Is a rail carrier exempt from Texas sales and use tax on its own purchases, and can Texas make it collect local sales tax on food and beverages sold aboard its trains?

Subject

Federal Government/Instrumentalities — Collection Of Tax On Sales Of Taxable Items — Buck Act

Plain-English summary

A rail corporation (identified only as "CORPORATION" / "TP" in the redacted letter) transports passengers by train through Texas and three other states. It did not report taxable purchases and did not collect local taxes on food and beverage sales made aboard the train. The company claimed it was exempt from state and local taxation under 49 U.S. Code SEC. 24301(k), a federal statute enacted under Public Law 103.

The Comptroller's Tax Policy Division answered three related questions:

1a) Does TP owe sales tax on its own purchases? No. Under 49 U.S.C. § 24301(k), CORPORATION (and its rail carrier subsidiaries, lessors, and lessees) is exempt from "additional taxes" -- taxes or fees on acquiring, improving, owning, or operating personal property, and most taxes on real property. Section 24301(l) broadens this: CORPORATION and its rail subsidiaries are exempt from any state, political-subdivision, or local tax levied on or after September 30, 1981, except a tax the company was already required to pay as of September 10, 1982. The letter also notes 49 U.S.C. § 24501, which describes a wholly-owned commuter subsidiary of CORPORATION and a related tax exemption (effective October 1, 1981) for certain commuter authorities that opted to run their own rail service starting January 1, 1983.

1b) Does TP have to collect local and MTA tax on food and beverage sales aboard the train? No -- but with a twist. The Comptroller cannot force TP to collect its taxes on those sales. However, the Comptroller may instead go after the individual purchasers of the food and beverages for the tax that should have been collected and remitted. This is grounded in the Buck Act, 4 U.S. Code SEC. 107(a), under which states cannot require the federal government or its instrumentalities to collect state sales tax, and in the Comptroller's own Hearing No. 28,773 (1993) (9305H1238A04).

1c) If tax is due on train sales, how should it be allocated among local taxing jurisdictions? The letter simply refers back to the answers given in 1a and 1b -- no separate allocation methodology is provided.

What this means for you

Rail carriers and similar federally chartered transportation companies

If your company qualifies as an exempt "CORPORATION" (or a rail carrier subsidiary, lessor, or lessee) under 49 U.S.C. § 24301(k)-(l), your own purchases and operations can be exempt from Texas state and local tax, subject to the exception for taxes you were already required to pay as of September 10, 1982.

Businesses selling taxable items (like food and beverages) on behalf of a federally exempt entity

Your own federal tax exemption does not automatically mean sales you make to customers are untaxed, and it does not shield you from every collection mechanism. Here, the Comptroller could not force the carrier itself to collect the tax, but said it could pursue individual purchasers directly for tax that should have been collected.

Accountants and tax professionals

This ruling is a useful illustration of the Buck Act, 4 U.S.C. § 107(a): it limits Texas's ability to compel a federal instrumentality to act as a tax collector, but it does not eliminate the underlying tax liability of the purchasers. Watch for this distinction between "who must collect" and "who ultimately owes the tax" when advising clients who are, or sell to, federal instrumentalities.

Common questions

Q: Is this rail company exempt from all Texas taxes?
A: Based on this letter, TP is exempt from sales tax on its own purchases under 49 U.S.C. § 24301(k), and from state/local taxes levied on or after September 30, 1981 under § 24301(l), except a tax it was already required to pay as of September 10, 1982.

Q: Can Texas make the rail company collect local sales tax on food and drinks sold on the train?
A: No. The letter states the Comptroller cannot compel TP to collect its taxes, citing the Buck Act, 4 U.S.C. § 107(a), which bars states from requiring the federal government and its instrumentalities to collect state sales tax.

Q: If the company doesn't have to collect the tax, does anyone owe it?
A: The letter says the Comptroller may still proceed against the purchasers of the food and beverages for the tax that should have been collected and remitted, citing Hearing No. 28,773 (1993) (9305H1238A04).

