Tax Policy News - March 2003

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.

The taxpayer argued that the mere fact that it may provide for onsite warranty work via a third- party service provider does not establish "substantial nexus" in Texas for assessing sales and use tax as required by the U.S. Supreme Court in Quill Corporation v. North Dakota, 504 U.S. 298 (1992).

The Administrative Law Judge concluded that the onsite repair performed for the taxpayer by third-party service contractors was an activity in Texas that clearly falls within the provisions of Tax Code Section 151.107(a)(7) and Rule 3.286(a)(1)(G). The taxpayer was found to have the necessary physical presence in Texas to result in constitutional substantial nexus above and beyond the mere mail order solicitation activities of the taxpayer in the case cited. (200209557H)

Predominant Use Study Requires Additional Study
Hearing No. 41,763
Issue: Whether an exemption for electricity can be denied if substantiated by a predominant use study by a professional engineer
The taxpayer manufactures pipe and parts for sale and repairs pipelines. A professional engineer performed a study certifying that the predominant usage of electricity at the taxpayer's plant was for manufacturing and therefore exempt. The taxpayer told the auditor, however, that 17 percent of sales were of manufactured pipe and the remaining 83 percent were related to repair and remodeling jobs.

The Administrative Law Judge noted that the manufacturing exemptions are reserved for manufacturers of tangible personal property for ultimate sale. While the taxpayer sold some of the items manufactured, most were used in repair and construction work. The taxpayer, who has the burden of proof, failed to show any evidence for the utility study's conclusion that the electricity was predominantly used in manufacturing. (200211669H)

My Refund Request Is In The Mail
Hearing No. 41,723
Issue: Whether the timeliness of a refund claim is determined by the date of delivery to the post office
A taxpayer sending in a refund claim ran the envelope through the company's postage meter and delivered it to the back counter of the local post office for express mailing to the Comptroller's office.

After failing to receive the refund within a reasonable time, the taxpayer contacted this office to check on the status. Comptroller's staff found no record of having received the claim, so the taxpayer sent a copy of the original claim and express mail receipt.

After part of the claim was denied, for earlier periods due to the statute of limitations, the taxpayer argued that the entire refund was still due, based on the date of the original mailing.

The Administrative Law Judge ruled that the critical factor is the date the Comptroller's office received a refund request. Without evidence that the claim reached this office, there is no proof that a claim was filed on time. Since the taxpayer's documentation stopped at the outgoing mailbox, the balance of the refund request was denied. (200209545H)

Some tax preparation companies charge a separate fee to electronically file a tax return, which is a taxable telecommunication service. (See Comptroller's Administrative Rule 3.344.) The tax professional is responsible for collecting sales tax and filing both sales and use tax returns and Telecommunications Infrastructure Fund reports. It's a nontaxable accounting service, however, if the tax professional charges a single fee for preparing and filing the return and does not increase this fee for customers who have returns submitted electronically.

Several companies allow refund anticipation loans based upon the information on the income tax return and may actually give the client a check for the loan amount. Administrative charges for processing the application and issuing the check are not subject to sales tax. (Some institutions may charge a loan administration fee of which $1 must be remitted to the state.)

Installation Services
Installation charges for appliances and fixtures may or may not be taxable, depending on whether the appliance is "tangible personal property" or an "improvement to realty." Here are some guidelines to help you determine when tax is due.

Installation of tangible personal property by the seller is taxable. An appliance is considered tangible personal property if it is not designed to be built into the cabinetry. A retailer should collect sales tax on installation charges for items such as refrigerators, washers and dryers, countertop microwave ovens, and freestanding or slide-in stoves and ranges.

An appliance designed to be built into cabinetry, however, becomes an improvement to real property when installed. There's no sales tax on separately stated charges for installing improvements to realty in residential property or in new construction (either residential or commercial). A retailer or contractor should not collect sales tax on installation charges for dishwashers, cook top or drop-in stoves and ovens, exhaust hoods, and similar appliances when installed in residential realty or new nonresidential structures.

Plumbing fixtures (water heaters and garbage disposals, for example) are also considered improvements to real property, as are lighting fixtures and ceiling fans that connect directly to a building's wiring in junction boxes. Once again, a retailer should not collect tax on installation of these items when installed in residential real property or new nonresidential realty.

Remember that all installation charges are taxable if they are for remodeling or restoration of existing nonresidential property.

The taxpayer contended that these activities were either limited solely to the solicitation of orders, ancillary to such solicitation, or de minimus activities. If the taxpayer's activities were any one of the above, the taxpayer would not be subject to the earned surplus component of the franchise tax.

The Administrative Law Judge concluded the imposition of extraneous fees, hiring a Texas law firm, and maintaining inventory in the state exceeded the protection of Public Law 86-272. Consequently, the taxpayer was subject to the earned surplus component. (200210640H)

The proposal notice informs the public of the Comptroller's intended interpretation and administration of a particular statute. Taxpayers may comment on the proposed rule during the 30 days following its publication in the Register. After reviewing the public comments, the Comptroller may make changes to the proposed text when the new or amended rule is formally adopted. Notice of the formal adoption of the rule is published in the Texas Register. The adoption preamble provides detailed information on all changes made to the rule text since publication of the proposal notice.

Recently Proposed Rules
Cigarette Tax
Proposed repeal of Rule 3.103 - Cigarette Stamp Meters and Rule 3.109 - Destruction of Seized Cigarettes
The Comptroller proposed the repeal of Rules 3.103 and 3.109. These repeals are the result of statutory changes made in recent years. Notice of the proposed action appears in the March 14, 2003, issue of the Texas Register.

Cigars And Tobacco Products Tax
Proposed repeals and adoption of new Rule 3.121-Definitions, Imposition of Tax, Permits, and Reports
The Comptroller proposed the repeal of the existing cigars and tobacco products tax rules in order to simplify their consolidation into a new Rule 3.121. The rules proposed for repeal are:

3.121 - Delivery of Tax-Free Cigar and Tobacco Products
3.122 - Permits Required for Vehicles
3.123 - Interpretation
3.124 - Transfer and Correction of Permits
3.126 - Change of Date for Filing Cigar and Tobacco Reports and Payment
3.127 - Weight of Cigars Defined.

In conjunction with the repeal of the existing rules, the Comptroller proposed a new Rule 3.121, which consolidates the substance of the repealed rules to provide taxpayers with a more effective means for obtaining information. Along with the consolidation of information, the content of the new rule has been updated to reflect legislative changes and to provide additional definitions. The new rule expands the definition of a commercial business location; requires that a permit holder be provided with an opportunity for a hearing before a permit may be suspended or revoked; and changes the due date for the distributor's and manufacturer's monthly reports to the Comptroller. The 77th Legislature added "importer" and "manufacturer" to the types of permits available under Tax Code, Chapter 155. Notice of the proposals appears in the March 14, 2003, 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: Virgie Bradsby, Adina Christian, Judy Cox, Lowell Dunn, Kevin Koller, Stefanie Medack, and Mike Wegner