SECTION 3.365. Sales Tax Holiday--Clothing, Shoes and School Supplies

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Clothing or footwear--An article of apparel that the article manufacturer designs for wear on or about the human body. Except as provided under paragraph (3) of this subsection, 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.

(2) Eligible item--For the purposes of this section, an article of clothing or footwear, a school backpack, or school supplies that are eligible for the sales tax exemption established under Tax Code, §151.326 and §151.327.

(3) School backpack--A pack with straps that one wears on the back, including a backpack with wheels (provided it may also be worn on the back like a traditional backpack) or a messenger bag, that is purchased for use by a student in a public or private elementary or secondary school. The term does not include an item that is commonly considered luggage, a briefcase, an athletic bag, a duffle bag, a gym bag, a computer bag, or a framed backpack.

(4) School supply--The term "school supply" has the meaning assigned by the Streamlined Sales and Use Tax Agreement adopted November 12, 2002, including all amendments made to the Agreement on or before December 14, 2006. The items set out in the following all-inclusive list are school supplies for the purpose of this exemption: binders, book bags, calculators, cellophane tape, blackboard chalk, compasses, composition books, crayons, erasers, expandable folders, pocket folders, plastic folders, manila folders, glue, paste, paste sticks, highlighters, index cards, index card boxes, legal pads, lunch boxes, markers, notebooks, loose leaf ruled notebook paper, copy paper, graph paper, tracing paper, manila paper, colored paper, poster board, construction paper, pencil boxes and other school supply boxes, pencil sharpeners, pencils, pens, protractors, rulers, scissors, and writing tablets. School supply items not on this list, for example, computers and textbooks, are not eligible for the exemption.

(b) Exempt sales.

(1) Sales or use tax is not due on the sale of an eligible item if:

(A) the sales price of the eligible item is less than $100; and

(B) the sale takes place during the period that begins at 12:01 a.m. on the Friday before the fifteenth day preceding the fourth Monday in August, and ends at 12:00 a.m. (midnight) on the following Sunday.

(i) Using 2013 as an example, the fourth Monday in August falls on August 26. The fifteenth day preceding August 26 is Sunday, August 11th. The Friday before August 11 is August 9. The sales tax holiday will begin at 12:01 a.m. on Friday, August 9 and end at 12:00 a.m. (midnight) on Sunday, August 11.

(ii) In 2014, the sales tax holiday will begin at 12:01 a.m. on Friday, August 8 and end at 12:00 a.m. (midnight) on Sunday, August 10.

(iii) In 2015, the sales tax holiday will begin at 12:01 a.m. on Friday, August 7 and end at 12:00 a.m. (midnight) on Sunday, August 9.

(2) The exemption applies to each eligible item 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 otherwise eligible item 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. The exemption under this section 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, athletic bags, duffle bags, gym bags, computer bags, framed backpacks, 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) school supplies and backpacks that are not purchased for use by elementary or secondary school students;

(4) school supplies not listed in subsection (a)(4) of this section;

(5) the rental of clothing or footwear. For example, the exemption under this section does not apply to the rental of formal wear, costumes, uniforms, diapers, or bowling shoes;

(6) taxable services that are performed on clothing or footwear, such as repair, remodeling, alterations, or maintenance services, and cleaning or laundry services. For example, 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

(7) purchases of items that are used to make or repair eligible items, 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 pre-packaged combinations containing both exempt and taxable items.

(1) When an eligible item is sold together with taxable merchandise in a pre-packaged combination or single unit and the predominant cost of the set or unit is taxable, then the full price is subject to sales tax unless the price of the eligible item 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 if the cufflinks and tie tack are the predominant cost and the price of the shirt and tie are not separately stated.

(2) When an eligible item is sold in a pre-packaged combination that also contains taxable merchandise as a free gift and no additional charge is made for the gift, the eligible item may qualify for the exemption under this section. 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 under this section. 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 $100.00).

(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 under this section. 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 under this section. 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 under this section. 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. The sale of an eligible item under a layaway plan 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 eligible 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 eligible item 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 eligible item 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 eligible item before the exemption period, but during the exemption period the customer returns the item and receives credit on the purchase of a different eligible item, 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, 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 eligible item 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 an eligible item, regardless of whether the charges are separately stated. 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 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 choose 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.

(1) Except as provided in paragraphs (2) and (3) of this subsection, a 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.

(2) A retailer who sells more than 10 backpacks to a customer at the same time must obtain an exemption certificate from the customer verifying that the backpacks are being purchased for use by elementary or secondary school students.

(3) If the purchaser is buying the school supplies under a business account, the retailer must obtain an exemption certificate from the purchaser certifying that the items are purchased for use by an elementary or secondary school student. "Under a business account" means the purchaser is using a business credit card or business check rather than a personal credit card or personal check; is being billed under a business account maintained at the retailer; or is using a business membership at a retailer that is membership based.

(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.

Source Note: The provisions of this §3.365 adopted to be effective September 7, 2000, 25 TexReg 8740; amended to be effective April 13, 2005, 30 TexReg 2085; amended to be effective October 6, 2008, 33 TexReg 8398; amended to be effective November 23, 2009, 34 TexReg 8338; amended to be effective December 3, 2012, 37 TexReg 9525; amended to be effective March 3, 2014, 39 TexReg 1479