34 TAC §3.365
The Comptroller of Public Accounts proposes a new §3.365,
concerning sales of clothing and footwear during a three-day period in August.
The proposed section reflects the addition to the Tax Code of §151.326
and changes to Tax Code, §151.3111. Senate Bill 441, 76th Legislature,
1999, provides for a three-day sales-tax holiday on sales of certain articles
of clothing and footwear. This new section sets out guidelines for administering
the three-day sales tax holiday.
James LeBas, Chief Revenue Estimator, has determined that for the first
five-year period the rule will be in effect there will be no significant revenue
impact on the state or units of local government.
Mr. LeBas also has determined that for each year of the first five years
the rule is in effect, it will benefit the public by providing them with a
more efficient means of obtaining tax information. There is no anticipated
significant economic cost to the public. This rule is adopted under the Tax
Code, Title 2, and does not require a statement of fiscal implications for
small businesses. There is no significant anticipated economic cost to individuals
who are required to comply with the proposed rule.
Comments on the proposal may be submitted to Bryant K. Lomax, Manager,
Tax Policy Division, P.O. Box 13528, Austin, Texas 78711.
This section is proposed under the Tax Code, §111.002, which
provides the comptroller with the authority to prescribe, adopt, and enforce
rules relating to the administration and enforcement of the provisions of
the Tax Code, Title 2.
The new section implements Tax Code, §151.326 and §151.3111.
§3.365.Sales of Clothing and Footwear During a Three-day Period in August.
(a)
Definitions. The following words and terms, when used in
this section, shall have the following meanings, unless the context clearly
indicates otherwise. Clothing or footwear - An article of apparel that the
article manufacturer designs for wear on or about the human body. For the
purposes of this section, the term does not include accessories, such as jewelry,
handbags, purses, briefcases, luggage, wallets, watches, and similar items
that are carried on or about the human body, without regard to whether the
item is worn on the body in a manner that is characteristic of clothing.
(b)
Exempt sales.
(1)
Sales or use tax is not due on the sale of an article of
clothing or footwear if:
(A)
the sales price of the article is less than $100; and
(B)
the sale takes place during the period that begins at 12:01
a.m. on the first Friday in August and ends at 12:00 a.m. (midnight) of the
following Sunday.
(2)
The exemption applies to each article of clothing
or footwear that sells for less than $100, regardless of how many items are
sold on the same invoice to a customer. For example, if a customer purchases
two shirts for $80 each, then both items qualify for the exemption, even though
the customer's total purchase price ($160) exceeds $99.99.
(3)
The exemption does not apply to the first $99.99 of
an article of clothing or footwear that sells for more than $99.99. For example,
if a customer purchases a pair of pants that costs $110, then sales tax is
due on the entire $110.
(c)
Taxable sales. This exemption does not apply to:
(1)
any special clothing or footwear that the manufacturer
primarily designed for athletic activity or protective use and that is not
normally worn except when used for the athletic activity or protective use
for which the manufacturer designed the article. For example, golf cleats
and football pads are primarily designed for athletic activity or protective
use and are not normally worn except when used for those purposes; therefore,
they do not qualify for the exemption. However, tennis shoes, jogging suits,
and swimsuits are commonly worn for purposes other than athletic activity
and thus qualify for the exemption;
(2)
accessories, such as jewelry, handbags, purses, briefcases,
luggage, umbrellas, wallets, watches, and similar items that are carried on
or about the human body, without regard to whether the item is worn on the
body in a manner that is characteristic of clothing;
(3)
the rental of clothing or footwear. For example, this
exemption does not apply to the rental of formal wear, costumes, uniforms,
diapers, or bowling shoes;
(4)
taxable services that are performed on the clothing
or footwear, such as repair, remodeling, or maintenance services, and cleaning
or laundry services. For example, sales tax is due on alterations to clothing,
even though the alterations may be sold or invoiced, and the customer pays
such invoice, at the same time as the clothing is being altered. If a customer
purchases a pair of pants for $90 and pays $15 to have the pants cuffed, then
the $90 charge for the pants is exempt, but tax is due on the $15 alterations
charge; and
(5)
purchases of items that are used to make or repair
clothing or footwear, including fabric, thread, yarn, buttons, snaps, hooks,
and zippers.
