May 1994 The General Services Commission has adopted rules on charges for public information. We are following the guidelines provided in the new rules. Our special toll-free number for tax practitioners is 1-800-248-4093, and the Austin number is 512-463-4600. Don't forget we get fewer phone calls on Thursdays and Fridays. Call then and avoid the rush. Adina Whittemore In This Issue: Gas and electricity-Going Up Successor liability-The Name Game Optional admission-Strike Three Statute of limitations-Get Out Your Timeline Aircraft used by a flight school-Parts Make a Difference Unitary income-Holding On Security services-To Protect and Defend Interstate motor carrier tax notice Fuels tax Rule 3.196 Interstate motor carrier tax Rules 3.443, 3.444, 3.445 Motor vehicle sales and use tax Rules 3.77, 3.89, 3.90, 3.94 Sales tax Rule 3.316 Hearings: Sales Tax Going Up Hearing No. 30,739 A taxpayer manufactures custom staircases, parts and accessories. In some cases (25 percent), the taxpayer installs the staircases, making improvements to its customers' realty. This hearing concerns the taxability of the electricity metered in and used by the custom department-where staircases are customized prior to installation. Manufacturing staircases that the taxpayer will install is a taxable use of electricity. These staircases are not sold as personal property. Instead, they are used in contracts to improve realty. Under Tax Code 151.317(c)(2)(A)(i), no tax is due on electricity used to process tangible personal property (except ready-to-eat food) for sale as tangible personal property. Rule 3.295, on natural gas and electricity, explains how to determine if tax is due when the gas or electricity is used for both exempt and taxable purposes and is measured by a single meter. The gas or electricity is either totally exempt or taxable depending on the predominant use of the utility measured by that meter as determined by an engineer's utility usage study. When a utility purchaser uses equipment both to fabricate personal property for sale (an exempt use of electricity) and to build items that the utility purchaser will install as improvements to realty (a taxable use of electricity), the engineer's utility study should list the equipment as both exempt use and taxable use equipment with the appropriate number of hours for each use. Taking into account that 25 percent of the property produced in the custom area is not sold as personal property, an engineer's utility use study shows that 53 percent of the electricity used in the custom area is used to build staircases that the taxpayer sells but does not install. This is an exempt use. Therefore, all electricity used in the custom area, running through that single meter, is exempt. (1278F06) The Name Game Hearing No. 30,262 A taxpayer purchased the right to use and/or alter the name of a business. The taxpayer then entered into a separate agreement with the landlord to lease that business's location. Next, the taxpayer purchased new inventory for its business. When the taxpayer completed its sales tax application, it stated that it purchased an existing business and/or the assets of an existing business, signing the application on the line that states the information in the document was true and correct. The previous owner had a sales tax liability in excess of the amount the taxpayer paid for the use of the name. Under Texas Tax Code 111.020, a successor to a business (the purchaser of the business or the stock of goods of the business) is liable for payment of any tax due up to an amount equal to the purchase price of the business. To avoid surprises, the purchaser or seller may ask for a "Certificate of No Tax Due" from the Comptroller or may withhold part of the payment to take care of any taxes. Because of the statement on the application, the taxpayer was assessed tax equal to the amount it paid the previous owner. To overcome the presumption that the taxpayer had purchased the business, it provided a copy of its contract with the previous owner. The taxpayer bought the business name, which it modified. It did not buy the operating assets, inventory, nor the receivables. It is difficult to determine exactly what constitutes a business. We must look at all of the circumstances surrounding the transaction and determine on a case-by-case basis what the parties intended to buy and sell. In this case, the taxpayer succeeded in proving that it purchased a trade name and nothing more. Consequently, it is not a successor to the prior owner's tax liability. (1287B11) Strike Three Hearing No. 29,064 A pay-for-play sports facility sold tickets at the gate for $1. Each ticket was good (that day only) for $1 toward the purchase of food or drink from the park's concession stand. Purchasing a ticket was not required for entrance. Nevertheless, the sports facility did not go out of its way to tell patrons they didn't have to buy a ticket. Another company ran the concession stand. Under that contract, the concession stand operator paid the sports facility a commission equal to 30 percent of its gross sales. In turn, the sports facility gave the concession stand operator 70 cents for each $1 ticket redeemed at the concession stand. Approximately 95 percent of the tickets sold were used at