Tax Policy News - November 2002

The Comptroller's toll-free number for tax practitioners is 1-800-248-4093. Tax specialists are available from 7:30 a.m. to 5:30 p.m. Call volume is lowest early in the morning and late in the afternoon.

House Bill 2686 repealed the deductions in sections 171.1015 and 171.1016 of the Tax Code. The repeal only applies, however, to projects that receive their designation from the Texas Department of Economic Development on or after September 1, 2001. Corporations that received project designation before September 1, 2001, should follow the old law and continue to take the applicable deduction on their franchise tax report until the designation expires.

Beginning September 1, 2001, eligible corporations receiving project designations can qualify for the Subchapter P Jobs Creation Credit (sections 171.751 through 171.761) and the Subchapter Q Capital Investment Credit (sections 171.801 through 171.811). Under current law, eligible corporations can qualify for these credits on franchise tax reports originally due on or after September 1, 2003, but before January 1, 2005. (200209496L)

The law exempts items used in the actual manufacturing of the product for sale when the items are necessary and essential to comply with public health and pollution regulations.

The administrative law judge denied the claim, noting that the OSHA-required system would only be exempt only if it was 1) required by the manufacturing operation and 2) consumed or used in the manufacturing process. Items that must be on-site but only used in emergency situations do not meet both of these criteria and are thus not exempt. (200208490H)

Refund of Taxes Paid to Non-Permitted Vendors
Hearing No. 41,173
Issue: Whether a purchaser who paid taxes in error to a non-permitted vendor can get a refund directly from the state
The taxpayer, a builder of new homes, bought waste removal services. Although it collected sales tax on the transactions, the waste removal firm was not permitted in Texas and did not remit the collected taxes to the state. Furthermore, since October 1, 1995, these services have been tax-exempt when purchased by the builder in connection with new residential construction.

The taxpayer requested a refund of the taxes paid in error directly from the Comptroller's office. Under Texas Tax Code Section 111.104(a), the Comptroller can credit unlawfully or erroneously collected taxes against a taxpayer's tax bill or, if no taxes are due, give the taxpayer a refund.

The administrative law judge denied the request, pointing out that the Comptroller did not collect the taxes paid by the builder. Since the waste removal company never passed the tax payment on to the state, the Comptroller's office could not refund taxes that it never received. (200205270H)

Have Faith in Your Certificates
Hearing No. 41,214
Issue: Whether an improperly completed resale certificate accepted in good faith offered any protection to the seller
The taxpayer argued that it was not liable for tax because it accepted a resale certificate in good faith. In Texas, a seller's gross receipts are presumed to be taxable but a sale is exempt from tax if the taxpayer receives from the purchaser a properly completed resale or exemption certificate.

The administrative law judge denied the taxpayer's contention, stating that the certificate at issue was defective, as it did not include the purchaser's name and address; a description of the taxable items generally sold, leased, or rented by the purchaser; or a description of the specific items being bought tax-free. In short, "good faith" acceptance only applies to resale and exemption certificates that are properly completed.

After receiving a written request from the Comptroller's office, a taxpayer must show possession of a necessary certificate within 60 days or it cannot claim deductions based on the certificate. At the time of the hearing, this 60-day period had elapsed and thus the taxpayer could not replace the incomplete certificate with a completed one. To avoid this situation, the seller should obtain a properly completed resale or exemption certificate at the time of the nontaxable transaction. (200206325H)

The president denied liability, stating that he acted solely as a financial investor and was not involved in the day-to-day operations that gave rise to the tax deficiency. He also believed that the liability was overstated.

The administrative law judge upheld the Comptroller's assessment. The corporation failed to file its first year franchise tax report and thus forfeited its privileges. As a result, the directors and officers became liable for all corporate debt incurred in Texas from the time the report was due until corporate privileges are reinstated. Exceptions are allowed if the debt is incurred over the director's objection, or without the director's knowledge, provided there has been reasonable diligence to become acquainted with the corporation's affairs.

The president could not prove that he qualified under these exceptions. Furthermore, to challenge the validity of the assessment itself, he had to first pay the audit liability and then request a refund. (200206369H)

The online information is updated nightly. While the listing can help confirm an organization's tax status, sellers are not required to use the online search before accepting an exemption certificate.

An exempt organization can give the seller a valid Texas Exemption Certificate in lieu of paying tax. The certificate must include the name and address of the seller, name and address of the purchaser, a description of the item being purchased, and the reason the purchase is tax exempt. The certificate must be signed and dated by the purchaser. See Rule 3.287, Exemption Certificates.

The Rule Review Process
Agency rule review occurs in three stages, each documented with the publication of a notice in the Rule Review section of the Texas Register. The first step in an agency's review process is the development of a comprehensive schedule (Rule Review Plan) for reviewing the agency's rules, and the publication of a notice of "plan to review." The notice of plan to review does not include the actual text of an agency's review plan; however, that text is posted under "Agency Review Plans" on the Texas Register page of the Secretary of State's website. This year the Comptroller's office filed a revised rule review plan that covers fiscal years 2003 through 2007. For your convenience, we've included the review schedule for FY03 at the end of this article.

The second stage in the rule review process begins with the publication of an agency's notice of "intention to review" specific rules (i.e., proposed review), in accordance with the agency's Rule Review Plan. The proposed review notice includes information regarding the specific rules under review, a request for comments on those rules from any interested person, and the name and address of the contact(s) to which comments may be submitted. The actual text of the rules under review is not published. The minimum period for accepting comments is 30 days from the publication date of the proposed review. For complete information regarding the Comptroller rules currently under review, check the "Proposed Rule Reviews" section in the August 30, 2002, issue of the Texas Register.

The third and final stage of the rule review process involves the publication of a notice of "readoption" (i.e., adopted review) in the Texas Register. The readoption notice provides information on the results of the agency's review of specific rules. The reviewed rules may be readopted without changes, readopted with changes, or repealed. The readoption notice also includes a summary of all comments received for the rules under review. To complete the rule review process, an agency must follow up by filing appropriate rule actions with the SOS under the normal rule adoption process. In some cases, an agency's readoption notice and the notice of a specific rule action are published concurrently. The Comptroller's most recent readoption notices were published in the August 30, 2002, issue of the Texas Register.

ABOUT THE NEWSLETTER:

The Comptroller's office publishes this newsletter to keep you informed about state taxes. Tax questions can be complicated, so use these summaries as guidelines only. For specific tax questions, call 1-800-248-4093 or 512-463-4600.

For a Copy of a Proposed Rule: For a copy of proposed rules or questions about a proposed rule, write to Bryant Lomax, Tax Policy Division, 111 West 6th St., Austin, TX 78701-2913, or e-mail <tax.help@cpa.state.tx.us>.
For a Copy of a Publication or Rule: Our publications, rules and notices are online at www.window.state.tx.us or call 1-800-252-1389.
Americans with Disabilities Act: In compliance with the Americans with Disabilities Act, this document may be requested in alternative formats by calling 512/463-4600. From a telecommunications device for the deaf (TDD), hearing impaired taxpayers may call toll free 1-800-248-4099, or 1-800-RELAY-TX. In Austin, the local TDD number is 512-463-4621.
Contributors: Jerry Bobbitt, Virgie Bradsby, Adina Christian, Judy Cox, Kevin Koller, and Mike Wegner