December 2002
In This Issue of Tax Policy News
Announcement-WSATA Conference
Sales Tax-A Sew-Sew Hearing Result
Sales Tax-Waste Not, Want Not
Sales Tax-Confirming Boundaries of Taxation
Mixed Beverage Gross Receipts Tax-Backing Out Tax
Franchise Tax-SIA Designations for Calendar 2003
Insurance Tax-Guaranty Fund Assessment Credits
Administrative Rules
Recently Adopted Rules
State Sales and Use Tax
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.
ANNOUNCEMENT: WSATA CONFERENCE
WSATA Conference September 7-10, 2003
Texas will host the 2003 Conference of the Western States Association of Tax Administrators. The conference will be held September 7-10, 2003, at the Hyatt Hotel in Austin, Texas. Please send your suggestions for general and breakout session topics to wsata2003@cpa.state.tx.us. The WSATA 2003 Conference web site will be online soon, and we'll post conference updates in Tax Policy News.
HEARINGS: SALES TAX
A Sew-Sew Hearing Result
Hearing No. 38,961
Issue: Whether a clothing retailer can purchase sewing machines tax free claiming a manufacturing exemption
The taxpayer purchased sewing machines for its retail department stores so that customers could get custom alterations when they bought clothing. The taxpayer claimed a manufacturing exemption and argued that no tax was due on the machines, since the alterations were a "processing" of the clothing into a finished product. In other words, the clothing was not finished and ready for sale until the alterations were done.The administrative law judge denied the exemption, pointing out that while the taxpayer kept possession of the clothing to do the alterations, the customer had paid for the item and was the actual owner. The customer could have the alterations done by the taxpayer or by someone else, but in either case the alterations constituted a separate transaction. Furthermore, while the taxpayer might apply materials that change the clothing, the alterations made the clothing less, not more, marketable, by customizing the garment for use by a single customer. In short, alteration of clothing constitutes remodeling, not manufacturing, and the sewing machines are not exempt under Section 151.318. (200207489H)
Waste Not, Want Not
Hearing No. 39,987
Issue: Whether waste removed from a recycling plant can qualify for exemption as industrial solid waste
The taxpayer bought waste materials, separated out the portion that was recyclable for compacting and baling, and disposed of the remainder. Because the compacting and baling are considered manufacturing, the taxpayer contended that disposal of the non-recyclable material was not taxable because it was industrial solid waste, that is, waste resulting from a manufacturing process.The administrative law judge denied the taxpayer's claim, noting that the waste resulted from the sorting and segregating of materials (a pre-manufacturing process) and not from the manufacturing activity itself (compacting and baling). Since the waste was generated before actual manufacturing began, it was not industrial solid waste but municipal solid waste, and thus its removal was a taxable real property service. (200208491H)
Confirming Boundaries of Taxation
Hearing No. 38,440
Issue: Whether surveying related to roads and streets in a new residential subdivision is subject to tax
The taxpayer, owner and operator of resort properties, bought and paid tax on surveying services during the development of its resort residential subdivisions. The taxpayer requested a refund for surveying related to the staking of roads and streets, arguing that such surveying was exempt as part of a contract to improve real property to be used as a residence.The administrative law judge denied the refund because the statutory exclusion does not apply to surveying of subdivision streets. (200209535H)
TAXABILITY RESPONSE: MIXED BEVERAGE GROSS RECEIPTS TAX
Backing Out Tax
Issue: Whether a mixed beverage permit holder can report mixed beverage gross receipts by backing out the tax
Texas imposes a 14 percent tax on gross receipts from the sale, preparation and service of alcoholic beverages. The tax is levied on mixed beverage permit holders, not customers.Since the tax is based on gross receipts, a permit holder cannot "back out" the tax from the amount received from customers or add it to the sales price as a separate charge. In fact, any separate charge labeled as a "tax reimbursement" becomes part of the gross receipts subject to the tax.
For example, a permit holder charges $10.50 for three drinks and on the bill adds a "tax reimbursement" of $1.47 (14 percent of $10.50), for a total of $11.97. Since the permit holder actually receives $11.97 from the customer, that is the amount subject to the tax. When reporting this transaction, the permit holder must show a gross receipt of $11.97 and pay tax of $1.68 (14 percent of $11.97).
