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Texas District Court Rules that Out-of-State Purchases of Jewelry Display Items Attached to Other Property and Shipped Outside of Texas are Not Subject to Use Tax 

Tax Development Jun 10, 2009

The taxpayer in Chapal Zenray, Inc. v. Strayhorn, et. al, Travis County District Court, 345th Judicial District, Cause No. D-1-GN-02-004506 is a wholesaler of costume jewelry. At its Texas facility, Chapal Zenray, Inc. ("Chapal") imports jewelry from outside the United States and affixes the jewelry to items such as display cards before shipping it out of Texas to its customers’ distribution centers. The case involves out-of-state purchases of display cards, labels, elastic strings, twist ties, foam ring pads, and jewelry boxes that Chapal affixed to each other and the jewelry before shipping outside the state. The Texas Comptroller of Public Accounts ("Comptroller") assessed use tax on the purchases, claiming that the items are taxable wrapping and packaging supplies. 

Chapal argued that its conduct with the items did not constitute a taxable use and that the items were never subject to tax because the definition of “use” excludes the following: 

[P]rocessing, fabricating, or manufacturing the property into other property or attaching the property to or incorporating the property into other property to be transported outside the state for use solely outside the state. 1 (Emphasis added.) 

Chapal attaches the items at issue to jewelry by pushing an earring’s post, for example, through a display card and fastening the back of the earring to the post. It attaches other jewelry (such as bracelets, necklaces, and rings) to display cards with twist ties or elastic string by running a twist tie or elastic string around the jewelry and then through a hole in the display card. Chapal attaches rings to foam ring pads by punching the ring into a slit that is cut into the ring pad. The slit is smaller than the ring so that the ring will fit tightly in the pad. Chapal presses the foam ring pad tightly into a jewelry box, which has dimensions smaller than the pad. The tight fit secures the ring pad to the jewelry box, preventing the ring pad from falling out. After attaching jewelry to the display items, Chapal then ships the goods by common carrier to its customers’ out-of-state locations. 

Despite these facts, the Comptroller maintained its position that the items at issue were taxable wrapping and packaging. The Court ruled, however, that such conduct did not constitute use or storage for tax purposes. The Court thus granted Chapal’s Motion for Partial Summary Judgment. 

The remaining issue is the amount of damages. Once that is resolved and a judgment is entered, the Comptroller will then have the opportunity to appeal the judgment if she so chooses. 

1 See Tax Code Sec. 151.011(f).