Tax Policy News - April 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 claimed that the purchase of the machines qualified for manufacturing exemption, since both the taxpayer and its customers manufactured soft drinks for resale. The Administrative Law Judge denied the claim, noting that the law does not state that a taxpayer can buy equipment for manufacturing processes other than its own.

The taxpayer also argued that the equipment could be purchased for resale. The Administrative Law Judge allowed this treatment for actual rental agreements evidenced by consideration valued in money. If the contract stated that the machine was free or simply tied to a commitment to purchase syrup, however, the Administrative Law Judge denied the exemption, pointing out that the equipment was purchased for promotional use and thus subject to tax. (200212717H)

Estimates Determined Tax Due
Hearing No. 40,097
Issue: Whether an automotive repair shop does lump-sum repairs if it separately states materials and labor on estimates
Labor to repair motor vehicles is not taxable. For repairs done for a single lump-sum charge, the repair shop is the consumer of materials incorporated into the vehicle. When buying those materials, the shop must pay tax and cannot issue a resale certificate. On the other hand, a shop that separates charges for labor and materials is a retailer and collects tax from the customer.

The taxpayer, a paint and body shop, operated under lump-sum contract guidelines, paying taxes to suppliers and not collecting tax from customers. The shop's estimates, however, listed separate charges for labor, materials and tax. The estimates, which were often revised for discounts or work changes, were usually the only invoice or document given to customers. Occasionally, an invoice would give only a total charge with the notation "repair per estimate."

The Administrative Law Judge found that the estimates were, for all practical purposes, enforceable contracts. When done for the estimated price (less any applicable discounts), the job was done under a separated contract. When the work changed and the price charged the customer was not related to the estimate, the job was determined to be lump sum. (200212767H)

Concrete Answers on Manufacturing Exemptions
Hearing No. 40,495
Issue: Whether the manufacturing exemption applies to equipment platforms and equipment for testing raw materials
A manufacturer and seller of concrete block products, the taxpayer bought a hydronix system and mixer platform tax-free. The hydronix system, used for quality control, has electronic probes that measure the moisture content of raw material. The mixer platform is a steel structure surrounding several mixers, each of which qualify for the manufacturing equipment exemption. A Comptroller audit assessed tax on both items.

The Administrative Law Judge denied both exemptions. While quality control is important to the manufacturing process, the hydronix system did not qualify because testing materials was done before, but not during, actual manufacturing. Since it supported multiple mixers, the platform could not be a component part of any one qualifying piece of equipment. (200210595H)

Secure in Paying Taxes
Hearing No 40,791
Issue: Whether additional security for entertainment events should be considered nontaxable temporary help services
The taxpayer operated an arena, using full-time and part-time employees to maintain security. For large sporting events and concerts, the taxpayer hired additional security services from an outside firm. Since the firm had to be licensed by the Texas Commission on Private Security, the security services are taxable.

The taxpayer argued that the services were not taxable, however, based upon the exemption in Texas Tax Code Section 151.057(2). That section says that services of a temporary help firm are exempt if:

Editor's Note- In 2001, Tax Code Section 151.057 was amended to require that the exclusion from tax be limited to services provided by employees of a temporary employment service as defined by Section 93.001, Labor Code. This Legislature noted that the change was a clarification.

Corporations required to pay the tax via Electronic Fund Transfer (EFT) may request an extension until August 15 to file the annual report. The request for extension must be postmarked on or before May 15. Payment must be 90 percent or more of the tax that will be due with the current year's report or 100 percent of the tax reported as due for the previous calendar year's report. If the corporation elects to pay 100 percent of the tax reported as due for the previous calendar year, the previous year's report must have been filed on or before May 14, 2003 in order for the extension to be granted. Payment must be sent by electronic fund transfer on or before May 15. The corporation may request an additional extension until November 17, 2003 to file the report if it files a second extension request postmarked on or before August 15. The balance of the amount of tax that will be reported on the franchise tax report for the current year must be sent electronically on or before August 15.