(d)
Articles normally sold as a unit. Articles that are normally
sold as a unit must continue to be sold in that manner; they cannot be priced
separately and sold as individual items in order to obtain the exemption.
For example, if a pair of shoes sells for $150, then the pair cannot be split
in order to sell each shoe for $75 to qualify for the exemption. If a suit
is normally priced at $225 on a single price tag, the suit cannot be split
into separate articles so that any of the components may be sold for less
than $100 in order to qualify for the exemption. However, components that
are normally priced as separate articles may continue to be sold as separate
articles and qualify for the exemption if the price of an article is less
than $100.
(e)
Sales of sets containing both exempt and taxable items.
(1)
When exempt clothing or footwear is sold together with
taxable merchandise as a set or single unit, the full price is subject to
sales tax unless the price of the exempt clothing or footwear is separately
stated. For example, if a boxed gift set that consists of a French-cuff dress
shirt, cufflinks, and a tie tack is sold for a single price of $95, the full
price of the boxed gift set is taxable because the cufflinks and tie tack
are taxable and the sales price of the shirt is not separately stated.
(2)
When exempt clothing is sold in a set that also contains
taxable merchandise as a free gift and no additional charge is made for the
gift, the exempt clothing may qualify for this exemption. For example, a boxed
set may contain a tie and a free tie tack. If the price of the set is the
same as the price of the tie sold separately, the item that is being sold
is the tie, which is exempt from tax if the tie is sold for less than $100
during the exemption period. Note: When a retailer gives an item away free
of charge, the retailer owes sales or use tax on the purchase price that the
retailer paid for the item.
(f)
Discounts and coupons.
(1)
A retailer may offer discounts to reduce the sales price
of an item. If the discount reduces the sales price of an item to $99.99 or
less, the item may qualify for the exemption. For example, a customer buys
a $150 dress and a $100 blouse from a retailer who offers a 10% discount.
After application of the 10% discount, the final sales price of the dress
is $135, and the blouse is $90. The dress is taxable (its price is over $99.99),
and the blouse is exempt (its price is less than $99.99).
(2)
When retailers accept coupons as a part of the sales
price of any taxable item, the value of the coupon is excludable from the
tax as a cash discount, regardless of whether the retailer is reimbursed for
the amount that the coupon represents. Therefore, a coupon can be used to
reduce the sales price of an item to $99.99 or less in order to qualify for
the exemption. For example, if a customer purchases a pair of shoes priced
at $110 with a coupon worth $20, the final sales price of the shoes is $90,
and the shoes qualify for the exemption.
(g)
Buy one, get one free or for a reduced price. The total
price of items that are advertised as "buy one, get one free," or "buy one,
get one for a reduced price," cannot be averaged in order for both items to
qualify for the exemption. The following examples illustrate how such sales
should be handled.
(1)
A retailer advertises pants as "buy one, get one free."
The first pair of pants is priced at $120; the second pair of pants is free.
Tax is due on $120. Having advertised that the second pair is free, the store
cannot register the charge for each pair of pants at $60 in order for the
items to qualify for the exemption. However, if the retailer advertises and
sells the pants for 50% off, and sells each pair of $120 pants for $60, each
pair of pants qualifies for the exemption. Note: When a retailer gives an
item away free of charge, the retailer owes sales or use tax on the purchase
price that the retailer paid for the item.
(2)
A retailer advertises shoes as "buy one pair at the
regular price, get a second pair for half price." The first pair of shoes
is sold for $100; the second pair is sold for $50 (half price). Tax is due
on the $100 shoes, but not on the $50 shoes. Having advertised that the second
pair is half price, the store cannot ring up each pair of shoes for $75 in
order for the items to qualify for the exemption. However, if the retailer
advertises the shoes for 25% off, and thereby sells each pair of $100 shoes
for $75, then each pair of shoes qualifies for the exemption.
