|Sales Tax Update|
|a quarterly online newsletter about Texas Sales and Use Tax|
New Sales Tax Locator Now Available!
Want an easy way to look up a local sales tax rate for a particular address?
Just go to the new Tax Rate Locator on the Local Sales and Use Tax page of our Web site where you may search for a local tax rate by entering the address and ZIP code of the location. You can then apply our guidelines for collecting local sales and use tax to determine the tax rate that should be collected on a transaction.
A rate search can't get much easier!
August Three-Day Sales Tax Holiday on Clothing, Footwear and Backpacks
Shoppers in Texas get a break from state and local sales taxes on purchases of most clothing, footwear and backpacks during our annual three-day Clothing Sales Tax Holiday in August.
This year's tax holiday begins at 12:01 a.m., Friday, August 21, 2009, and ends at midnight on Sunday, August 23, 2009. Every city and local taxing jurisdiction in the state will participate in the holiday, so the tax break applies to both state and local sales taxes.
During the tax holiday, retailers cannot collect sales taxes on most clothes and shoes (including boots) that sell for less than $100. Backpacks sold for less than $100 for use by elementary and secondary students are also eligible for the holiday. The tax holiday does not extend to clothing and shoe rentals.
Tax is still due on sales of athletic and protective clothing and footwear not normally worn except during an athletic activity or as protection. For example, since basketball shoes are worn for many activities other than basketball, they can be sold tax free during the tax holiday. On the other hand, spiked golf shoes are rarely worn except when playing golf, so they are not exempt from tax.
Additionally, tax is still due on sales of accessories, jewelry, handbags, luggage, umbrellas, wallets, watches and similar items.
Summer Fun in the Sun - Keeping it Cool and "Collected"
The sun is high in the Texas sky and that means sales are up on many warm weather products. To help retailers beat the heat, here is a reminder about the taxability of many seasonal products. Remember, all food and drinks (except unflavored water, which is exempt) sold in individual serving sizes by a business with eating facilities are taxable when the items require no further preparation before eating.
Drinks and Ice
Water (including bottled and carbonated water) isn't taxable unless it's flavored.
Flavored water, sports drinks, sodas and frozen "slush" drinks are taxable.
Bottled or canned diluted juices that are not more than 50 percent juice are taxable.
Juice drinks containing more than 50 percent fruit or vegetable juice by volume are exempt unless sold ready for immediate consumption (such as with a cup or straw).
Beer and wine are taxable when sold at a grocery or convenience store.
Ice is taxable.
Individual servings of ice cream sundries (such as ice cream bars and sandwiches, sherbet push-up pops or ice cream cones) and half pints of ice cream are taxable.
Tax is not due on ice cream sundries that are sold in prepackaged containers with two or more servings.
Ice pops, juice pops and popsicles that do not contain milk products are not ice cream sundries. These items are taxable regardless of how many are in the package, unless they contain more than 50 percent fruit juice.
Fruits and Vegetables
Watermelons and other fresh fruit and vegetables are not taxable unless sold ready for immediate consumption (such as with a plate or eating utensils).
Charcoal and firewood are taxable.
Grill bottles filled with propane and lantern bottles filled with kerosene are exempt from sales tax.
Sunscreen is taxable.
Mosquito and bug sprays are taxable.
Insect repellants for lawns and gardens are taxable.
Camps for Children
Camps for children, including day camps and boarding camps, are not amusement services. The same is true of instruction for any sport or musical discipline. Therefore, charges for children's camps or for instructional classes in sports or music are not taxable. See STAR # 8709L0838G06.
Tax-Free Sales: It's a New Calendar Year
Generally, nonprofit organizations are required to collect sales tax on sales of taxable items and services. There are, however, some exceptions.
For example, a nonprofit religious, educational or charitable organization, or an organization exempted under Internal Revenue Code, Section 501(c)(3), (4), (8), (10) or (19) that applies for and receives sales tax exemption on its purchases, based on Texas Tax Code Section 151.310(a)(1) and (a)(2), as well as each bona fide chapter of those qualified organizations, is allowed to hold two one-day, tax-free sales each calendar year. A calendar year starts January 1 and ends December 31, so be careful not to confuse this with a school year. This exemption is found in Texas Tax Code Section 151.310(c).
A qualified organization that has obtained sales tax exemption, (as set out in the previous paragraph) must designate in its records prior to the sale which two one-day sales will be exempt that calendar year. This may require careful planning and coordination for organizations that operate on a fiscal year basis. For example, PTAs, PTOs and other school groups commonly plan events based on school years rather than calendar years. When planning fundraising activities for a new school year, the school groups should verify the number of tax-free fundraisers conducted by the organization during the prior school year that occurred during the current calendar year.
