Tax Exemption Status
The State of Texas charges sales tax on all purchases made by individuals or entities within the state unless the entity making the purchase has a tax-exempt status. Texas State, as a governmental instrumentality of the State of Texas, claims federal tax-exempt tax status under Section 115 of the Internal Revenue Code. Although the university is generally exempt from paying Texas sales taxes, some purchases are not exempt and sales tax must be paid. Tax-exempt purchases, taxable purchases, and allowable payments or reimbursements of sales taxes are discussed below.
Texas State does not pay sales and use tax when it purchases taxable items that are necessary to the university's tax-exempt purpose. An authorized agent or employee of Texas State may purchase items tax-free for the university if the agent or employee gives the merchant a Sales Tax Exemption Certificate. If an item is purchased tax-free for Texas State, the item cannot be used for a private party's or the individual's benefit afterwards.
When tax-exempt items are purchased for the university, the agent or employee is required to complete a Sales Tax Exemption Certificate. The agent or employee signing the document will be responsible for any questioned purchases under a State of Texas sales tax audit. The Texas Sales Tax Exemption Certificate may be downloaded from the Texas State Tax Specialist's webpage.
State of Texas sales tax regulations consider certain purchases as taxable even when they are made by the university as a tax-exempt entity. A sales Tax Exemption Certificate may not be given to merchant for the following taxable purchases:
- The purchase, rental or use of motor vehicles.
- The purchase of items of a personal nature by an agent or employee of the university, even if the university
will later reimburse that individual for those items. Such items include meals, toiletries, and clothing. See
additional guidance below concerning purchases of business meals.
- Purchases such as meals or parking when an agent or employee is in travel status on official university
business. The employee must pay sales tax on all taxable purchases even if they are later reimbursed per
diem or for actual expenses incurred.
Allowable Sales Tax Payments or Reimbursements
Texas sales tax may be paid or reimbursed on taxable purchases at the discretion of the account manager. Texas sales tax may not be paid or reimbursed on tax-exempt purchases. If an agent or employee fails to submit a Texas Sales Tax Exemption Certificate for a tax-exempt purchase, the agent or employee is personally responsible for payment of the sales tax.
Special Guidance for Business Meals
State of Texas sales tax regulations specifically list meals as an example under “items of a personal nature.” Although no definition of items of a personal nature is given in the regulations, the regulations are clear that such purchases are taxable. However, the university does not consider all meal purchases to be items of a personal nature. Business meals purchased directly by the university are not considered items of a personal nature and are therefore considered a tax-exempt purchase. Properly identifying whether a meal is an item of a personal nature or not is key to determining whether the meal should be taxable or tax-exempt. To assist employees in making such determinations, the following guidance is provided.
When business meals are purchased with a personal credit card or with cash by an agent or employee of Texas State, the meal is considered an item of a personal nature, even if the meal will be consumed in conjunction with official Texas State business. The agent or employee may not present a completed Sales Tax Exemption Certificate to the merchant to claim a sales tax exemption. Because the Texas State agent or employee is unable to avoid payment of the sales tax, the sales tax is considered a valid business expense and may be paid or reimbursed to the agent or employee at the discretion of the account manager.
When meals in conjunction with official Texas State business are purchased by an agent or employee with a purchase order, a direct payment form (e-NPO with the merchant as the vendor), or a P-card, the meal is considered to be sales tax-exempt. The agent or employee must present a completed Sales Tax Exemption Certificate to the merchant and avoid paying sales tax.
Effort should be made to purchase business meals with a purchase order, a direct payment form (e-NPO with the merchant as the vendor), or a P-card to avoid unnecessarily paying sales tax.