A chemical vessel exploded in a section of the taxpayer's chemical plant, causing substantial damage. The taxpayer completed repairs of the damaged property by October 1995. Neither the Texas governor nor the U.S. president declared the affected area a disaster area.

Before October 1, 1993, Rule 3.310(h) provided an exemption from sales tax on labor to "clean, restore, or repair tangible personal property when damaged with real property by fire, flood, explosion, natural disasters, or other accident." Rule 3.357(c)(5) provided a similar exemption for real property repairs. Effective October 1, 1993, Tax Code Section 151.350(a)(2) narrowed that exemption to "property damaged within a disaster area" and defined "disaster area" as one declared so by the governor or the president. The legislative change was carried forward in Rule 3.292(h) for tangible personal property, effective February 10, 1994, and in Rules 3.357(c)(5) for real property, effective March 23, 1995.

The taxpayer contended that since the Legislature did not amend Sections 151.0047 and 151.0101 to specifically address repairs of real or tangible personal property due to casualty losses, they accepted the Comptroller's interpretation set forth in its rules before the passage of Section 151.350. Thus, the rules could not be validly changed since the Legislature did not amend those statutes when it enacted Section 151.350.

The Administrative Law Judge's rejection of the taxpayer's argument was twofold. First, the argument would result in the Comptroller never having authority to amend a rule unless the Legislature amended the interpreted statute, a clear conflict with the Comptroller's statutory rulemaking authority. Second, in enacting Section 151.350, the Legislature manifestly did not accept the broad exemption and instead specifically narrowed the exemption. Because there was no disaster area declaration resulting from the explosion, the taxpayer's repairs did not fall within the exemption. Therefore, the taxpayer's refund claim was denied.

As part of its banking operation, the taxpayer owned and operated automatic teller machines, or ATMs. The ATMs are freestanding drive-up island machines, weighing approximately 3,200 pounds, bolted to concrete blocks in the bank's drive-through areas. Various cables for alarms, computer lines, and electricity connect the ATMs to a main bank building.

The taxpayer requested a refund of taxes paid on charges relating to the installation of the ATMs, claiming that they constituted improvements to realty.

On its books and records, however, the taxpayer treated its ATMs as tangible personal property, depreciating the ATMs as equipment. The related invoice for the installation of the ATMs contained the notation "tech moved ATM and installed another."

Given the way the ATMs were annexed to the realty and the taxpayer's treatment of the ATMs as personal property, the Administrative Law Judge concluded that the taxpayer failed to prove its contention by a preponderance of the evidence. Accordingly, the taxpayer's refund claim was denied.

A qualifying corporation may take a capital investment credit to reduce its franchise tax liability for qualifying investments made on or after January 1, 2000.

To be eligible for the capital investment credit, a corporation must be a qualified business; pay an average weekly wage at the location where the credit is claimed that is at least 110 percent of the county average weekly wage; offer a group health benefit plan for which the corporation pays at least 80 percent of the costs for all full-time employees at the location where the credit is claimed; and make a minimum $500,000 qualified capital investment (QCI).

A qualified business is an establishment primarily engaged in agricultural processing, central administrative offices, distribution, data processing, manufacturing, research and development, or warehousing. A qualified business also includes an enterprise project or defense readjustment project designated on or after September 1, 2001.

A QCI is tangible personal property first placed in service in a strategic investment area (SIA), or first placed in service in a Texas county with a population under 50,000 if the QCI is made by a corporation primarily engaged in agricultural processing. Investments in multiple locations within an SIA and investments within multiple SIAs may be combined to satisfy the minimum $500,000 qualified capital investment.

Tangible personal property means engines, machinery, tools, etc., used in a trade or business or held for investment and subject to depreciation or amortization, as described in Section 1245(a) of the Internal Revenue Code. QCI consists only of the costs incurred for fabrication labor and parts. The property must retain its character as tangible personal property after it is placed in service. Tangible personal property is not real property or buildings (and their structural components) or property expensed under Section 179 of the Internal Revenue Code.

For corporations located in an SIA the investment credit is equal to 7.5 percent of the QCI and is taken in five equal installments over five consecutive reports beginning with the report that is based upon the period during which the QCI was made. The credit expires and a corporation may not take any remaining installment of the credit if in one of the five years in which the installment of a credit accrues, the corporation disposes of the QCI; takes the QCI out of service; moves the QCI out of this state; or fails to pay 110 percent of the county average weekly wage. The credit claimed cannot exceed 50 percent of the franchise tax due before other credits and any unused credit may be carried forward for five consecutive reports.

Enterprise projects or defense readjustment projects designated on or after September 1, 2001, may claim a credit equal to 7.5 percent of the QCI beginning on the date the project is designated. The project may claim the entire credit earned on a report originally due on or after September 1, 2003 and before January 1, 2006. The credit claimed cannot exceed 50 percent of the franchise tax due before other credits and any unused credit may be carried forward for five consecutive reports. Additionally, the project does not have to meet the 110 percent average weekly wage requirement, the 80 percent health insurance requirement or the minimum investment of $500,000.

To claim the investment credit a corporation must complete and submit with its franchise tax report Schedule D - Credits Summary, Schedule J - Investment Credit, and Schedule K - County Worksheet. The credit schedules, a list and map of SIAs, and information regarding the county average weekly wage are available on our web site at the following address: http://window.state.tx.us/taxinfo/franchise/index.html.

Please refer to Texas Tax Code §171.801 through §171.811 and Comptroller Rule 3.578 for additional information.

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.

The following rule actions were published in the August 6, 2004, issue of the Texas Register.

BATTERY SALES FEE
Proposed amendment of Rule 3.711 - Collection and Reporting Requirements
The proposed amendment to Rule 3.711 will delete all references to the now-expired waste tire recycling fee.

NATURAL GAS
Proposed amendment of Rule 3.21 - Exemption or Tax Reduction for High-Cost Natural Gas
Pursuant to House Bill 2425 (2003), the proposed amendment to Rule 3.21 will add a 24-month time limitation on refund eligibility under Tax Code, Sec. 201.057(i).

STATE SALES AND USE TAX
Proposed amendment of Rule 3.285 - Resale Certificate; Sales for Resale
Rule 3.285 was proposed for amendment to reflect provisions under Tax Code, Sec. 151.152, that allow the Comptroller to authorize the use of electronic signatures on resale certificates.

Proposed amendment of Rule 3.299 - Newspapers, Magazines, Publishers, Exempt Writings
The proposed amendment to Rule 3.299 will increase the average sales price per copy exemption threshold for newspapers from 75 cents to $1.50, effective October 1, 2003, in accordance with House Bill 2424 (2003).

Proposed amendment of Rule 3.318 - Water-Related Exemptions
Rule 3.318 was proposed for amendment to clarify that the exemption is for equipment, services, or supplies used solely for qualified activities. In addition, the proposed amendment will change references to the Texas Natural Resource Conservation Commission to reflect that agency's new name, the Texas Commission on Environmental Quality (TCEQ).

OIL FIELD CLEANUP REGULATORY FEE
Proposed amendment of Rule 3.732-Reporting Requirements for the Gas Fee
The proposed amendment to Rule 3.732 will incorporate changes to Natural Resources Code, Sec. 81.117, that require payment of the fee on gas approved for the severance tax Two-Year Inactive Well Exemption, Three-Year Inactive Well Exemption, Co-Production Project Exemption, Tax Credit for Incremental Production Technique Exemption, Tax Reduction for High-Cost Gas, Flared Gas Exemption, and the Texas Experimental Research and Recovery Activity Exemption (TERRA), pursuant to House Bill 3442 (2003).