Texas law (Tax Code Section 111.016) requires that any money represented and collected as a "tax" must be paid to the state in full. In the example above, for instance, if the extra charge had been labeled "tax" rather than "tax reimbursement," the permit holder must pay the state the $1.47 represented as "tax" in addition to the 14 percent tax on $10.50, for a total of $2.94 ($1.47 tax collected in error from customer + $1.47 tax due from permit holder).
Taxpayers who backed out the mixed beverage gross receipts tax, added the tax to their sales prices as a separate charge, or did not report reimbursements in their gross receipts must amend their returns to reflect the correct amount of tax. (200210479T)
FYI: FRANCHISE TAX
SIA Designations for Calendar 2003
Issue: Counties and areas eligible for full-purpose and limited-purpose SIA designation
Many Texas counties and sub-county areas qualify as Strategic Investment Areas (SIAs) for calendar year 2003. SIAs are counties and sub-county areas where taxpayers can earn franchise tax credits through job creation, investment and research. The 2003 SIA determination is effective for business activity in calendar year 2003. For more information about the economic development credits, see Franchise Tax Rule 3.578.Full-Purpose SIAs
Eighty-one counties qualify for full-purpose SIA designation based on their relative unemployment rate and per capita income. Corporations engaged in agricultural processing, manufacturing, warehousing, distribution, data processing, central administrative offices or research and development can establish eligibility for job creation and investment credits. Corporations with qualified research expenditures in a full-purpose SIA are eligible for a research-credit bonus.
The 81 counties eligible for the full-purpose SIA designation are:
Angelina
Aransas
Bailey
Bee
Brazoria
Brooks
Calhoun
Cameron
Camp
Cass
Cochran
Coryell
Cottle
Crane
Crosby
Culberson
Deaf Smith
Dimmit
Duval
Ector
El Paso
Fannin
Floyd
Frio
Galveston
Grayson
Gregg
Grimes
Hardin
Harrison
Hidalgo
Hill
Hunt
Jasper
Jefferson
Jim Wells
Kaufman
Kinney
Lamar
Lamb
La Salle
Liberty
Lynn
McCulloch
Marion
Matagorda
Maverick
Morris
Navarro
Newton
Nolan
Nueces
Orange
Panola
Pecos
Polk
Potter
Presidio
Red River
Reeves
Robertson
Sabine
San Augustine
San Patricio
Scurry
Shelby
Starr
Terry
Trinity
Tyler
Upshur
Uvalde
Val Verde
Ward
Webb
Willacy
Winkler
Wood
Young
Zapata
Zavala
Limited-Purpose SIAs
Based on their population, another 139 counties qualify only for the limited-purpose SIA designation. Corporations engaged in agricultural processing in these counties can apply for the job creation and investment credits.
The 139 counties eligible for the limited-purpose SIA designation are:
Andrews
Archer
Armstrong
Atascosa
Austin
Bandera
Baylor
Blanco
Borden
Bosque
Brewster
Briscoe
Brown
Burleson
Burnet
Caldwell
Callahan
Carson
Castro
Chambers
Cherokee
Childress
Clay
Coke
Coleman
Collingsworth
Colorado
Comanche
Concho
Cooke
Crockett
Dallam
Dawson
Delta
DeWitt
Dickens
Donley
Eastland
Edwards
Erath
Falls
Fayette
Fisher
Foard
Franklin
Freestone
Gains
Garza
Gillespie
Glasscock
Goliad
Gonzales
Gray
Hale
Hall
Hamilton
Hansford
Hardeman
Hartley
Haskell
Hemphill
Hockley
Hood
Hopkins
Houston
Howard
Hudspeth
Hutchinson
Irion
Jack
Jackson
Jeff Davis
Jim Hogg
Jones
Karnes
Kendall
Kenedy
Kent
Kerr
Kimble
King
Kleberg
Knox
Lampasas
Lavaca
Lee
Leon
Limestone
Lipscomb
Live Oak
Llano
Loving
McMullen
Madison
Martin
Mason
Medina
Menard
Milam
Mills
Mitchell
Montague
Moore
Motley
Ochiltree
Oldham
Palo Pinto
Parmer
Rains
Reagan
Real
Refugio
Roberts
Rockwall
Runnels
Rusk
San Jacinto
San Saba
Schleicher
Shackelford
Sherman
Somervell
Stephens
Sterling
Stonewall
Sutton
Swisher
Terrell
Throckmorton
Titus
Upton
Van Zandt
Waller
Washington
Wharton
Wheeler
Wilbarger
Wilson
Yoakum
Sub-County Zones
Dallas, Harris, Bexar, McLennan and El Paso counties qualify as sub-county zones. These counties meet the criteria to qualify for the full-purpose SIA designation based on their selections as federal urban enterprise communities.
