(1) Can a wholesaler accept a manufacturing exemption certificate from a grocery store buying packaging supplies it knows are used only to repackage, not manufacture, products? (2) When taxable and nontaxable items ship together for one delivery charge, how much of that transportation charge is taxable?

Plain-English summary

A wholesaler that buys from manufacturers and resells to retailers (mostly grocery stores) asked the Comptroller two questions. First: the wholesaler sells bulk packaging supplies to grocery stores that use them to "repackage" existing food products -- not to "process" or manufacture anything, as those terms are defined in Rule 3.314(e) -- and the wholesaler KNOWS this. Can it still accept the grocery stores' manufacturing exemption certificates and skip charging tax? No. Rule 3.287(d)(2)/(e)(2) only protects a seller who accepts an exemption certificate in GOOD FAITH; if the seller actually knows the claimed exemption doesn't apply (as here, where it knows the supplies are used for repackaging, not manufacturing), it can't rely on the certificate and must collect tax. The Comptroller pointed to Administrative Hearing No. 33,089, which addressed this exact good-faith question on identical facts.

Second: when the wholesaler delivers a shipment containing BOTH taxable items (like the packaging supplies) and nontaxable items to a customer for one combined delivery charge, how much of that delivery charge is taxable? Under Tax Code § 151.007 and Rule 3.303, a transportation/delivery charge billed by the seller is part of the taxable "sales price," so on a mixed shipment, the delivery charge has to be split proportionally: the same percentage of the shipment's dollar value that's taxable applies to the delivery charge too. The letter walks through a concrete example: a $10,000 shipment where $1,000 (10%) is taxable supplies, with a $500 delivery charge -- 10% of that $500 ($50) is taxable, so sales tax is collected on $1,050 total ($1,000 of goods plus $50 of the apportioned delivery charge). The apportionment is based on the DOLLAR VALUE ratio of taxable to total items, not weight, volume, or a flat percentage.

What this means for you

Wholesalers and distributors selling to grocery stores or other resale customers

Don't accept an exemption certificate you know doesn't reflect how the buyer will actually use the goods -- if you know packaging supplies are for repackaging (not manufacturing), a manufacturing exemption certificate won't protect you, and you must collect tax on that sale.

Any seller shipping taxable and nontaxable items together for one delivery charge

Apportion the delivery charge by the dollar-value ratio of taxable items to the total shipment value, then apply sales tax to that apportioned share of the delivery charge on top of the taxable goods themselves -- don't tax the whole delivery charge, and don't use weight or volume to split it.

Accountants and tax professionals

Two distinct, reusable rules here: (1) actual knowledge defeats good-faith reliance on an exemption certificate (Rule 3.287(d)(2)/(e)(2), Hearing No. 33,089), and (2) mixed-shipment delivery charges are apportioned by dollar-value ratio under § 151.007/Rule 3.303, illustrated with the letter's own worked example.

Common questions

Q: Can a seller accept an exemption certificate if it knows the buyer's claimed exemption doesn't actually apply?
A: No, per this letter -- good-faith protection under Rule 3.287(d)(2)/(e)(2) requires the seller to lack actual knowledge that the exemption is invalid.

Q: When taxable and nontaxable goods ship together for one delivery charge, is the whole delivery charge taxable?
A: No, per this letter -- only the portion of the delivery charge proportional to the taxable items' share of the total shipment value.

Q: How is that proportional share calculated?
A: Per this letter's example, divide the taxable items' dollar value by the total shipment's dollar value to get a percentage, then apply that percentage to the delivery charge.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.314(e) (definition of "processing")
• 34 Tex. Admin. Code Rule 3.287(d)(2), (e)(2) (good-faith acceptance of exemption certificates)
• Administrative Hearing No. 33,089 (good-faith certificate acceptance)
• Tex. Tax Code § 151.007 (sales price includes transportation/delivery charges)
• 34 Tex. Admin. Code Rule 3.303 (transportation and delivery charges)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9704456L

Original ruling text

April 11, 1997

Dear ***:

Thank you for your letter with two questions concerning sales and use tax.

Situation 1): *** primary enterprise is to purchase products from
manufacturers and sell them to retailers (or non-taxable institutions) at a
profit. Your customers are primarily grocery stores, and virtually all have
Texas State Resale Certificates on file with you, allowing you to sell them
taxable goods without charging them tax (because they are in business to resell
it to consumers). One part of ***** sales comes from selling packaging
supplies in bulk to grocery stores, which use the packaging supplies primarily
to "repackage" (not manufacture) existing product without "processing" it as
defined in Section 3.314(e) of the Texas Tax Code.

*** is aware that its customers (grocery stores) are purchasing these
bulk supplies in order to repackage food products.

Question: Because *** knows that the packaging supplies you sell to
grocery stores are not used in "manufacturing," is ***** required to
collect tax on the sale to the grocery store?

Response: Rule 3.287(d)(2) on exemption certificates says that a sale
is exempt if the exemption certificate is accepted in good faith at the time of
the transaction and the seller lacks actual knowledge that the claimed
exemption is invalid. Therefore, *** cannot accept an exemption
certificate in good faith if it knows that the packaging supplies sold to the
grocery store are not used in manufacturing. See subsection (e)(2) for an
explanation regarding purchases by grocery stores. The enclosed Administrative
Hearing No. 33, 089 dealt with the issue of good faith acceptance of resale and
exemption certificates by a seller in an identical situation.

Situation 2): *** primary enterprise is to purchase products from
manufacturers and sell them at a profit. Title of the merchandise is
transferred to the customer (usually a grocery store) in one of three different
ways: (a) the customer picks up the merchandise at your dock and pays no
transportation charge to **; (b) the customer contracts with a
third-party carrier and pays a transportation charge to the carrier, but not to
*; or (c) * delivers or contracts the merchandise, and
**** bills the customer a specific total for the delivery charge.

Let's assume that *** can and may sell and deliver to its customers
(as in example (c) above) merchandise to be used by the grocery store as
"supplies," and on which ***** is required to collect tax at the point
of sale to the grocery store.

Question: Is the transportation charge that *** charges its
customers taxable in part and/or in whole?

Response: Texas Tax Code Section 151.007 defines the "sales price" of
a taxable item to include transportation or delivery charges billed to
purchasers by sellers of taxable items. This is also covered in enclosed Rule
3.303, Transportation and Delivery Charges. When nontaxable items and taxable
items are delivered in the same shipment, a portion of the transportation
charge is attributable to the sales price of the taxable items and a portion of
the transportation charge is attributable to the sales price of the nontaxable
items.

Situation 2 continued): For example, *** may sell $10,000 in
merchandise to a resale customer. Let's say that $1,000 of the total sale is
in taxable supplies (for which you must charge your resale customers state
sales tax). Let's say ***** bills its customer $500 to ship it to the
customer.

Question: What is the total taxable base in this case? (Is it $1,000 plus 10%
of $500? Or is it $1,000 plus 100% of $500? Or should the taxable percentage
of the transportation charge be allocated on the basis of another measure, such
as total cubic feet or total pounds?)

Response: The transportation charge should be apportioned based on the
charges for nontaxable items to the charges for taxable items and tax collected
on the taxable portion. For example, 10 percent of the total charge for items
in that shipment is attributable to taxable items ($1,000 divided by $10,000
equals 10 percent). 10 percent of $500 is $50 dollars. Therefore, sales tax
is collected on $1,050 ($1,000 plus $50).

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division

Enclosures

cc: Nina Roberts, Tax Assistance