores it in Texas, and then ships it out of state before using it for anything other than storage, does Texas use tax apply?

Plain-English summary

This letter answers a question from a direct pay permit holder about when tangible personal property purchased and stored in Texas becomes subject to Texas use tax if it is later shipped out of state.

The Comptroller's Tax Policy Division confirmed the basic rule: a direct pay permit holder may purchase items either inside Texas or from an out-of-state seller and not owe tax until the goods are actually used in Texas. Storage alone is not a taxable use. So:

• If a plant purchased equipment in Texas, stored it in Texas, and then shipped it to Louisiana, no Texas tax would be owed.
• The result is the same in reverse — if the equipment had been purchased in Louisiana, shipped to a Texas warehouse, and then shipped back to Louisiana, no Texas tax would be owed either.

The letter then answers three specific questions the taxpayer raised:

1. What would subject a Texas facility's purchase from an out-of-state seller to Texas use tax? Answer: use in Texas other than storage or shipment out of state.
2. Does Tax Code Sec. 151.011(f) apply when a Texas facility acquires property from an out-of-state vendor and later ships it out of state? Answer: yes, that section applies, and the goods would not be subject to Texas use tax.
3. Does it matter if the Texas facility didn't know, at the time it acquired the property, that the property would later be shipped out of state? Answer: no, the outcome is the same either way.

What this means for you

Direct pay permit holders

You can purchase equipment, software, or other tangible personal property — whether from a Texas seller or an out-of-state vendor — and store it in Texas without triggering Texas use tax, as long as your only activity involving the property in Texas is storage before it is shipped out of state. Tax is triggered only by an actual use of the property in Texas beyond storage.

Businesses with multi-state warehousing or distribution operations

Routing property through a Texas warehouse (in either direction — purchased in Texas and shipped out, or purchased out-of-state and shipped through Texas) does not by itself create Texas use tax exposure. What matters is whether the property is put to use in Texas before it leaves the state.

Accountants and tax professionals

Note that the taxpayer's lack of advance knowledge about the eventual out-of-state destination doesn't change the analysis — the Comptroller confirmed the answer is the same whether or not the facility knew at the time of acquisition that the property would later be transferred out of state.

Common questions

Q: Does storing purchased equipment in a Texas warehouse trigger Texas use tax if it's later shipped to another state?
A: No. Storage alone is not a taxable use. Tax is owed only if the property is used in Texas for something other than storage or shipment out of state.

Q: Does it matter whether the property was originally purchased in Texas or from an out-of-state vendor?
A: No. The same rule applies either way — a direct pay permit holder purchasing in Texas and shipping out of state, or purchasing out-of-state and routing through a Texas warehouse before shipping it back out, owes no Texas tax in either scenario.

Q: How does Tax Code Sec. 151.011(f) fit into this?
A: The Comptroller confirmed that Sec. 151.011(f) applies to property acquired by a Texas facility from an out-of-state vendor and subsequently shipped out of state, and that such property is not subject to Texas use tax.

Q: Does it matter if the company didn't know at the time of purchase that the property would eventually be shipped out of state?
A: No. The Comptroller confirmed the answer would be the same even if the Texas facility did not know, at the time of acquisition, that the property would later be transferred out of state.

Citations and references

Statutes:

• Tex. Tax Code Sec. 151.011(f)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9505167L

Original ruling text

May 5, 1995

Dear Mr. **:

On April 21, 1995, you asked for our opinion concerning the taxability of items
purchased and stored in Texas by a direct pay permit holder and subsequently
shipped out-of-state prior to any use other than storage. The basic rule is
that a direct pay permit holder may purchase items both inside Texas or from
out-of-state and not owe tax until the goods are used in Texas. Therefore, if a
plant purchased equipment in Texas, stored it in Texas, and then shipped it to
Louisiana, no Texas tax would be owed. Similarly, no Texas tax would be owed if
the equipment had been purchased in Louisiana, shipped to the warehouse in
Texas, and then shipped back to Louisiana.

You asked the following questions:

1. When a Texas facility acquires tangible personal property from an out of
   state seller, what circumstances under Texas law would subject the transaction
   to Texas use tax?

Answer Use in Texas other than storage or shipment out of state.

2. If the Texas facility acquires tangible personal property from an
   out-of-state vendor and subsequently ships the property out of the state, would
   not the provisions of Code Sec. 151.011(f) apply? If not, please explain.

Answer: The section would apply and the goods would not be subject to Texas use
tax.

3. Would your answer to question no. 2 be different if the Texas facility does
   not know at the time of acquisition that the property will be subsequently
   transferred out of the state?

Answer. No.

I hope this satisfactorily answers your questions. If not, please feel free to
either write or call me.

Sincerely,

Wade Anderson
Assistant Director, Tax Administration

cc: Joe Galvan, Manager, Tax Administration