If the corporation will owe no tax or if the corporation owed no tax on last year's report, the corporation may use telefile to file an extension request. To telefile an extension request using a touch-tone phone, call 1-888-4filing (1-888-434-5464).

The first group is set out in the Insurance Code, Article 3.50-2, the Texas Employees Uniform Group Insurance Benefits Act. The group includes appointed and elected officers and employees of the State of Texas, employees of state institutions of higher education, and retirees under the state's Employee Retirement System. (An institution of higher education means any public community/junior college or senior college or university, except for those in The University of Texas System or The Texas A&M University System, which are covered by a separate act, below.)

The second group is administered under the Texas State College and University Employees Uniform Insurance Benefits Act, Article 3.50-3 of the Insurance Code. The group includes employees and retirees from The University of Texas System and The Texas A&M University System.

The third group is defined in the Texas Public School Retired Employees Group Insurance Act, Article 3.50-4 of the Insurance Code. This group includes retirees, along with their spouses and dependent children, under the state's Teacher Retirement System.

Active public school employees' insurance coverage is not exempt from premium or maintenance taxes or fees.

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 consolidation of cigarette tax rules
The Comptroller proposed the repeal of the existing cigarette tax rules under 34 TAC, Part 1, Chapters 3 and 11, to simplify their consolidation into two new rules. The rules proposed for repeal are:

3.101-Delivery of Unstamped Cigarettes
3.102-Cigarette Permits for Trucks and Cars
3.104-Transfer and Correction of Permits
3.106-Change of Date for Filing Cigarette Reports and Payment
3.107-Weight of Cigarettes Defined
3.108-Cigarette Tax Stamps and Meter Impressions
3.110-Issuance of Cigarette Tax Stamps to the Texas Alcoholic Beverage Commission
3.111-Affixing of Cigarette Tax Stamps by Texas Alcoholic Beverage Commission Agents
3.112-Disposition of Cigarettes Seized by Texas Alcoholic Beverage Commission Agents
3.114-Investigation of Applicants for Permits
11.51-Evidence of Return of Cigarette Unfit for Use
11.52-Importation of 200 or Fewer Cigarettes.

The two new cigarette tax rules provide taxpayers with a more effective means for obtaining information. In addition to the consolidation of information, the new rules have been updated to provide additional definitions and to reflect legislative changes that expand the definition of a commercial business location; require that a permit holder be provided with an opportunity for a hearing before a permit may be suspended or revoked; change the due date for the distributor's and manufacturer's monthly reports; allow a person to transport for personal use 200 or fewer cigarettes into Texas from another state without paying the tax and add "importer" and "manufacturer" to the types of permits available under Tax Code, Chapter 154. Notice of the proposals was published in the March 21, 2003, issue of the Texas Register.

State Sales and Use Tax
Proposed amendment to Rule 3.356-Real Property Service
The proposed amendment to Rule 3.356 includes definitions for the terms "contractor," "real property services," "disaster area," and "new construction," and incorporates legislative changes to Tax Code, Sections 151.0048 and 151.347, as well as the addition of Section 151.354 to the statute. The amended rule reflects changes to Tax Code, Section 151.0048, which temporarily excluded from the definition of "real property services," surveying services purchased by a homeowner in connection with the construction of a new residential structure or other improvement immediately adjacent to the new structure if the improvement is used in the residential occupancy of the structure. This temporary exclusion was effective from October 1, 1999 through September 30, 2001. In response to changes to Tax Code, Section 151.347, the proposed amendment increases the dollar limit for exempt landscaping and lawn maintenance services sold by persons under 18, and provides limitations that apply to the exemption for self-employed individuals who perform landscaping and lawn maintenance services. Finally, the amended rule reflects the addition of Tax Code, Section 151.354, which codified and expanded provisions related to property management companies and real property services. Notice of the proposal was published in the March 28, 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: Tina Allen, Teresa Bostick, Virgie Bradsby, Adina Christian, Judy Cox, Kevin Koller, and Mike Wegner