Are security labels/tags that retailers attach to merchandise to prevent theft taxable, and did the resale/exemption certificates retailers had on file for these labels remain valid after the October 1, 1991 law change?

Plain-English summary

This is not a taxpayer-specific letter ruling. It's an internal exchange between two Texas Comptroller staffers: a June 23, 1995 written request from Dennis Eastman, an auditor in the Fort Worth field office, to Eddie Washington in the Tax Administration Division, followed by Washington's July 14, 1995 written response.

Eastman was auditing a taxpayer that sells surveillance equipment and related items, including security labels/tags. These labels are usually attached to merchandise by the retailer at the store; they act as a theft-deterrent that gets deactivated at the register when a customer buys the item (and can be reactivated if the item is returned), and they often carry the product's bar code. A smaller number of these labels are attached to products at the manufacturing location instead of at retail.

The taxpayer had been accepting resale certificates for all sales of these security labels — including sales to retailers — even after the sales tax law on wrapping, packing, and packaging materials (which includes labels) changed on October 1, 1991. Eastman asked the Tax Administration Division to confirm in writing: (1) whether the October 1991 law change made labels attached to merchandise by a retailer taxable, and (2) whether that law change invalidated the resale/exemption certificates the taxpayer already had on file.

Washington's response confirms Eastman's understanding was correct on both points:

• Labels sold to manufacturers for attaching to products during manufacturing remain exempt.
• Labels sold to retailers for attaching to products at the retail location became taxable effective October 1, 1991.
• As of that date, any resale or exemption certificates retailers had on file for these labels became invalid for transactions occurring on or after October 1, 1991.

What this means for you

Retailers who buy security labels/tags for in-store use

If you buy security labels or anti-theft tags to attach to merchandise at your own retail location, those purchases are taxable — you cannot use a resale certificate to buy them tax-free, and any resale/exemption certificate you may have on file for these purchases has been invalid since October 1, 1991.

Manufacturers who buy security labels/tags for use during manufacturing

Labels attached to a product during the manufacturing process (before the product reaches a retail location) remain exempt, consistent with the general rule that wrapping/packaging materials that become part of a product sold to the end customer aren't taxed at the manufacturing stage.

Sellers of security labels/tags

If you sell security labels to both manufacturers and retailers, you need to distinguish between the two: sales to manufacturers can still be made under a valid resale/exemption certificate, but sales to retailers (for the retailer's own use tagging merchandise in the store) have been taxable since October 1, 1991 regardless of any certificate on file.

Accountants and tax professionals reviewing older certificates

This memo is a useful reminder that a pre-October-1991 resale/exemption certificate on file does not protect wrapping/packing/packaging-material purchases (including security labels) made by a retailer for its own retail-location use on or after that date — such certificates became invalid for those transactions as of the effective date of the rule change.

Common questions

Q: Are security labels/tags that a retailer attaches to merchandise in the store taxable?
A: Yes. As of October 1, 1991, sales of labels to retailers for attaching to products at the retail location are taxable.

Q: What about security labels attached to products at the manufacturing location instead of the store?
A: Those remain exempt, per the memo's description of labels sold to manufacturers for attaching to manufactured products.

Q: The taxpayer had resale certificates on file from retailers before October 1991 — are those still good?
A: No. The memo confirms that, as of October 1, 1991, resale or exemption certificates on hand from retailers are invalid for transactions occurring on or after that date.

Q: Is this document a binding ruling the taxpayer named in it can rely on?
A: It's an internal memo answering a field auditor's question during an audit, not a "Dear taxpayer" letter ruling addressed to the taxpayer directly, so it does not carry the same reliance protection as a letter ruling issued to a specific taxpayer under 34 Tex. Admin. Code Rules 3.1 and 3.10.

Q: Why are these labels taxable at all — aren't packaging materials usually exempt?
A: The memo ties this to the October 1, 1991 change in the sales tax law concerning wrapping, packing, and packaging materials (which the memo says includes labels). That change is what made labels sold to retailers for their own retail-location use taxable, even though labels used earlier in the supply chain (at manufacturing) remain exempt.

Citations and references

No statutes, administrative rules, or case law are cited by name in this document. It refers only to "the sale tax law" concerning wrapping, packing, and packaging materials that changed effective October 1, 1991.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9507L1358G01

Original ruling text

DATE: July 14, 1995

TO: Dennis Eastman, ** Audit

FROM: Eddie C. Washington, Tax Administration Division

SUBJECT: Taxability of Security Labels

FACTS: Taxpayer (TP) is in the business of selling surveillance equipment and
other related items. The specific item in question is a label that is quite
often attached by the retailer at the retail sales location. The label is
attached to the product when it arrives at the store and serves as a security
device to prevent theft of the product. When the customer buys security devices
to prevent theft of the product, the labels are run across a device at the cash
register that deactivates them so that they can be carried out of the store with
the product. If the customer returns the product for any reason, the label can
be reactivated. The label usually carries the bar code of the product.

A small number of the security labels are attached to the products at the
manufacturing location. TP has been accepting resale certificates for all sales
of these security labels, even though the sales tax law changed October 1, 1991.

It is your understanding that the labels sold to manufacturers for attaching the
manufactured products are exempt, but as of October 1, 1991, the labels sold to
retailers are taxable.

TAX DIVISION'S RESPONSE: Your understanding of the October 1, 1991, changes to
the sale tax law concerning wrapping, packing and packaging materials, which
includes labels, is correct. Effective October 1, 1991, sales of labels to
retailers for attaching to products at the retail locations are taxable. As of
October 1, 1991, the resale or exemption certificates on hand from retailers are
invalid for transaction occurring on or after that date.

Date: June 23, 1995

To: Eddie Washington, Tax Administration

From: Dennis Eastman, Fort Worth Audit

Subject: Security Labels

I contacted you several weeks ago to discuss a situation that had arisen
concerning security labels attached to merchandise at retail sales locations.
Per agreement with the taxpayer, I would like to request a response in writing
concerning the taxability of the product.

The taxpayer in question is in the business of selling surveillance equipment
and other related items. The specific item in question is a label that is
quite often attached by the retailer at the retail sales location. The label
is attached to the product when it arrives at the store, and serves as a
security device to prevent theft of the product. When the customer purchases
the product, the labels are run across a device at the cash register, which
deactivates them so that they can be carried out of the store with the
product. If the customer returns the product for any reason, the label can
be reactivated. The label quite often will carry the bar code of the product.

A small number of the security labels are attached to the products at the
manufacturing location, and it is my understanding that these items would be
nontaxable. However, the taxpayer has been accepting resale certificates for
all sales of these security labels, even though the law changed on
October 1, 1991. As I understand the October, 1991 law change, the labels
attached at the retail location became taxable at that date and the
certificates were no longer valid.

Two questions need to be answered on these labels. First, did the October,
1991 law change make these items taxable when attached to the product by the
retailer? Second, did the October, 1991 law change invalidate certificate
the taxpayer already had on file? I have a sample of the label and will
be happy to forward it to you at your request. If you have any questions or
problems, please don't hesitate to call me at (817) 831-0932.

NOTE: Previous Accession Number 9507310L