(h)
Rebates. Rebates occur after the sale and do not affect
the sales price of an item purchased. For example, a customer purchases a
sweater for $110 and receives a $12 rebate from the manufacturer. The retailer
must collect tax on the $110 sales price of the sweater.
(i)
Layaway sales. A layaway sale is a transaction in which
merchandise is set aside for future delivery to a customer who makes a deposit,
agrees to pay the balance of the purchase price over a period of time, and,
at the end of the payment period, receives the merchandise. An order is accepted
for layaway by the retailer when the retailer removes the goods from normal
inventory or clearly identifies the items as sold to the customer. A sale
of eligible clothing under a layaway sale qualifies for exemption when either:
(1)
final payment on a layaway order is made by, and the merchandise
is given to, the customer during the exemption period; or
(2)
the customer selects the item and the retailer accepts
the order for the item during the exemption period, for immediate delivery
upon full payment, even if delivery is made after the exemption period.
(j)
Rain checks. Eligible items that customers purchase during
the exemption period with use of a rain check will qualify for the exemption
regardless of when the rain check was issued. However, issuance of a rain
check during the exemption period will not qualify an eligible item for the
exemption if the item is actually purchased after the exemption period.
(k)
Exchanges.
(1)
If a customer purchases an item of eligible clothing or
footwear during the exemption period, but later exchanges the item for an
item of a different size, different color, or other feature, no additional
tax is due even if the exchange is made after the exemption period.
(2)
If a customer purchases an item of eligible clothing
or footwear during the exemption period, but after the exemption period has
ended, the customer returns the item and receives credit on the purchase of
a different item, the appropriate sales tax is due on the sale of the newly
purchased item.
(3)
If a customer purchases an item of eligible clothing
or footwear before the exemption period, but during the exemption period the
customer returns the item and receives credit on the purchase of a different
item of eligible clothing or footwear, no sales tax is due on the sale of
the new item if the new item is purchased during the exemption period.
(4)
Examples:
(A)
A customer purchases a $35 shirt during the exemption period.
After the exemption period, the customer exchanges the shirt for the same
shirt in a different size. Tax is not due on the $35 price of the shirt.
(B)
A customer purchases a $35 shirt during the exemption period.
After the exemption period, the customer exchanges the shirt for a $35 jacket.
Because the jacket was not purchased during the exemption period, tax is due
on the $35 price of the jacket.
(C)
During the exemption period, a customer purchases a $90
dress that qualifies for the exemption. Later, during the exemption period,
the customer exchanges the $90 dress for a $150 dress. Tax is due on the $150
dress. The $90 credit from the returned item cannot be used to reduce the
sales price of the $150 item to $60 for exemption purposes.
(D)
During the exemption period, a customer purchases a $60
dress that qualifies for the exemption. Later, during the exemption period,
the customer exchanges the $60 dress for a $95 dress. Tax is not due on the
$95 dress because it was also purchased during the exemption period and otherwise
meets the qualifications for the exemption.
(l)
Returned merchandise. For a 30-day period after the temporary
exemption period, when a customer returns an item that would qualify for the
exemption, no credit for or refund of sales tax shall be given unless the
customer provides a receipt or invoice that shows tax was paid, or the retailer
has sufficient documentation to show that tax was paid on the specific item.
This 30-day period is set solely for the purpose of designating a time period
during which the customer must provide documentation that shows that sales
tax was paid on returned merchandise. The 30-day period is not intended to
change a retailer's policy on the time period during which the retailer will
accept returns.
(m)
Mail, telephone, e-mail, and Internet orders and custom
orders. Under the Texas sales tax law, a sale of tangible personal property
occurs when a purchaser receives title to or possession of the property for
consideration. Therefore, an item of eligible clothing or footwear may qualify
for this exemption if:
(1)
the item is both delivered to and paid for by the customer
during the exemption period; or
(2)
the customer orders and pays for the item and the
retailer accepts the order during the exemption period for immediate shipment,
even if delivery is made after the exemption period. The retailer accepts
an order when the retailer has taken action to fill the order for immediate
shipment. Actions to fill an order include placement of an "in date" stamp
on a mail order, or assignment of an "order number" to a telephone order.
