Texas Sales Tax: Fulfillment Services Held Non-Taxable

On December 19th, a state district court in Austin, Texas issued two significant rulings pertaining to Texas sales taxes. The first held that the sales price of taxable items sold did not include the seller’s charges for the storage and later handling/packaging and transportation of those items (“fulfillment services”). The second held that Texas courts have jurisdiction over issues raised in a protest suit that were not assessed in the underlying sales tax audit.

The Plaintiff was Pointsmith Point-of-Purchase Management Services, LP, headquartered in Katy, Texas. It prints and sells custom marketing materials and provides fulfillment services, mainly to large franchisors of fast food restaurants and gas stations. Pointsmith’s customers store the marketing materials purchased from Pointsmith and third parties in spaces they rent within Pointsmith’s facility. Later, at the customer’s direction, Pointsmith selects particular materials from storage and packages them in specific combinations for shipment to various locations, both within and outside the state of Texas. Pointsmith separately charges for the marketing materials and fulfillment services. It charges sales tax on the marketing materials, but not on the fulfillment services. The Comptroller audited Pointsmith and assessed tax on the charges for the fulfillment services, alleging they were taxable under the “Sales Price Rule.”

The Sales Price Rule is a provision found in the Texas tax code that requires a seller to include the charges for otherwise nontaxable services in the price of an item sold when the services are “part of the sale” of the taxable item. Here, the court held that Pointsmith’s fulfillment services were not “part of the sale” of the marketing materials.

With regard to the second issue, Pointsmith alleged that the Comptroller could not tax its transactions under a particular taxing theory and then ignore the consequences of that theory in other respects. Specifically, Pointsmith argued that the Comptroller couldn’t claim Pointsmith’s fulfillment services were taxable under the Sales Price Rule while simultaneously ignoring the out-of-state destination of the marketing materials being fulfilled.

The court has issued a letter ruling in Pointsmith’s favor requesting a written judgment. The decision is significant for Texas businesses operating in Texas that sell products and provide fulfillment services. It is also important to businesses seeking to challenge Texas audit assessments that were generated by auditors applying inconsistent taxing theories.

For more information, contact Jimmy Martens or Danielle Ahlrich with Martens, Todd, Leonard & Ahlrich, the law firm that represented Pointsmith at trial, at (512) 542-9898.