the concession stand. The concession stand operator collected and remitted sales tax on 100 percent of its total sales (including the $1 tickets). Admissions to amusement services are taxable. In this case, the charge was not mandatory, not a fee for admission and not taxable. On the other hand, the ticket was taxable when it was used to buy food or drinks at the concession stand. (1284E13) Letters: Sales Tax Get Out Your Timeline editor's note-Because this summary on the statute of limitations involves following many different dates, the meat of the letter might get lost. For that reason, I've added subheadings to highlight the important concepts. A taxpayer was audited for sales and use tax for the period January 1, 1986 through June 30, 1989 (the "audit period"). A tax bill (called a "determination") was issued on June 14, 1990. The taxpayer timely requested redetermination (a hearing to contest the audit assessment) on July 13, 1990. The redetermination proceeding was concluded, and the amended determination became final on December 6, 1990. On April 20, 1993, the taxpayer filed a refund claim for sales and use tax overpayments reported between March and June of 1989 (the "refund period"). During the audit period, the taxpayer reported sales and use taxes monthly (each month was a "reporting period"). Days during which a redetermination or refund proceeding is pending do not count against the four-year statute of limitations. The April 20, 1993, refund claim was filed within the four-year statute of limitations. The prescribed four-year statute of limitations for March, April, May and June of 1989 had not yet expired. In addition, the 146 days during which the audit was pending in redetermination were not counted against the four-year statute of limitations for sales and use tax refunds for any month within the audit period. A claim filed within six months of the date a determination becomes final will be timely for all transactions included in the audit assessment-even if they are outside the four-year statute of limitations. If the taxpayer had claimed a refund within six months of the date the determination became final, then the claim would have been timely for all transactions included in the audit assessment even if they were outside the normal four-year statute of limitations. Refunds for items not included in the audit assessment were limited to four years from the date the tax was due and payable (plus the number of days during which any sales tax redetermination or refund proceeding was pending for the same reporting periods). Filing a refund claim does not re-open an audit period for additional refunds or assessments. Finally, the filing of the refund claim did not re-open the entire audit period for additional refunds or assessments. However, the Comptroller has some extra time to make assessments for reporting periods within the refund period. Parts Make a Difference There is a tax exemption under 151.328(a)(2) for aircraft used exclusively in a licensed course of instruction to train pilots. A licensed course of instruction is defined in Rule 3.297 as one that has been certified under the Federal Aviation Administration Regulations, 14 Code of Federal Regulations, Part 141 (1974). That's because a flight school desiring Part 141 certification submits its curriculum to the FAA. If the FAA approves, the school is certified. In contrast, under Part 61, a pilot receives certification to teach. Only aircraft purchased by flight schools certified under Part 141 meet the criterion set out in the tax law and in Rule 3.297. (1295B02) Letter: Franchise Tax Holding On A Texas corporation holds various intangibles, which it licenses to entities in Texas and in other states and countries. This is the corporation's only business activity, and the corporation is not subject to tax in any other state. Under Texas Tax Code 171.1061, non-unitary income will be allocated rather than apportioned to Texas if the corporation's commercial domicile is in Texas. All income is presumed to be unitary income. In this case, all of the corporation's income is unitary. Therefore, the income will be apportioned rather than allocated. (1297B10) Attorney General's Opinion: Sales Tax To Protect and Defend editor's note-Taxable security services are defined in the tax law as those services that require a license under Section 13, Private Investigators and Private Security Agencies Act (Article 4413(29bb)), Vernon's Texas Civil Statutes. This opinion is about the applicability of an exemption under the private investigators act. Any person in the business of or performing any services as an investigations company, guard company, alarm systems company, armored car company, courier company or guard dog company must be licensed under the Private Investigators and Private Security Agencies Act. However, that requirement does not apply to a full-time peace officer who receives compensation for private employment as an independent contractor if such person is employed in an employee-employer relationship or employed on an individual contractual basis. In other words, when a peace officer works directly for the entity receiving the security service, the service is not taxable. When a peace officer is hired by another party (including