Tax Policy News - March 2002

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FYI: FRANCHISE TAX
Franchise Tax Reports are on the Way!
Issue: Due date is May 15
The Comptroller's office has started mailing annual franchise tax report packets to more than 450,000 corporations and limited liability companies.

We should have all the packets in the mail by March 31. Blank report forms are also available on our Web site at www.window.state.tx.us.

This year, we've included instructions which apply only to the 2002 annual franchise tax report. This means taxpayers and practitioners won't have to wade through information intended for first-time filers.

The reports are due May 15 unless the taxpayer receives an extension. The packet includes forms to request an extension.

Records can be on microfilm, microfiche, or in a computerized format acceptable to the base jurisdiction. The IFTA four-year requirement supersedes any shorter retention periods set by other agencies or regulations.

An audit extends the four-year retention requirement until the licensee provides all necessary records. If the carrier's true tax liability cannot be determined due to inadequate records, the Comptroller may assess tax due for each jurisdiction on the basis of the best information available.

Licensees who do not comply with the record-keeping requirement could have their licenses revoked or canceled.

The administrative law judge found that the prizes were not an integral part of the games, which were conducted in the same manner and at the same price whether the player won a prize. Therefore, under Rule 3.301(b)(2), the taxpayer was considered the consumer of the prize, and was liable for sales tax on the purchase price. (200110738H)

Contracts with the Feds
Hearing No. 40,015 and No. 32,631A
Issue: Can a taxpayer get a refund of taxes paid on overhead materials used in contracts with the U.S. Government?
The taxpayer, a defense contractor, paid sales and use taxes on overhead materials that were allocated to government contracts that contained "title-passing" provisions. The contractor claimed a refund of sales tax, arguing that these materials were resold to the U.S. Government.

The "title-passing" provisions were in the following FAR clauses contained in the contracts between the taxpayer and the U.S. Government:

A TDU that is subject to franchise tax has gross receipts for franchise tax purposes because the TDU is providing a service. The value of the receipts will be the amount the TDU is paid for its services. These receipts will be apportioned for franchise tax purposes to the location where the service is performed.

The REP that is subject to franchise tax sells the electricity, tangible personal property, to the customer at the meter. A REP will have gross receipts for the entire amount billed for the sale of the electricity to the customer, presuming the customer is located in Texas.

This scenario does not result in double taxation for franchise tax purposes. Gross receipts are used in determining a corporation's apportionment factor. Just as is the case with a wholesaler/retailer relationship. For example, a retailer's receipts include the total amount received for goods sold, with no deduction for the amount paid to wholesalers. (200202819L)

A new type of business in stores and malls offers aqua massage machines, which look like tanning beds. The machines use water pressure to massage customers.

These machine aqua massages are not massage parlors, and no tax is due on the charge for a machine aqua massage. The aqua massage operator should pay tax when purchasing the equipment. (200108718L)

All in the Family! Motor Vehicle Taxes.
Issue: Motor vehicle tax due on title transfers between family members
A "sale" means transfer of title or possession of a motor vehicle for a consideration, and the motor vehicle sales tax is based on the total consideration paid.

If there's an outstanding loan on the vehicle and the new owner assumes the loan, sales tax is due because assuming the debt is a "consideration." (If the new owner originally co-signed the loan, sales tax is still due, since a co-signer is a guarantor of the debt, not the original borrower.)

If, on the other hand, the new owner is a co-maker of the original loan and jointly liable for paying the debt, no consideration changes hands and thus no sales tax is due when the vehicle is transferred to the co-maker.

If a person gives a vehicle to someone else, and there is no consideration paid or received, no sales tax is due. But the recipient owes a $10 gift tax. (200202781L)

Eye of newt, tail of toad…or parts is parts
Issue: Sales of human or animal blood cells for research purposes
Humans are not tangible personal property. Sales of human parts or tissues, such as blood, lungs, and corneas are not subject to tax.

Sales of animal blood or tissue are taxable. Animals are tangible personal property and subject to sales tax unless specifically exempted.

A purchaser buying animal blood or blood cells for resale may give the seller a properly completed resale certificate in lieu of sales tax.

A veterinarian may give an exemption certificate when purchasing blood for transfusions to treat animals. While there is no specific exemption for animal blood used for research, an exempt organization may give an exemption certificate in lieu of tax for the purchase of taxable items related to its exempt purpose. (200202788L)

The proposal notice lets the public know the Comptroller's intended interpretation and administration of the statute. Taxpayers may comment on the proposed rule during the 30 days following its publication. After reviewing the public comments, the Comptroller may make changes in the proposed text and formally adopts the new rule or amendment. The final, adopted rule is published in the Texas Register.

Recently Proposed Rules
General Rules
Proposed amendment to Rule 3.9-Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers
The Comptroller proposed an amendment to Rule 3.9 to incorporate changes made to Tax Code, Chapter 111, by Senate Bill 640, 77th Legislature, 2001. The amendment lowers the limit for required electronic payments from $250,000 to $100,000, requires electronic filing of tax returns by certain taxpayers, and allows taxpayers to request a waiver of the electronic reporting requirements. This rule is also amended to reflect current policy concerning the requirements of Government Code Section 404.095(c).

