A manufacturer hired a company to manage its parts/supplies warehouse, and that same company also sells parts/supplies to the manufacturer. What determines whether the warehouse management fee is taxable?

Plain-English summary

A taxpayer wrote in about a warehouse management arrangement: a manufacturer contracted with a company ("ABC") to manage its parts/supplies warehouse. ABC was also a separate parts/supplies vendor to the same manufacturer, but the charges for managing the warehouse were not tied to the sales price of any parts or supplies ABC sold to the manufacturer. The taxpayer asked what criteria determine whether the warehouse management fee itself is taxable.

The Comptroller's answer: it depends on what ABC is actually doing as part of the management work. If ABC performs any taxable services — the letter names janitorial services and data processing as examples — tax is due on that portion of the fee. Any overhead expense the service provider incurs to deliver those taxable services, such as warehousemen's salaries, is treated as part of the taxable sales price.

If the charges for taxable services aren't separately stated from nontaxable services, and the taxable portion works out to more than 5% of the total charge, the entire charge is presumed to be taxable. That presumption isn't necessarily final — it can be overcome as described in Rule 3.356(i)(2). As always with these letters, the ruling is based on the specific facts presented, and different facts (even if similar) could produce a different answer.

What this means for you

Manufacturers hiring third parties to manage a warehouse

Whether your management fee is taxable turns on what services are bundled into it — not simply on the fact that a warehouse is involved. If the manager also handles taxable activities like janitorial work or data processing as part of the arrangement, expect tax on that portion of the charge.

Warehouse managers / service providers (especially those who are also vendors)

Keep taxable and nontaxable service charges separately stated on invoices. If you don't separate them and the taxable component exceeds 5% of the total charge, the Comptroller's default position is that the whole charge is taxable — you'd then need to work through Rule 3.356(i)(2) to overcome that presumption. Note also that overhead costs like your own employees' salaries tied to delivering a taxable service count as part of the taxable sales price, not as a nontaxable pass-through cost.

Accountants and tax professionals

This letter is a useful illustration of the "5% rule" for bundled taxable and nontaxable service charges: separate stating avoids an all-or-nothing taxability presumption, and Rule 3.356(i)(2) is the relevant carve-out/rebuttal mechanism when charges aren't separately stated.

Common questions

Q: Is a warehouse management fee automatically taxable in Texas?
A: No. It's taxable only to the extent the manager is performing taxable services — the letter cites janitorial services and data processing as examples — as part of the management arrangement.

Q: What if the management fee includes both taxable and nontaxable services, but they're billed as one lump sum?
A: If the charges aren't separately stated and the taxable services make up more than 5% of the total charge, the entire charge is presumed taxable. That presumption can be overcome as described in Rule 3.356(i)(2).

Q: Does the manager's own overhead, like employee salaries, escape tax?
A: No. Overhead expenses the service provider incurs in performing the taxable services, such as warehousemen's salaries, are part of the taxable sales price.

Q: Does it matter that the warehouse manager is also a separate vendor of parts/supplies to the manufacturer?
A: In this letter, the manufacturer's facts specified that the warehouse management charges were not related to the sales price of parts/supplies sold to the manufacturer — the two were treated as distinct. The ruling addresses only the management fee's taxability based on the services bundled into it.

Q: Can this taxpayer's competitor or another company rely on this exact letter?
A: No. The letter states its conclusion is based on the facts presented, and different facts, although similar, may result in a different response.

Citations and references

• Rule 3.356(i)(2) (presumption of taxability when taxable/nontaxable service charges aren't separately stated and the taxable portion exceeds 5% of the total; how the presumption may be overcome)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9606L1416A07

Original ruling text

June 7 1996

Dear ***:

Thank you for your letter concerning the taxability of
a warehouse management fee.

In your situation a manufacturer has contracted with
ABC to manage their parts/supplies warehouse. ABC is also a parts/supplies
vendor to the manufacturer. It is my understanding that charges for the
warehouse management operation is not related to the sales price of any
parts/supplies sold to the manufacturer.

You asked what criteria should be used in determining
if the warehouse management fee is taxable.

If ABC is performing any taxable services such as
janitorial or data processing, tax will be due. Any overhead expense the
service provider may incur such as warehousemen's salaries, is part of the
taxable sales price. If the charges for those taxable services are not
separated from nontaxable services and the portion of the charge relating to
the taxable services exceeds 5%, the total charge is presumed to be taxable.
This presumption may be overcome as provided for as described in Rule
3.356(i)(2).

This statement is based on the facts presented.
Different facts, although similar may result in a different response.

If you have any questions please do not hesitate to contact this office.

Sincerely,

Curt Swenson
Tax Policy Division

NOTE: Previous Accession Number 9606326L