other peace officers) to provide security services for its customers, the service is taxable. And when a group of peace officers forms a business to provide security services, the services are taxable. (1296D08) Notice Interstate Motor Carrier Tax This notice was mailed with quarterly Fuels Tax Interstate Trucker Reports. It informs interstate trucker permit holders that they may also need an Interstate Motor Carrier Permit. Interstate motor carrier sales and use tax is imposed on interstate trucks and trailers purchased or operated in Texas by residents and other carriers doing business in Texas. That includes carriers who have terminals or employees or who perform various services in Texas. If you think you or one of your clients may need an Interstate Motor Carrier Sales and Use Tax Permit, call 1-800-252-1382. Administrative Rules Fuels Tax Proposed amendment to Rule 3.196-Reports, Due Dates, Bonding Requirements, and Qualifications for Annual Filers The proposed amendment will allow a diesel fuel bonded user to initially qualify to file an annual report upon approval by the comptroller and was published in the May 10, 1994, issue of the Texas Register. Interstate Motor Carrier Tax These proposed amendments are necessary because of changes made by the 73rd Legislature. These changes include: * defining a lease as "an agreement by an owner of a motor vehicle, trailer, or semitrailer to give to another for longer than 180 days under a single agreement exclusive use of the vehicle without a driver for consideration," * redefining a purchase as "a lease of, or a transfer of title to, a motor vehicle, trailer, or semitrailer for consideration," and * redefining preceding year as "the period of 12 consecutive calendar months immediately prior to January 1 or to any calendar quarter that is consistently used". Proposed amendment to Rule 3.443-Imposition of Tax after Effective Date-Interstate Motor Carrier Sales and Use Tax Proposed amendment to Rule 3.444-Computation of the Proportioned Tax-Interstate Motor Vehicles Proposed amendment to Rule 3.445-Computation of the Proportioned Tax-Trailers and Semitrailers Motor Vehicle Sales Tax Proposed new Rule 3.77-Refunds and Payments Made Under Protest (Proposed repeal of the old rule) The new rule will provide guidelines for requesting a refund of tax paid to a dealer under a dealer-financed sale. The purchaser will be required to obtain the refund from the dealer. After the dealer refunds the tax, the dealer may obtain a refund of that amount from the state. This rule also outlines the statute of limitations on refund requests and provides instructions on paying motor vehicle tax under protest. Proposed amendment to Rule 3.89-Sales of House Trailers This proposed amendment to 3.89 will delete mobile offices from the definition of motor vehicles as provided by the 73rd Legislature, 1993. Proposed amendment to Rule 3.90-Motor Vehicles Purchased for Use Outside of Texas Under this proposed amendment, a purchaser claiming an exemption from motor vehicle sales tax because the vehicle is purchased for use exclusively outside of Texas must give the seller a Texas Motor Vehicle Tax Exemption Certificate as described in this proposed amendment. The seller must keep the certificate. Rule 3.94-Filing Reports Filing Reports informs certain motor vehicle dealers of their reporting responsibilities. It was proposed in the January 28, 1994, issue of the Texas Register. State Sales Tax Rule 3.316-Occasional Sales This amendment provides that a person holding a permit who makes a purchase in a transaction on which the seller is not required to collect tax under 151.304(b)(1) must accrue tax on the transaction and remit the tax to the Comptroller. The amendment to the Tax Code is effective September 1, 1993. Reader Survey Here's your chance to tell me what you think (about this newsletter). What do you want me to add or leave out-more (or fewer) hearings, more (or fewer) letters? Are the summaries too long, too short? Take a minute to let me know what you think. About the Newsletter: This newsletter is designed to keep you informed. Tax questions can be complicated, so use these summaries as guidelines only. If you have a specific tax question, you may call or write us. The toll-free number for tax practitioners is 1-800-248-4093. The Austin number is 512-463-4600. For a copy of a publication or a rule For a copy of a publication, write to Account Maintenance Division, Data Output/Microfilm Section, 111 E. 17th Street, Austin, Texas 78774-0100. The fax number is 512/475-0397. Be sure to clearly indicate that your request is a "TADD" order. For a copy of a proposed rule If you have a question about a proposed rule, write Chuck Johnstone in Tax Administration, 111 West 6th St., Austin, TX 78701. For a copy of a document If you want a copy of one of the documents summarized in this publication, please send your request in writing to the MTIS Section, 111 West 6th St., Austin, TX 78701. If you're in a hurry, our fax number is 512-475-0900-we fill requests on a first-come, first-served basis. Don't forget to include the microfiche number in parentheses at the end of each summary. Depending on the number of documents and the number of pages, there may be a fee. If so, we'll bill you. -- END --