Q: How should tax be divided among local jurisdictions if it is due on train sales?
A: The letter does not provide a separate methodology -- it just refers back to the answers given for questions 1a and 1b.

Citations and references

Statutes and authorities:

• 49 U.S. Code SEC. 24301(k), (l) (exemption from additional and post-1981 state/local taxes for the rail corporation)
• 49 U.S. Code SEC. 24501 (commuter subsidiary status; tax exemption for certain commuter authorities)
• 4 U.S. Code SEC. 107(a), the Buck Act (limits on states compelling federal instrumentalities to collect state tax)
• Hearing No. 28,773 (1993) (9305H1238A04)
• Referenced (not quoted): microfiche document 8904L0864D11 (sales tax permit fees, since repealed); 9206L1178B10

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9610134L

Original ruling text

DATE: October 7, 1996

TO: Sammy Saab, ** Audit

FROM: Eddie C. Washington, Tax Administration Division

SUBJECT: Exempt Status

RE: CORPORATION (TP)
Taxpayer Number **

Facts: ** (CORPORATION) does not report taxable purchases
or report local taxes on food/beverage sales aboard the train. The
train transports passengers throughout Texas and three other states.
TP claims exemption from state and local taxation under the provisions
of Public Law 103 - Act of Congress: 49 U.S. Code SEC. 24301(k).

Questions:

1a) Is TP responsible for paying sales tax on all purchases?

Answer: TP is exempt under 49 U.S. Code SEC. 24301 which states in part:

(k) Exemption from additional taxes. -- (1) In this subsection --

(A) "additional tax" means a tax or fee --

(i) on the acquisition, improvement, ownership, or operation of personal
property CORPORATION; and

(ii) on real property, except a tax or fee on the acquisition of real
property not attributable to improvements made, or the operation of
those improvements by CORPORATION.

(B) "CORPORATION" includes a rail carrier subsidiary of CORPORATION and a lessor
or lessee of CORPORATION or one of its rail carrier subsidiaries.

(l) Exemption from taxes levied after September 30, 1981. -- (1) CORPORATION
or a rail carrier subsidiary of CORPORATION is exempt from a tax or fee imposed
by a State, a political subdivision of a State, or a local taxing authority
and levied on or after September 30, 1981. However, CORPORATION is not exempt
under this subsection from a tax or fee that it was required to pay as of
September 10, 1982.

Title 49 U.S. Code SEC. 24501 reads:

(a) Status.-- CORPORATION Commuter--

(1) is a wholly-owned subsidiary of CORPORATION:

(2) provides by contract commuter rail passenger transportation for a
commuter authority with which CORPORATION Commuter makes a contract to
provide the transportation under this chapter;

(3) has no common carrier obligations to provide rail passenger or
freight transportation; and

(4) is not a department, agency, or instrumentality of the United States
Government.

. . . . .

(g) Tax exemption for certain commuter authorities. -- A commuter
authority with which CORPORATION Commuter could have made a contract to provide
commuter rail passenger transportation under this chapter but which decided
to provide it own rail passenger transportation beginning on January 1,
1983, is exempt, effective October 1, 1981, from paying a tax or fee to
the same extent CORPORATION is exempt.

Also see microfiche document 8904L0864D11 regarding sales tax permit fees
(since repealed).

1b) Is local and MTA tax due on sales of food and beverages on the train?

Answer: The Comptroller cannot compel TP to collect its taxes; however,
the comptroller may proceed against the purchasers for the taxes that
should have been collected and remitted. Hearing No. 28,773 (1993)
(9305H1238A04). Also see 9206L1178B10 on the inability of states to
require the federal government and its agencies, instrumentalities, etc.,
to collect statesales tax under the Buck Act, 4 U.S. Code SEC. 107(a).

1c) If tax is due on train sales, is there a preferred methodology on
assigning tax to local taxing jurisdictions?

Answer: See answers to 1a) and 1b).