An order is for immediate shipment when the customer does not request delayed
shipment. An order is for immediate shipment notwithstanding that the shipment
may be delayed because of a backlog of orders or because stock is currently
unavailable to, or on back order by, the company.
(n)
Shipping and handling charges.
(1)
Shipping and handling charges are included as part of the
sales price of the clothing or footwear, whether separately stated or not.
Except as provided in paragraph (2) of this subsection, if multiple items
are shipped on a single invoice, the shipping and handling charge must be
proportionately allocated to each item ordered, and separately identified
on the invoice, to determine if any items qualify for the exemption. The following
examples illustrate the way that these charges should be handled:
(A)
A customer orders a jacket for $95. The shipping charge
to deliver the jacket to the customer is $5.00. The sales price of the jacket
is $100. Tax is due on the full sales price.
(B)
A customer orders a suit for $285 and a shirt for $95.
The charge to deliver the items is $15. The $15 shipping charge must be proportionately
and separately allocated between the items: $285 / $380 = 75%; therefore,
75% of the $15 shipping charge, or $11.25, must be allocated to the suit,
and separately identified on the invoice as such. The remaining 25% of the
$15 shipping charge, or $3.75, must be allocated to the shirt, and separately
identified on the invoice as such. The sales price of the shirt is $95 plus
$3.75, which totals $98.75; therefore, the shirt qualifies for the exemption.
(C)
A customer orders a suit for $285 and a shirt for $95.
The charge to deliver the items is $20. The $20 shipping charge must be proportionately
and separately allocated between the items: $285 / $380 = 75%; therefore,
75% of the $20 shipping charge, or $15, must be allocated to the suit, and
separately identified on the invoice as such. The remaining 25% of the $20
shipping charge, or $5.00, must be allocated to the shirt, and separately
identified on the invoice as such. The sales price of the shirt is $95 plus
$5.00, which totals $100; because the sales price of the shirt exceeds $99.99,
the purchase of the shirt is taxable.
(2)
If the shipping and handling charge is a flat
rate per package and the amount charged is the same regardless of how many
items are included in the package, for purposes of this exemption the total
charge may be attributed to one of the items in the package rather than proportionately
and separately allocated between the items. For example, a customer orders
five shirts, with four priced at $98 and one at $85. The retailer charges
$10 for shipping and handling the order. The retailer would have charged the
same amount for shipping and handling whether the customer ordered one shirt
or five shirts. The retailer may chose to attribute the $10 shipping and handling
charge to the shirt that was sold for $85 rather than allocate the charge
proportionately and separately between the shirts. If the charge is attributed
to the $85 shirt, the sales price of that shirt is $95, and all of the shirts
will qualify for the exemption.
(o)
Documenting exempt sales. The retailer is not required
to obtain an exemption certificate on sales of eligible items during the exemption
period. However, the retailer's records should clearly identify the type of
item sold, the date on which the item was sold, and the sales price of the
item.
(p)
Reporting exempt sales. No special reporting procedures
are necessary to report exempt sales made during the exemption period. Sales
should be reported as currently required by law.
(q)
Local taxes. The three-day exemption also applies to local
taxes, unless the local taxing authority adopts an appropriate order such
as an ordinance to repeal the application of the exemption in the manner provided
by Tax Code, §326.003. A taxing authority that has repealed the application
of the exemption under this section may reinstate the exemption in the same
manner. The repeal of the application of the exemption or a reinstated exemption
takes effect on the first day of the first calendar quarter that occurs after
the expiration of the first complete calendar quarter that occurs after the
date on which the comptroller receives a copy of the order adopted. State
taxes on qualifying purchases are still not due.
This agency hereby certifies that the proposal has been reviewed
by legal counsel and found to be within the agency's legal authority to adopt.
Filed with the Office of
the Secretary of State, on June 23, 2000.
TRD-200004408
Martin Cherry
Deputy General Counsel for Tax Policy and Agent Affairs
Comptroller of Public Accounts
Earliest possible date of adoption: August 6, 2000
For further information, please call: (512) 463-3699