External Sales Policy
1.0 Policy Statement
Schools, departments and centers are encouraged to fully utilize academic expertise and institutional resources to generate additional sources of revenue from external customers in a commercial and competitive manner. The sale of property and/or services must be consistent with the University's mission of education, research, and public service or maximize the use of existing department, school, or administrative unit resources, consistent with the objectives of the University. Whenever feasible, these sales activities should strive to provide learning opportunities for students and foster positive, mutually beneficial, collaborative relations with outside constituencies.
External sales activity should be conducted in accordance with University policy and procedures to ensure adequate compliance with federal and state regulations and to minimize legal, insurance, and tax risks. Any department, school, or administrative unit desiring to sell property, lab space and/or instrumentation or services to external customers must obtain appropriate approval. Approval and reporting responsibilities are defined in the attached procedures.
When planning or approving business activities Deans, Department Heads, and other administrators should ensure that these activities are consistent with this policy. Units that do not follow the guidelines set forth in this policy will be held responsible for any fines or penalties incurred.
2.0 Reason for Policy
Align current policy with UT System Administration Business Procedures Memoranda #42-03-90. Effectively use University resources and to establish a University policy that reflects current practices and financing realities of higher education:
- Need to better manage risks associated with external sales activity.
- State support for public higher education will not increase in real terms.
- Tuition levels may need to increase faster than the overall inflation rate.
- Pressure will increase on academic entrepreneurial activities in order to generate critical new revenue.
- Technology investments are critically short and the need is growing.
3.0 Who Should Know This Policy
- Office of Sponsored Projects Personnel
- Dean, Director, Department Head
- Finance Personnel
- Vice Presidents
- Department Sales of Property or Services A unit activity, usually academic, that provides goods or services at approved rates on a regular and continuing basis:
Examples: Continuing Education Conferences, Child Care Centers
- Predominantly to the general public
- Incidentally to University departments
- Incidentally to individuals who are part of the University community (i.e. staff, faculty, students)
- Auxiliary Enterprises An administratively approved unit activity that provides goods or services at approved rates on a regular and continuing basis:
Examples: University Bookstore, Housing, Food Services
- Predominantly to individuals who are part of the University community (i.e. staff, faculty or students)
- Incidentally to the general public
- Incidentally to University departments
- Check (Foreign, 3rd Party, etc.)
- Credit Card
- Wire Transfers
- Payroll Deductions
- Gift Annuities
- Retained Life Estates
- Life Insurance
- Life Income Gifts
- Incurring penalties or fines on unreported and underpaid sales or income tax liabilities.
- Improper handling of sales (program income) generated from sponsored projects.
- Allegations of unfair business practices resulting from underpriced products or services.
- Litigation resulting from copyright, intellectual property, or product liability issues.
- Discrediting the University name or reputation.
An exchange by the University of tangible or intangible property or service with external customers for monetary consideration. Transactions for technology transfer, license, and trademark agreements are excluded from this definition. See Appendix A for example of external sales.
These are the different types of external sellers:
A transfer of money or property (i.e., equipment, land, stock, etc.) made to the University via a recognized University foundation by an individual group, business, foundation, or nongovernmental agency when the use of the funds is NOT intended to result in direct economic benefit or any other tangible compensation (i.e., goods or services) to the donor. The donor may specify that the gift be used for a specific purpose such as scholarships or faculty awards or for the general use of a college, department or individual. Some general reporting may be required.
Cash gifts include:
An externally funded activity that is governed by specific terms and conditions. Sponsored projects must be separately budgeted and accounted for subject to terms of the sponsoring organization. Sponsored projects may include grants, contracts, and cooperative agreements for research, training, and other public service activities. The project commits the University to specific work or research with financial and or technical reporting. To help assure compliance with submitted proposals, these projects are routed through Office of Sponsored Projects (OSP).
Other Sponsored Activities
Other academic projects not related to instruction funded by sponsors; project activities typically fall in the category of public service. For assistance in distinguishing between gifts, sponsored projects and external sales - see Appendices A and C.
Teaching and training activities at the University funded by federal or nonfederal sponsors.
Research and scholarship activities that include inquiry, experiment, or investigation to increase the scholarly understanding of the involved discipline.
