If an industrial supply company runs a customer's on-site tool crib and charges a management fee plus product costs, is that management fee taxable?

Subject

Industrial Supply Company — Manages And Operates A Customer'S Tool Crib Inside Customer'S Manufacturing Plant — Services And Equipment Used

Plain-English summary

An industrial supply company that distributes maintenance, repair, and operating (MRO) supplies planned to start a new "in-site management" service: it would place two to three of its own employees at a customer's manufacturing plant to manage and operate the customer's tool crib. The arrangement was contracted for a three-to-five year period and billed to the customer as a monthly fee, computed from the company's direct and indirect costs plus profit for running the tool crib. The company would also procure MRO supplies for the customer from other vendors, billing the product cost and a transaction fee either together on one invoice or separately.

The Comptroller's answer: presuming the company is a retailer of all the sales made through the tool crib — and is not simply acting as the customer's purchasing agent — all of the additional charges described (the monthly management fee and the transaction fees) are taxable as services that are part of a taxable sale, under Section 151.007(b) of the Tax Code. Services performed in connection with nontaxable sales of tangible personal property, by contrast, are nontaxable. Where a charge can be directly tied to a taxable or a nontaxable transaction, tax follows that transaction, and the Comptroller has allowed prorata tax treatment for charges connected to both taxable and nontaxable sales at once. Finally, it doesn't matter whether the fee is billed monthly, on the same invoice as the product, or on a separate invoice — none of that billing mechanics changes whether the charge is taxable.

As with other letters of this era, the Comptroller notes the opinion is based on the facts presented and could change if the facts are different.

What this means for you

Industrial supply and distribution companies

If you operate a customer's tool crib or similar on-site inventory-management arrangement and you are the retailer of the goods sold through it (rather than acting as your customer's purchasing agent), expect your management fee and any transaction fees to be taxable as part of the sale, regardless of how or how often you invoice them.

Businesses using outsourced tool crib or vendor-managed inventory services

If your vendor manages your on-site tool crib and bills you a management fee, that fee is likely taxable if the vendor is the retailer of the supplies (not your purchasing agent). Whether specific charges are taxable can depend on whether they tie to taxable or nontaxable sales of the underlying tangible personal property.

Accountants and tax professionals

The key distinction in this letter is retailer-of-the-goods versus purchasing-agent-for-the-customer: that status determines whether the service charges are taxable under Section 151.007(b). Where charges relate to a mix of taxable and nontaxable sales, the Comptroller has allowed prorata apportionment rather than requiring an all-or-nothing tax treatment.

Common questions

Q: Is the monthly fee for managing a customer's tool crib taxable?
A: Yes, presuming the company managing the tool crib is a retailer of all sales made through it (not acting as the customer's purchasing agent). The fee is taxable as a service that is part of a sale under Section 151.007(b) of the Tax Code.

Q: Does it matter whether the management fee is billed separately from the products?
A: No. The letter states that charges appearing on a monthly basis, or on a separate invoice from the product itself, has no bearing on whether the service is taxable.

Q: What if the tool crib includes both taxable and nontaxable sales of tangible personal property?
A: Services connected to nontaxable sales of tangible personal property are nontaxable. Where a charge can be directly tied to a taxable or nontaxable transaction, tax applies accordingly, and the Comptroller has allowed prorata tax treatment for charges connected to both.

Q: What if the company is instead acting as the customer's purchasing agent rather than a retailer?
A: The ruling's taxable conclusion is expressly premised on the company being a retailer of all sales through the tool crib and not acting as a purchasing agent for its customer. The letter does not describe the tax treatment that would apply in a purchasing-agent arrangement.

Q: Could this answer change under different facts?
A: Yes — the letter states the opinion is based on the facts presented, and could change if there are additional or different facts.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.007(b) (service charges that are part of a sale are included in the taxable sales price)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9608L1430G13

Original ruling text

August 23, 1996

Dear ***:

Thank you for your letter of July 23, 1996, concerning
the taxability of services provided by an industrial supply company in the
operation of a customer's tool crib.

Your client, an international distributor of
maintenance, repair, and operating (MRO) supplies. They plan to begin a new
service which will involve in-site management. This service is contracted for
a 3 to 5 year period and will be billed to the customer as a monthly fee. The
company will employ 2 to 3 individuals to work at the customer's site and
manage the tool crib. The fee is computed based upon direct and indirect costs
plus profit for managing the function.

Additionally, the company will procure MRO supplies
from other vendors. The company may bill the cost of the product and a
transaction fee on the same invoice or on a separate invoice.

Response. Presuming that your firm is considered a
retailer of all sales through the tool crib and is not acting as a purchasing
agent for its customer, all additional charges stated are taxable as services
that are part of a sale. See Section 151.007(b) of the Tax Code. Services
performed in connection with non taxable sales of tangible personal property
are non taxable. To the extent that any of the foregoing charges can be
directly tied to taxable or nontaxable transactions, the tax will be applied
accordingly. We have allowed prorata tax treatment of services that are in
connection with both taxable and nontaxable sales of tangible personal
property.

The fact that charges appear on a monthly basis or on
separate invoices from the product itself has no bearing on the taxability of
the service.

This opinion is based on the facts presented. If there
are additional or different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext.
5-0613. The direct line is 512/475-0613. You may also write to Tax Policy
Division, Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division

NOTE: Previous Accession Number 9608553L