Volume XIV | ![]() |
Issue 4 |
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April 2004 in this issue... SALES TAX: HEARING NO. 41,730 It's a Lock - Care, Custody and Control Not Transferred Issue: Whether a country club providing taxable amusement services can purchase lockers used by members tax free for resale Source Document: 200401396H A private club, providing golf, tennis, swimming, food and beverage services charged taxable membership dues for the use of club facilities, including clubhouse locker rooms. It also charged a taxable monthly "locker rental" fee. Each member was a given a new lock and two keys for a full-length, wood, furniture-quality locker with a brass nameplate. Members who lost their keys had to pay a third party for a new lock and set of keys. With access to the lockers only during the club's normal hours, members maintained custody of the contents while the taxpayer had custodial rights over the lockers themselves, which were installed in the club's real property. The taxpayer claimed a resale exemption for its purchase of uninstalled lockers, stating that the lockers were rented to members after installation. Providers of taxable services, including amusement services, can buy items tax free only if they are transferred to the customer's "care, custody, and control." The Administrative Law Judge denied the claim, finding that care, custody, and control of the lockers were not transferred to the members renting them. The lockers were located on the taxpayer's real property and remained in the taxpayer's custody and control at all times. A member rented the right to use the secure space created by the locker and was given minor custodial rights. While both members and the taxpayer cared for the lockers, it was the taxpayer who primarily maintained them. in this issue...>>SALES TAX: HEARING NO. 41,876 One Man's Trash is Another Man's Treasure Issue: Whether hauling paper to a recycling firm is garbage collection Source Document: 200401407H An insurance firm hired a company to collect and remove large amounts of paper thrown out from its administrative offices. The other company took title to the paper upon possession, and then recycled and resold the paper. The insurance firm claimed that it purchased non-taxable recycling services and thus was entitled to a refund of the sales taxes paid to the service provider. Real property services include "removal or collection of garbage, rubbish, or other solid waste" but the statute specifically excludes from taxation the removal or collection of some materials such as hazardous and industrial solid waste. The insurance firm disagreed that the paper was "garbage, rubbish, or solid waste" because it had value: it was "not discarded useless paper, but rather paper that has been intentionally set aside for the purpose of recycling." The Administrative Law Judge held that the insurance firm's distinctions did not qualify for any exemption and that the charges were for taxable real property services. in this issue...>>SALES TAX: HEARING NO. 42,163 Manufacturing Exemptions - When does Manufacturing Begin? Issue: Whether de-palletizers and conveyors purchased prior to the October 1, 1997, changes in the Tax Code qualified for manufacturing exemptions Source Document: 200401393H The taxpayer operated a soft drink bottling plant. Forklifts loaded empty cans on pallets into a de-palletizer, which separated the rows of cans and pushed them onto a conveyor that moved them to a de-ionized air rinser. From the rinser, the cans went to a filling machine and then to a seaming machine which attached the lids. The cans were moved to a warmer and then to a fill-detector, which eliminated those that were not filled to specifications, before being packaged into six-packs or twelve-packs. Finally, the packages of cans were put on pallets for warehousing and outbound shipment. Throughout the operation, the cans were moved from station to station by conveyors. The taxpayer argued that prior to October 1, 1997, the Tax Code exempted tangible personal property used in, and necessary and essential to, manufacturing. The statute at the time defined manufacturing as "each operation beginning with the first stage of production of tangible personal property and ending with the completion of tangible personal property having the physical properties (including packaging, if any) that it has when transferred by the manufacturer to another." The Administrative Law Judge found that the de-palletizers and rinser did not qualify for exemption, since they were used in acts of preparation prior to actual manufacturing. The manufacturing process in this case began with filling the cans. The Administrative Law Judge also held that the conveyors used throughout the process were used solely in providing intraplant transportation and thus were subject to tax both before and after October 1, 1997. in this issue...>>FRANCHISE TAX: LETTER The Job Creation and Worker Assistance Act of 2002 The Jobs and Growth Tax Relief Reconciliation Act of 2003 Issue: Impact of the Job Creation and Worker Assistance Act of 2002 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 on the Texas franchise tax Source Documents: 200003280L, 200204014L, 200401314L, and 200402373L Two recent federal laws may affect corporations' income tax. The Job Creation and Worker Assistance Act of 2002 provided some new depreciation guidelines, while the Jobs and Growth Tax Relief Reconciliation Act of 2003 gave new guidelines for additional bonus depreciation, increased the Section 179 deduction, and expanded the definition of Section 179 property to include off-the-shelf computer software. The earned surplus component (Schedule B) of the Texas franchise tax is calculated based upon the Internal Revenue Code of 1986 in effect for the tax year beginning January 1, 1996 and before January 1, 1997, and any regulations adopted under that code applicable to that period. Consequently, the new guidelines under the Job Creation and Worker Assistance Act of 2002 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 are not allowed in computing the earned surplus component. In computing net taxable earned surplus, the amount of Section 179 deduction allowable is $25,000 for federal tax years beginning in 2003 or later. Any adjustments to federal taxable income required to reconcile to the 1996 Internal Revenue Code in the calculation of earned surplus should be made prior to entering the corporation's federal taxable income on item 19, Schedule B, of the Texas franchise tax report. Close corporations with 35 or fewer shareholders, Subchapter S corporations, and corporations with taxable capital of less than one million dollars are eligible to report taxable capital using the federal income tax accounting (FIT) method. An eligible corporation that elects to report taxable capital using the FIT method applies the accounting methods used in its most recent federal income tax return originally due on or before the date on which the corporation's franchise tax report is originally due. For example, a corporation with a calendar year end qualifies and elects to use the FIT method to compute its taxable capital for the 2004 franchise tax report. The corporation's allowable Section 179 deduction reported on its 2003 federal income tax return is $100,000. The full amount of the Section 179 deduction, $100,000, is allowable in computing taxable capital for the 2004 franchise tax report. However, the corporation is limited to a Section 179 deduction of $25,000 in computing earned surplus. in this issue...>>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 first publishes 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 <http://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. Recently Proposed RulesLast month the Comptroller proposed amendments to several rules. Notice of those amendments was published in the March 12, 2004, issue of the Texas Register. A summary of each of the proposals follows. GENERAL RULES HOTEL OCCUPANCY TAX MOTOR VEHICLE SALES TAX STATE SALES AND USE TAX Proposed amendments to Rule 3.331-Transfers of Common Interests in Tangible Personal Property; Intercorporate Services Recently Adopted Rules CENTRAL ADMINISTRATION-Practice and Procedure Adopted amendment to Rule 1.42-Definitions FRANCHISE TAX RULES Adopted amendment to Rule 3.580-Credit for Hiring Persons with Disabilities PROPERTY TAX ADMINISTRATION-Appraisal District Administration Adopted amendments to Rule 9.419-Procedures for Determining Property Tax Exemption for Motor Vehicles Leased for Personal Use |
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Carole Keeton Strayhorn
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