July 05, 2018
Texas Tax Code § 151.007 defines the “sales price” as the “total amount for which a taxable item is sold, leased, or rented, valued in money… .” The total sales price includes:
a. the taxable item sold, leased, or rented;
b. the materials used, labor or service employed, interest, losses, or other expenses;
c. the transportation or installation of tangible personal property; or
d. transportation incident to the performance of a taxable service.
The sales price also includes a service that is a part of the sale and the amount of credit given to the purchaser by the seller. Even if these items are separately stated, or separately invoiced by the same entity that sold the taxable item, they are still subject to sales and use tax.
The sales price does not include the following amounts if they are separately identified to the customer by such means as an invoice, billing, sales slip or ticket, or contract:
a. Cash discounts;
b. Refunds or credits (for tangible personal property or services);
c. Trade-ins (if it’s a type of property the seller sells in the ordinary course of business);
d. The face value of United States coin or currency in a sale of that coin or currency in which the total consideration given by the purchaser exceeds the face value of the coin or currency; or
e. Gratuities. Gratuities include both voluntary gratuities and reasonable mandatory charges for service of a meal or food products (including soft drinks and candy, for immediate human consumption). In order for a mandatory gratuity to be excluded from the taxable sales price (1) the service charge must be separated from the sales price of the meal or food product and separately identified as a gratuity or tip and (2) the employer must disburse the total amount of the service charge (mandatory gratuity) to employees who customarily and regularly provide the service.
Coupons and Rebates
Coupons reduce the taxable sales price of an item. Rebates do not. For example, coupons issued under the federal Digital-to-Analog Converter Box Coupon Program reduce the price of a converter box by $40. The coupon for the converter box, like other coupons, also reduces the taxable sales price of the converter box.1 Unlike coupons, items sold under rebates are generally subject to sales and use tax because the sales price includes the entire charge for the item and the rebate occurs after the transaction is complete.
Gift certificates are not considered tangible personal property. The gift certificate represents the intangible right to a future purchase. Accordingly, no sales tax is due on the sale of a gift certificate. Instead, tax is calculated when the gift certificate is redeemed. No sale occurs if the gift certificate remains unredeemed or expires. When the gift certificate is redeemed for merchandise either by the original purchaser or another who may have received the certificate as a gift, the gift certificate is treated like cash given for the purchase of the item.2 If the item purchased is taxable, sales tax is due on the full sales price including any amount paid with the use of the gift certificate.
Gift certificates may also be given away by retailers as promotional items. When a retailer gives away a gift certificate, receiving no consideration from the customer, no sale occurs when the retailer gives away the certificate or when the customer redeems the certificate for a taxable item.
When a promotional gift certificate is redeemed, it is treated as a cash discount and any tax due from the customer should be based on the discounted price.3 For example, ABC retail store gives any customer who spends more than $200 in one trip a gift card valued at $25 that can be redeemed on the customer’s next trip to the store. A customer redeems one of the $25 promotional gift cards when purchasing a $30 t-shirt. The value of the gift card is subtracted from the original sales price of the shirt and tax is calculated on the final reduced price of $5. If redemption of the promotional gift card
1 Comptroller Letter No. 200712092L.
2 Comptroller Letter 200105272L (May 30, 2001).
3 TEX. TAX CODE § 151.007(c)(1) (Vernon 2011); 34 TEX. ADMIN. CODE § 3.301 (West 2011). Texas Sales and Use Tax 2018 © Christina A. Mondrik Page 15 reduces the item’s sales price to zero, then no tax is due from the customer. The retailer owes tax on the amount he paid for the item(s) given away.