If a qualified exempt organization does collect sales tax on a sale, the tax must either be remitted to the state or refunded to the purchaser. The organization cannot collect the tax and keep it under the tax-free sale provision. "One day" means 24 consecutive hours. If a designated tax-free sale or auction exceeds a consecutive 24-hour period, the organization may not hold another tax-free sale or auction that calendar year. If two or more groups hold a one-day tax-free sale together, the event counts as one tax-free sale for each participating organization. Each of those organizations is then limited to one additional tax-free sale during the remainder of the calendar year.
During a designated tax-free fundraising event, the qualifying exempt organization may sell taxable items free of tax as long as the sales price does not exceed $5,000. If an item is donated to the organization, however, and is not sold back to the person who donated the item, then the item may be sold tax free regardless of the sales price. This means the sale of donated items during a designated tax-free fundraising event may be exempted even if the sales price of a donated item is greater than $5,000 as long as it is not sold back to the person who donated the item. Additionally, if an item is made by an exempt organization and sold at one of the organization's one-day tax-free sales or auctions, then the item is exempt regardless of the sales price.
A qualifying exempt organization may take orders over an extended period of time before delivery is made, and this event can still count as a one-day tax-free fundraiser as long as the items are either delivered to purchasers on a single day or received by the selling organization from a third party vendor on a single day. A sale occurs when title or possession of the item transfers to the purchaser. In the case of items that are preordered and generally prepaid (such as yearbooks), the organization can transfer title to the items as soon as it receives the order. Therefore, the date the items are delivered by the vendor to the seller can be designated as the "one day" for the purposes of the tax-free sale.
Additionally, items sold on the spot on a day that is held out to be one of the organization's tax-free days is perfectly acceptable and does not cause the pre-ordered sales to lose the exemption.
The tax-free fundraising provisions described apply only when a qualified exempt organization is the seller of the items. There is no exemption from the collection of sales tax when a qualified exempt organization raises funds by acting as a sales representative or commissioned sales agent for a for-profit retailer. In this case, the group receives a commission for selling candy, gift wrap, Christmas ornaments, candles or similar items. The for-profit retailer (not the exempt organization) is considered the seller, so the tax-free sale provision does not apply.
The exempt organization must collect sales tax on the taxable sales and forward the tax collected to the for-profit retailer, who reports and remits the tax. An alternative would be for the for-profit retailer to include a statement in the catalogs and order sheets that the selling price includes Texas sales or use tax on taxable items. This type of fundraising activity does not count against the two one-day tax-free sale days available to qualifying exempt organizations.
Blueprints and Reproduction Services Purchased by Architects, Engineers, Contractors and Government Entities
Persons providing nontaxable services must pay tax on all items purchased to perform their service, unless the items otherwise qualify for exemption.
Architects and engineers provide a nontaxable professional service when producing original plans and copies of the original plans for clients. An architect or engineer does not collect sales tax on separately stated charges for copies of blueprints or blueline prints provided to clients per client/architect/engineer agreements. In such circumstances, the service provider must pay sales tax on the purchase regardless of the exempt status of the client.
Contractors are consumers of blueprint or design copies used for a contract to improve real property, even if the contract is with an exempt organization or the contractor separately states the charge for the copies to the owner of the real property. The contractor should pay sales tax on such copies regardless of the exempt status of the client.
Architects, engineers and contractors who sell copies of "stock" or duplicate copies of blueprints and specifications which are not produced specifically for a client under an owner/architect/engineer agreement must collect sales tax on such sales. For example, a person who wishes to bid on a construction project may seek to purchase a copy of the original plans directly from the architect. The architect may then issue a resale certificate for the copies purchased for resale, and must collect tax on the sale of the duplicate copy to the contractor.
An architect hired to create a design for a new building does not collect sales tax from the client. The architect is providing a nontaxable professional service. If the architect goes to a draftsman (who is not an employee of the architect) to draw the blueprint of the building based on the architect's specifications, the draftsman collects sales tax from the architect on the charges for the blueprint and any additional copies of the blueprint. If the architect passes the cost of these blueprints to the client, the architect collects no sales tax from the client because the architect is selling the client a nontaxable service, not tangible personal property. If the architect later sells the "stock plans" of the building that the architect previously designed to a person other than the client, this would simply be a sale of tangible personal property.
"Caught in the Middle" - Contracts with Exempt Entities: Purchases of Taxable Services, Supplies and Rental Equipment by the "Middleman"
When purchasing real property improvement services, such as new construction or repair and remodeling, exempt organizations defined in Tax Code Section 151.309 or 151.310 commonly employ general contractors or engineering firms for these projects. Frequently, questions arise about the applicability and responsibility for sales and use taxes on taxable items purchased, leased or rented to complete these projects.