An agreement between the University and another entity to provide an economic benefit for compensation paid. This exchange transaction is binding and creates a quid pro quo relationship between the University and the entity. Sponsored contracts are administered by Office of Sponsored Projects. Some contracts related to external sales activities may be negotiated at the unit but must be approved by University Official with authority to obligate the University in contractual matters.
Cost of Space Occupied
Rent paid or the square footage cost of occupying University-owned space as determined by the Finance Division. The cost of University space used in external sales activity should be included in the calculating of cost of providing the serevices.
Current Operating Costs
Salaries, wages, benefits, employee related expenses, travel, supplies, and other direct costs of operations.
Individuals (including faculty, students, and staff), private businesses, foundations and government agencies that acquire property or services from any University departments, and do NOT use the University internal billing system. Purchases are made by individuals or non-University organizations.
External Sales Risks
Risks related to external sales can include but are not limited to legal, tax, insurance, federal compliance, accounting, environmental health and safety, and public relations risks. These risks can be at a departmental or institutional level or both. Some examples include:
Grants are additional resources awarded to the University to support instruction, research or public service. Sponsored grants are administered by Office of Sponsored Projects. The terms of the grant will determine whether it should be processed as a gift or a sponsored project. For guidance in distinguishing between gifts and sponsored projects, see Appendix A.
Decide if external sales activity is appropriate. Prepare and approve External Sales Action Form. Prepare business proposal. Generate additional sources of revenue. Properly code and route gift and sponsored project revenue. Manage external sales activity to comply with policy. Report external sales activity to the University External Sales Coordinator.
University External Sales Coordinator
Coordinate external sales activity for the University. Assist in determining if revenue sources are gifts, sponsored projects or external sales. Sponsor meetings for those with external sales to promote and explain policy. Respond to questions on external sales. Compile information on those who are making external sales and collect information on their annual sales. Notify Audit Department of high risk business activity and send them year end reports.
UT System Office of General Council
Provide legal expertise to the University External Sales Coordinator and departments to support the implementation of the policy. Approve standard external sales contract forms for use by academic and administrative units and provide ongoing legal assistance to such units and the External Sales Coordinator, as needed.
Associate VP for Finance
Provide tax expertise to the University External Sales Coordinator and departments to support the successful implementation of this policy. Promote activities to minimize taxes paid by the University. Provide specialized tax assistance to those selling to external customers. Provide accounting expertise to the University External Sales Coordinator to support the successful implementation of this policy. Provide specialized accounting assistance to those selling to external customers. Provide guidance to on rate setting and cost recovery. Approve chart of account requests. File Unrelated Business Income Tax Return.
Insurance and Risk Manager
Provide risk management expertise to the University External Sales Coordinator and departments to support the successful implementation of this policy. Provide specialized insurance assistance to those selling to external customers.
Environmental Health and Safety
Provide environmental health and safety expertise to the University External Sales Coordinator and departments to support the successful implementation of this policy.
Office of Sponsored Projects
Administer sponsored project activity and forward other activity to the central administration or departments.
Office of Executive Vice President and Provost
Determine the types of businesses that the University will engage in and designate the person to be responsible for managing each business. Decide if revenue sources are gifts, sponsored projects, or external sales.
6.1 Planning Sales to External Customers
University departmental activities are supported by 8 major categories of revenue. External sales represent one of these categories of revenue:
- Tuition and Fees
- Government Appropriations
- Sponsored Projects
- Investment Income
- Patient Care Reimbursement
- Sales to University Departments
- Sales to External Customers
WHAT ARE EXTERNAL SALES?
An external sale is an exchange by the University of tangible or intangible property or service for monetary consideration with external customers. Transactions related to technology transfer, licensing or trademark agreements are excluded from this policy. See Appendix A for examples of external sales.
Sales to external customers include the following:
- Department sales of property and services
- Auxiliary enterprise sales (Housing, Bookstores, etc.)
- Service Center department sales to customers that are NOT University departments
At times, it is difficult to determine if an activity is an external sale or if it is a sponsored project or gift. To help with this determination see Appendix A.
Can I conduct this activity?
External sales activity must be consistent with the University mission or be undertaken to maximize the use of existing University resources consistent with the objectives of the University. These activities should be pursued in a commercial and competitive manner and whenever feasible provide learning opportunities for students and foster good relations with outside constituencies. The following are some examples of activity that would be appropriate and inappropriate.