Based on El Paso County's unemployment and per capita income, the entire county is included in the SIA. Dallas, Harris, Bexar and McLennan counties are included in the SIA only to the extent of the sub-county zone boundaries.
Since January 1, 2002, areas designated as Defense Economic Readjustment Zones qualify for full-purpose SIA treatment. The four Defense Economic Readjustment Zones are located in Bee, Bexar, Lubbock and McLennan counties.
Bee County is also included in the SIA based on its unemployment and per capita income, qualifying the entire county as a SIA. Lubbock, McLennan and Bexar counties are included only to the extent of the sub-county zone boundaries.
The nine sub-county zones eligible for the full-purpose SIA are:
Area County Dallas Urban Enterprise Community Dallas El Paso Urban Enterprise Community El Paso Houston Urban Supplemental Enterprise Community Harris San Antonio Urban Enterprise Community Bexar Waco Urban Enterprise Community McLennan Chase Field Defense Economic Readjustment Zone Bee Reese Center Defense Economic Readjustment Zone Lubbock McGregor Defense Economic Readjustment Zone McLennan San Antonio Defense Economic Readjustment Zone Bexar To download a map with the Strategic Investment Area in Acrobat PDF format click here.
Additional information about federal urban enterprise communities is available at http://hudweb.esri.com/egis/cpd/rcezec/welcome.htm.
FYI: INSURANCE TAX
Guaranty Fund Assessment Credits
Insurance companies can assign or transfer the assessments that they pay to guaranty associations. The assessments are used to offset the associations' administrative costs as well as to pay claims and other obligations for insolvent insurers. Transfers of guaranty fund assessment credits must meet the criteria in Articles 21.28-C and Article 21.28-D of the Texas Insurance Code.Property and casualty insurers can transfer or assign assessment credits with or among other insurers if there is an acquisition, merger or total assumption of reinsurance among the insurers involved, or if the commissioner of insurance approves the transfer by order. (See Texas Insurance Code Article 21.28-C, Section 21.)
Life, accident, health and hospital service insurers can assign or transfer premium tax credits to another insurer if there is an acquisition, merger or total assumption of reinsurance between the insurers, or if the commissioner of insurance approves the transfer by order. (See Texas Insurance Code Article 21.28-D, Section 13.)
The insurer must report the transfer or assignment of an assessment credit to the Comptroller's office within 60 days or by November 1, whichever is later. The submission should use the preprinted "Guaranty Assessment Credits Transfer Request Report" and must include all applicable documents or a copy of the insurance commissioner's approval. After the report has been reviewed for legal compliance, the available credits will be transferred and included on the annual assessment credit report sent to insurers.
ADMINISTRATIVE RULES
The Comptroller adopts administrative rules to clarify and explain Texas tax laws. Before a new rule or an amendment to an existing rule goes into effect, the Comptroller publishes first a proposal notice and later an adoption notice in the Secretary of State's weekly Texas Register. The Register is available on the Secretary of State's website at <www.sos.state.tx.us/texreg/index.html>.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. In November, we adopted one rule amendment.
Recently Adopted Rules
State Sales and Use Tax
Adopted amendment to Rule 3.322-Exempt Organizations
The Comptroller adopted an amendment to Rule 3.322, concerning exempt organizations, with changes to the proposed text as published on page 7766 of the August 23, 2002, issue of the Texas Register. With this amendment, we've clarified subsections (b)(5) and (e)(1); moved the revocation information from subsection (b)(5)(A)-(C) to subsection (f); and deleted from subsection (c)(7), the reference to the Agricultural Development Act of 1983, which has been repealed. The new language in subsection (f) provides guidelines for the revocation of exemptions from sales tax. We amended various other subsections of the rule for clarity.The adopted rule includes changes to the proposed text in subsection (e)(1)(B) to clarify the documentation required for an organization to use a group exemption letter. We also corrected the text in subsection (f)(2) of the proposed rule to complete a reference to Tax Code, Section151.310(a)(2).
We received no comments regarding the proposed amendment. Notice of the adoption appears in the November 29, 2002, issue of the Texas Register. The amended rule is effective on December 2, 2002.
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
- Tina Allen, Jerry Bobbitt, Virgie Bradsby, Don Dillard, Adina Christian, Judy Cox, Kevin Koller, and Mike Wegner
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