To illustrate, assume a city hires a contractor to repair a city road. This contractor will need to rent barricades for use on the job site. The rental of equipment that the contractor will use in the performance of the contract is subject to sales tax. The contractor may not issue a resale certificate to the barricade vendor because the contractor is the end user of the barricades. The contractor is purchasing the barricades for use in completing the job and is not re-renting the barricades to the city. Nor may the contractor issue an exemption certificate to the barricade vendor. The exempt status of the city does not flow through to the contractor. Therefore, the contractor must pay tax on the rental of the barricades.
There are, however, some exemptions that a contractor may claim on purchases necessary to complete a contract for real property improvement for an exempt entity. These exemptions are found in Tax Code Section 151.311(a) and (b).
A contractor may issue an exemption certificate in lieu of paying tax on purchases of taxable items incorporated into the property of the exempt entity and on certain types of consumable items the contractor uses to complete the job. Machinery and equipment are specifically excluded from this exemption.
If the contractor wants reimbursement for the rental of the equipment plus tax, the contractor may build the cost of the rental into the pricing of a lump sum contract, or separately state a reimbursement amount for the rental of the equipment plus tax on the equipment.
For example, if the cost for rental of the equipment is $10,000 plus $825 tax, the contractor can state on the invoice:
|Reimbursement for equipment rental||$10,000|
|Reimbursement for sales tax on equipment rental||825|
Often, an exempt entity (such as the city in our example above) is reluctant to pay a "tax" reimbursement. The exempt entity should be aware, however, that paying the tax reimbursement is simply paying an expense, or reimbursing the contractor for a cost incurred in completing the contract. The exempt entity is not paying sales tax to the contractor on a purchase for its use that it would normally claim as an exempt purchase.
An exempt entity may purchase nontaxable services, such as an engineering service. The provider of this nontaxable service may, depending on the terms of the contract, seek reimbursement from the exempt organization for costs incurred in performance of the contract, including taxes paid to vendors of taxable items.
For this example, let's assume our city hired an engineer to create the specifications for a new county building to be built on a new parcel of land purchased by the city. To begin the project, the engineer would need to purchase taxable surveying services in order to learn the exact boundaries of the property. Again, the exempt status of the city does not flow through to the engineer so the engineer must pay tax to the surveyor on the charge for boundary surveying.
If the engineering service wants reimbursement for the cost of the surveying plus tax, it may, like the contractor, separately state a reimbursement amount for the surveying, plus tax on the surveying.
For example, if the cost of the surveying is $1,000 plus $82.50 tax, the engineer can state on the invoice:
|Reimbursement for taxable surveying||$1,000.00|
|Reimbursement for sales tax on taxable surveying||82.50|
As with a contractor, the exempt entity should be aware that, in paying the reimbursement, the exempt entity is not paying sales tax, but, rather, is reimbursing the engineer for sales tax expense incurred to provide the specifications the city desired.
Clearly Identify Reimbursement
As in the examples above, the tax reimbursement must be clearly identified as "reimbursement for sales tax." If the charge is not clearly identified as a reimbursement, tax is collected in error and must be either remitted to the state by the contractor or nontaxable service provider or refunded to the customer.
Some exempt entities request that bidders delete all state and local sales tax from their bid estimates or invoices. Bidders, however, may owe tax on purchases to complete the work. When preparing payment for the job, exempt entities should take note of the tax obligations imposed by law on contractors and service providers before deleting all tax related charges from the invoice.
Firearms Sold by Out-of-State Dealers - Transfer Fees Charged by Texas Dealers
When a gun is purchased from out of state by an individual in Texas, federal law provides that the out-of-state seller must ship the gun to a Texas dealer for transfer to the individual.
Frequently, the Texas dealer will charge the purchaser a transfer fee to cover the costs of paperwork and handling. Because the gun was not purchased from the Texas dealer, the transfer fee does not represent a sale. Therefore, the transfer fee is not taxable.
For example, assume an individual paid $1,500 to an out-of-state seller for a gun. The out-of-state seller shipped the gun to a Texas gun dealer. The customer picked up the gun at the Texas dealer's place of business and was charged a $25 transfer fee by the dealer. The $25 transfer fee is not considered a sale for Texas sales and use tax purposes and therefore is not subject to sales tax.
The purchase of the gun itself is, however, subject to Texas use tax. If the out-of-state seller does not collect the applicable Texas tax, then the purchaser is responsible for accruing and remitting the tax directly to the Comptroller's office. The Texas gun dealer handling the transfer is not responsible for collecting the use tax since the Texas dealer is not the seller of the gun. Purchasers may use a Texas Occasional Use Tax Return (Form 01-156) to report and remit the Texas use tax on the purchase of a firearm from an out-of-state gun dealer.
Contributors to This Month's Issue
Robin Corrigan, Jody Frierson, Carol McAnnally, Stefanie Medack and Viki Smith