Potentially Appropriate Activity (Subject to Procedures in this Policy):
- Use University labs and equipment to consult with business and industry
- Test commercial software products
- Operate psychological testing labs
- Provide psychological services to hospitals and individuals (Callier and Brain Health)
- Offer management seminars to business community
Potentially Inappropriate Activity
- Operate businesses such as a shoe store entirely unrelated to the U mission
- Contract with a vendor in a manner that violates existing exclusive University vendor agreements
- Engaging in activities that violate federal or state laws or University policy (copyright, trademark, conflict of interest)
- Seek unfair competitive advantage by using government appropriations, tuition revenues, or other University funds to subsidize operations (e.g., no charge for space or utility costs)
- Engaging in activities that expose the University to unresolved insurance, legal, tax, or environmental health and safety risks
Once you have determined that the business activity you are considering is appropriate, you should then decide if you have the appropriate staffing to handle this activity. The External Sales Coordinator can help with these questions.
Should I Conduct This Activity?
A major purpose of conducting these activities is to generate profits to support the department and University mission. To determine profit, you must estimate the revenue and expenses related to the activity. Expenses include not only the direct expenses of the activity (i.e. salaries and cost of goods sold) but also indirect expenses (i.e., space, utilities, administrative support, and depreciation). An external sales activity should generally not be undertaken if it cannot be sustained as a self-supporting activity. In situations where University facilities would otherwise sit idle, incremental revenue may be desirable even if allowable indirect expenses are not fully recovered. Many University facilities carry fixed overhead costs that will be incurred regardless of how a facility might be used with an external customer base.
External sales activities can also enhance student experiences and expand relationships with entities outside the University. These goals along with the chance to generate profits must be balanced with the risks associated with the activity. Consideration should be given to risks such as legal, tax, or insurance issues as well as the consequences of sales on major donors or supporters.
6.2 Obtaining Approval to Conduct External Sales Activity
Once you have made the decision to sell property or services externally you should complete the External Sales Action Form, Appendix B and prepare an appropriate business plan.
Note: This form is designed to be used by units to:
- Capture the scope of the University external sales activities
- Secure necessary approvals before sales begin
- Facilitate University compliance with legal, insurance, and tax requirements
- Identify potential departmental and University risks
When there are unique legal, tax, or insurance types of risk, the activity must be reviewed by the External Sales Coordinator and approved by the VP for Business Affairs prior to implementation. Otherwise the activity may be approved by your Dean or Department Head, as designated by the Dean.
Complete the External Sales Action Form and follow routing instructions.
PREPARE A BUSINESS PLAN AND REVIEW WITH YOUR UNIT
A business plan should generally address all of the following items:
- A description of the department, including its primary activities at the University.
- A description of the proposed sales activity.
- How the proposed sales activity relates to the department's mission and purpose or leverages existing resources of the department.
- Who within the department will be responsible for the proposed activity?
- Who within the department will be responsible for reporting and monitoring the finances of the proposed activity?
- Any other sales activity currently being conducted by the department that would demonstrate the department's ability to successfully manage the proposed activity.
- Anticipated start up date and any related or dependent deadlines.
Marketing and Pricing Information
- Identify who else (in or outside the University) performs these services or sells these goods and indicate their prices.
- Describe type and size of expected customer base.
- Indicate the expected per-unit price(s), and provide an analysis of the product's cost structure (operating costs, cost of goods sold, faculty and administrative costs other direct and indirect costs).
Budgeting and Forecasting
- Prepare a financial forecast for the current and next 3 fiscal years, detailing estimated annual revenues, expenses, capital needs, and sales volumes.
- Prepare a projection of capital funding needs for expenditures such as equipment, facilities, or inventory acquisition.
OBTAIN APPROPRIATE APPROVAL
Any department, school, or administrative unit planning to sell goods or services to external customers must obtain appropriate approval. The required signatures for approval are indicated on the External Sales Action From and Procedures.
Which External Sales Activities Are Exempt from the Approval Requirement?
- Auxiliary sales to students, faculty and staff
- Service Center sales to University departments
6.3 Managing Business Activity
Once the activity has begun, appropriate monitoring must take place to ensure proper accounting, prudent management of business considerations, and proactive management of tax, legal, and insurance risks.
The external sales activity should be set up in a separate six digit account to properly track the activity revenues and expenses. It is important to use the correct revenue object code to designate where the revenue is coming from. Also important is the function code, which indicates the purpose of the expenditures.