Recently Adopted Rules
General Rules
Adopted repeal of Rule 3.3-Unjust Enrichment
The Comptroller adopted the repeal of Rule 3.3 without changes to the proposed text as published in the November 23, 2001, issue of the Texas Register (26 TexReg 9530). The substance of this rule will be added to new Rule 3.2 of this title relating to Application of Payments. No comments were received regarding adoption of the repeal.

Adopted new Rule3.3-Contract Audit Program
The Comptroller adopted a new Rule 3.3 without changes to the proposed text as published in the November 23, 2001, issue of the Texas Register (26 TexReg 9530). This rule is adopted to implement Senate Bill 1458, 77th Legislature, 2001, and establishes administrative and procedural guidelines for a new audit program in which the Comptroller may contract with persons or accounting firms to perform tax audits to determine a taxpayer's tax liability. No comments were received regarding adoption of the new rule.

State Sales and Use Tax
Adopted amendment to Rule 3.310-Laundry, Cleaning, and Garment Services
The Comptroller adopted an amendment to Rule 3.310, concerning laundry, cleaning, and garment services, without changes to the proposed text as published in the December 7, 2001, issue of the Texas Register (26 TexReg 10041). This rule was amended to implement Senate Bill 1125, 77th Legislature, 2001, by adding Tax Code Section 151.3021, which allows an exemption for wrapping, packing, and packaging supplies used by a laundry or dry cleaner to wrap, pack, or package laundered or dry cleaned items. No comments were received regarding adoption of the amendment.

Adopted amendment to Rule 3.314-Wrapping, Packing, Packaging Supplies, Containers, Labels, Tags, Export Packers, and Stevedoring Materials and Supplies
The Comptroller adopted an amendment to Rule 3.314, concerning wrapping, packing, packaging supplies, containers, labels, tags, export packers and stevedoring materials and supplies, without changes to the proposed text as published in the December 7, 2001, issue of the Texas Register (26 TexReg 10042). This section was amended to implement Senate Bill 1125, 77th Legislature, 2001, by adding Tax Code Section 151.3021. That provision allows an exemption for wrapping, packing and packaging supplies used by a laundry or dry cleaner to wrap, pack, or packaged the laundered or dry cleaned items. No comments were received regarding adoption of the amendment.

Adopted new Rule 3.320-Texas Emissions Reduction Plan Surcharge; Off-Road, Heavy-Duty Diesel Construction Equipment
The Comptroller adopted a new Rule 3.320 with changes, to correct a reference, to the proposed text as published in the December 28, 2001, issue of the Texas Register (26 TexReg 10798). The new section implements Senate Bill 5, 77th Legislature, 2001 by adding Tax Code Section 151.0515, which imposes a 1 percent surcharge on taxable diesel construction equipment sold, leased, or rented on or after September 1, 2001. The Comptroller administers the collection and remittance of the surcharge under Tax Code Chapter 151, and deposits the surcharge to the credit of the Texas Emissions Reduction Plan Fund, which is administered by the Texas Natural Resource Conservation Commission and used to provide grants and other incentives to improve air quality in Texas. No comments were received regarding adoption of the new rule.

Fireworks Tax
Adopted new Rule 3.1281-Fireworks Tax
The Comptroller adopted a new Rule 3.1281 without changes to the proposed text as published in the January 4, 2002, issue of the Texas Register (27 TexReg 108). This new rule was adopted to implement House Bill 3667, 77th Legislature, 2001, which added Tax Code, Chapter 161. This new chapter imposes a 2 percent fireworks sales tax on fireworks sold on or after October 1, 2001. The new rule provides important information to taxpayers concerning the collection and remittance of the fireworks tax. No comments were received regarding adoption of the new rule.

ABOUT THE NEWSLETTER:

This newsletter is designed to keep you informed. 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.

Visit Our Website: Tax Policy News is available on the Comptroller's website, <www.window.state.tx.us>. The website includes many of the documents summarized in this newsletter, the latest versions of tax rules, the Tax Code from the Texas Legislative Council, and publications on Texas taxes.
For a Copy of a Document: Documents summarized in this newsletter are available on the State Tax Automated Research System (STAR) on the Internet, <http://aixtcp.cpa.state.tx.us/star/>. For a paper copy of a document, please write to Policy Dissemination Section, 111 West 6th St., Austin, TX 78701-2913, send e-mail to <tax.help@cpa.state.tx.us>, or fax 512-475-0900. Requests will be filled on a first-come, first-served basis. Depending on the number of paper documents requested and the number of pages in each document set, a fee may be charged.
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: For a copy of an agency publication, adopted rule, or notice, write to the Revenue Processing Division, Microfilm and Retention Section, 111 E. 17th Street, Austin, Texas 78774-0001. The fax number is 512/475-0397.
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: Adina Christian, Lowell Dunn, Connie Ford, Gary Johnson, Kevin Koller, Johnnie Sielbeck, Barbara Truesdale, Mike Wegner and Steve White