Tax Rate
The tax rate is 0.5 percent for entities primarily engaged in wholesale or retail trade, as defined in Division F and G of the 1987 Standard Industrial Classification (SIC) Manual.
A taxable entity is primarily engaged in retail or wholesale trade only if:
- the total revenue from its activities in wholesale or retail trade is greater than the total revenue from its activities in trades other than the wholesale and retail trades;
- less than 50 percent of the total revenue from activities in wholesale or retail trade comes from the sale of products it produces or products produced by an entity that is part of an affiliated group to which the taxable entity also belongs (a product is not considered to be produced if modifications made to the acquired product do not increase its sales price by more than 10 percent); and
- the taxable entity does not provide retail or wholesale utilities, including telecommunications services, electricity or gas.
Note: A thorough discussion of an entity's qualification for the 0.5 percent tax rate appeared in the April 2010 Tax Policy News. Also, as discussed in our article on the restaurant industry in the October 2010 issue, eating and drinking places are considered to be engaged in retail trade even though they produce the products they sell.
Cost of Goods Sold (COGS)
Generally, the COGS provisions apply to entities that sell real or tangible personal property in the ordinary course of business and include all direct costs of acquiring or producing the goods. Wholesalers and retailers typically acquire and then resell tangible personal property and can include as COGS the costs incurred from the acquisition of the goods through to the point of putting the goods on display for sale, as allowed in Texas Tax Code Section 171.1012. Costs incurred once the goods are displayed are considered selling costs and are not allowed as COGS.
Costs allowed as COGS include:
- the purchase price of the goods;
- repackaging costs;
- inbound transportation costs; and
- storage costs, but not rental of storage space. See Tax Code Section171.1012(e)(1).
Costs not allowed as COGS under Section171.1012(e) include:
- selling costs;
- distribution costs (including outbound transportation);
- advertising costs;
- rehandling costs; and
- officers' compensation.
Example 1
A department store chain that sells clothing for men, women and children has several retail stores throughout Texas. The department store chain owns a centrally located distribution center that supplies the retail stores with the acquired apparel.
The following costs are allowed as COGS:
- the cost of acquiring the apparel;
- compensation and other expenses (travel, etc.) related to purchasing agents;
- the cost of transporting apparel to the distribution center;
- depreciation of the distribution center;
- depreciation on equipment used in the distribution center;
- distribution center utility costs;
- the cost of transporting apparel from the distribution center to the retail stores; and
- the cost of utilities for the storage area only at the retail stores.
The following costs are not allowed as COGS:
- rent paid to shopping centers for retail store space;
- utility costs for the retail store display areas;
- display racks and display shelving;
- compensation paid to sales managers and sales personnel;
- the cost of cash registers;
- credit card company fees;
- shopping bags; and
- tissue.
Example 2
A grocery store chain has stores located throughout central Texas and rents a distribution center located in San Antonio.
The following costs are allowed as COGS:
- the cost of acquiring the groceries;
- compensation and other expenses (travel, etc.) related to purchasing agents;
- the cost of transporting the groceries to the distribution center;
- depreciation on equipment used in the distribution center;
- distribution center utility costs;
- the cost of transporting groceries from the distribution center to the grocery stores; and
- compensation paid to employees that stock the shelves.
The following costs are not allowed as COGS:
- rent paid for the distribution center;
- rent paid for the grocery store space;
- refrigerated display cases;
- shelving for grocery display;
- compensation paid to cashiers and baggers;
- the cost of cash registers;
- credit card company fees; and
- grocery bags.