Determine Budget Amounts
- Determine budget amounts for the activity: Estimate the amount of sales revenue for the year in which the sales are expected to occur.
- Estimate the amount of expenses that will be incurred to generate the expected sales (any raw materials, supplies, postage, rentals, equipment, additional personnel or benefits costs, etc.).
External sales activity should generally be self-supporting. Goods and services should be priced at a rate to cover both direct and indirect University expenses as well as to provide residual support for the University's departments and programs. In addition, where similar products or services are commercially available through the local small business community, prices should approximate fair market rates in order to avoid allegations of unfair commercial business practices. When developing prices for external sales the following cost elements should be considered:
- Current operating costs: Billing rates should include a factor for all related current operating costs of the activity being sold.
- Capital usage factors: Billing rates should include factors for "capital usage" related to equipment and building & improvements. These factors are used in lieu of current period capital expenditures.
- Administrative Service Charges: Billing rates should include a factor for University & department Administrative Service Charges.
- In lieu of Capital usage and Administrative Services Charges factor the University's Facilities and Administrative cost rate can be applied.
Consider your need for additional insurance coverage. Consult with the Office of Risk Management and Insurance or the External Sales Coordinator for assistance.
Departments expecting to sell goods and/or services outside the University (including sales to individual students, faculty, and staff) may have a legal obligation to collect State of Texas sales tax. Consult the Office of Finance or the External Sales Coordinator for guidance on whether the activity is taxable.
Departments do not need to collect tax if the purchaser can provide a Certificate of Tax Exempt Status OR if the sale is made outside the state of Texas and the property shipped directly to the customer's out-of-state location.
Collecting Sales Tax
Record each sale of taxable or nontaxable goods or services. Collect sales tax on every sale determined to be taxable. The amount of sales tax should be itemized on the customer receipt.
Reporting and Remitting Sales Tax
Report sales tax collected to the External Sales Coordinator who will consolidate information into a central University sales tax return. Contact the External Sales Coordinator.
The net income of your activity may be subject to federal and state unrelated business income tax (UBIT). Appendix A provides general guidance on UBIT. The UBIT laws are very complicated and many exceptions to general rules exist. The IRS interpretation of activities "related" to the University's tax-exempt mission will not always agree with what the University has traditionally considered to be activities "related" to its mission. The External Sales Coordinator will obtain assistance from The University of Texas Office of General Council to make a final determination about the taxability of your activity and provide assistance on appropriate accounting and reporting standards. See the External Sales Coordinator for questions on any of these topics.
Disposition of Excess Equipment
Departments should not sell excess University equipment or other University property. Instead unneeded equipment items should be turned over to Property Administration for further use within the University system, sale or disposal.
7.0 Reporting on Business Activity
Reporting Sales Activity
- Departments will make a brief reporting of their external sales activities to the External Sales Coordinator on an annual basis. The External Sales Annual Reporting Form, (Appendix E) should be used for annual reporting. The information requested will address several institutional needs. First, the data base information will enable the University to track, understand, and appreciate departmental relationships with the general public, business, and industry, and other external parties not currently tracked as gifts through the foundations or as sponsored projects through OSP. Also, the reporting will establish basic external sales activity information to facilitate the University's compliance with federal and state income tax law and state sales tax law.
- Departments are responsible for completing the reporting form and transmitting it to the External Sales Coordinator as part of fiscal year end financial reporting activity.
- Departments that fail to report, and that conduct sales which are subsequently discovered and determined to generate UBIT or State of Texas sales tax will be required to pay all taxes plus any penalties, fines, or interest assessed by the Internal Revenue Service or the Department of Revenue.
- Appendix A - Indicators for Gifts, Sponsored Projects, and External Sales
- Appendix B - External Sales Action Form
- Appendix C - Examples of Gifts, Sponsored Projects, and External Sales
- Appendix D - Selling to External Customers: Institutional Risks
- Appendix E - External Sales Annual Reporting Form
- Appendix F - Distinguishing Gifts/Sponsored Projects/External Sales
- Appendix G - Unrelated Business Income Tax
- Appendix H - External Sales Process - Central Support Perspective
- Appendix I - External Sales Accounts - Receivable Policy and Procedure
To view the appendices, please click here.
Last Updated: August 8, 2012