The taxpayer operates a track for car racing and special events. While the actual races typically last about four hours on a weekend, the track also has campgrounds open from the Tuesday before to the Monday after racing weekends. One of the campgrounds is in the infield, within the racetrack.

Customers who use the infield campground must pay a fee for each camping space as well as $65.00 per person to view the races. The taxpayer contended that the infield camping fees were not taxable as an amusement service. (Rule 3.298(a)(2)(F) excludes campground admission as a nonamusement service.)

The Comptroller's office argued that the campground fees were analogous to sports stadium skybox rentals (STAR document 200406701H) and were thus taxable as an amusement service. In that hearing, the taxpayer argued that the separate fees for using a skybox were nontaxable rental of real property. The Administrative Law Judge agreed with the Comptroller that the sky box rental fee and the admission fee were part of a total charge, "…based on the obvious conclusion that the only reason for licensing a skybox is to be able to view events in the facility."

In the current case, the Administrative Law Judge maintained that there are distinctions between a skybox rental and the infield camping fee. The skyboxes were only occupied when a game was in progress, but the campgrounds could be rented for up to a week. Customers could use the campsites when there was no racing and separately bought a pass for the opportunity to view the races.

The Judge therefore granted the taxpayer's refund claim, concluding that the infield campground fees should be treated as nontaxable campground admissions.

Food is taxable when it's sold ready for immediate consumption. For example, there's tax on ice cream sundries (frozen servings of milk products and flavoring). These taxable sundries include individual packages of ice cream bars and sandwiches, and half pints of ice cream.

There's no tax on ice cream sundries that are sold in prepackaged containers with two or more products (ice cream sandwiches, sherbet push-up pops, or ice cream cones). In the past, these ice-cream products were only exempt from tax if the package included six or more items.

There's also no tax on whole ice cream cakes and pies, or on ice cream sold in pint-sized or larger containers, unless the seller provides eating utensils.

Ice pops, juice pops, and popsicles that do not contain milk products are not ice cream sundries. These items are taxable regardless of how many are in the package, unless they contain more than 50 percent fruit juice.

A new feature of many parties and special events is a chocolate fountain. Guests can dip marshmallows, pretzels, and similar items into the melted chocolate as it cascades from the fountain.

If the person providing the fountain is responsible for replenishing the chocolate and stocking the trays of dipping items, they are acting as a caterer and must collect Texas sales tax on the total charge to their client. The chocolate fountain qualifies for exemption as processing equipment used to prepare ready-to-eat food. The caterer can issue a properly completed Texas sales tax exemption certificate to their supplier in lieu of paying Texas sales tax. Additionally, the caterer can issue an exemption certificate for non-reusable items such as paper napkins, paper plates, and plastic eating utensils given to customers.

Constructing or operating certain water or wastewater systems to supply or treat water for Texans can result in sales tax savings. Equipment, services, and supplies are exempt from state and local sales tax when used solely to construct or operate a regional water or wastewater system certified by the Texas Commission of Environmental Quality (TCEQ).

TCEQ only certifies a system after it is completed. Once certified by TCEQ, the system can claim a refund of sales tax paid on qualifying purchases within the statute of limitations and no earlier than the effective date of the exemption. The sales tax exemption began September 1, 2001, and the statute of limitations is four years.

All purchased or leased equipment, services, and supplies used solely on that particular system are exempt, whether provided under lump-sum or separated contracts. The exemption also applies to utilities to operate the equipment, as well as to dedicated office trailers and similar facilities at the job site. But trucks or other motor vehicles purchased or used by the system operator are still taxable. (Motor vehicles are not taxed under the sales tax law, but are taxed under the motor vehicle sales and use tax law.)

After receiving an exemption certificate along with a request for a sales tax refund from the system operator, the construction company should check the TCEQ's website to confirm the certification. The construction company can then refund the taxes it collected from the system operator on building materials sold under a separated contract (a contract that separates charges for building materials from labor) and take credit on its sales tax report for the taxes refunded. Or if the contract was a lump-sum contract, the contractor can give a completed exemption certificate to its suppliers. After refunding the sales tax, the suppliers can take a credit for the amount of the refund on their next sales and use tax returns. The appropriate statutory reference to cite for the exemption is Tax Code Section 151.355(5).

For a list of certified regional systems, go to the TCEQ's Web Site at http://www.tceq.state.tx.us/permitting/water_supply/ud/ud.html and find the section titled "Regional Certification for Water and Sewer Utilities."

Recent federal legislation, the American Jobs Creation Act of 2004 and the Gulf Opportunity Zone Act of 2005, changed various provisions of Section 1361 of the Internal Revenue Code (IRC) regarding S Corporations. Under the new provisions the number of shareholders that an S Corporation may have increased from 75 to 100.

The earned surplus component 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. As a result, the new provisions under the American Jobs Creation Act of 2004 and the Gulf Opportunity Zone Act of 2005 are not allowed in computing the earned surplus component of Texas franchise tax.

In computing earned surplus, S Corporations with more than 75 shareholders are not exempt from the officer and director compensation add back under Tax Code Section 171.110(b)(2). S Corporations with more than 75 shareholders must add back the compensation of officer and directors.

For computing taxable capital the provisions of the American Jobs Creation Act of 2004 and the Gulf Opportunity Zone Act of 2005 will be respected.

For an entity subject to franchise tax, the beginning point in computing earned surplus is its reportable federal taxable income as computed under the Internal Revenue Code (IRC) 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. Since partnerships are not among the entities subject to the franchise and a partnership is generally a distinct entity, separate from its partners for franchise tax, a partnership is not subject to the Tax Code IRC definition.

As a result, a partner in a partnership that has taken a deduction for bonus depreciation allowed under the Job Creation and Work Assistance Act of 2002 in computing the partnership's ordinary income does not add back or otherwise adjust its pro rata share of that depreciation amount in computing earned surplus.

Hotel occupancy tax is due on a separate charge for tax or fee reimbursement if the charge is directly related to occupying a room.

Some hotel guest folios include a charge to offset the cost of taxes and fees, such as reimbursements for property tax and franchise fees. By separating the charge from the room rate, the hotel operator avoids paying a franchise fee to the hotel chain on the reimbursement. Hotels must collect hotel tax on the reimbursement charges.

Reimbursements of taxes and fees administered by the Comptroller should be clearly identified as such. If not identified as a "tax reimbursement" or "fee reimbursement," or similar wording, then Texas law (Tax Code, Section 111.016) requires the "tax" or "fee" be paid to the state in addition to the 6 percent tax on the room charge.

Legislative changes from 2005 have required major rewrites of the reporting systems for crude oil and natural gas production taxes. The rewrites will allow us to update and expand the capabilities of these two reporting systems.

While we have already met with some members of industry on the work in progress, we will arrange further seminars to go over the final changes. These seminars will be held well in advance of the new systems' proposed implementation date of September 1, 2007.

We should also have our free EDI software packages ready by the end of this year, so that you can download them before the new systems are up and running.

The Comptroller's office is reviewing certain agency rules to determine if they are still necessary and current. The tax rules currently under review are found in Texas Administrative Code, Title 34, Part 1, Chapter 3 (Tax Administration), Subchapters:

Notice of the review is published in the March 24, 2006, issue of the Texas Register. The agency will accept comments regarding the readoption of any of these rules for 30 days following publication of the notice. Comments may be submitted to Comptroller of Public Accounts, Tax Policy Division-Rule Review, P.O. Box 13528, Austin, Texas 78711-3528.