Good news! We now offer state tax help by email at tax.help@cpa.state.tx.us.
Texas annual franchise tax returns are due May 15, 1996. Don't forget that this year the Public Information Report must be signed by an officer or director of the corporation.
Our special toll-free number for tax practitioners is 1-800-248-4093. Our tax specialists are available from 7:30 in the morning until 5:30 in the evening. The call volume is lowest on Thursdays and Fridays, early in the mornings and late in the afternoons. Call then and avoid the rush.
--Adina Whittemore
In This Issue:
Rule 3.356, lighting maintenance--Illuminating
Rule 3.302, trade-in--Almost Partners
Rule 3.300, modification is processing--Software Modification
Rule 3.300, non-manufacturing use--Divergent Use
Notices
Administrative Rules--Franchise, Hotel, Motor Vehicles, Practice and Procedure and State Sales and Use tax
ADMINISTRATIVE HEARINGS:
SALES TAX
Illuminating
Hearing No. 33,505
In this hearing, a taxpayer operated a lighting maintenance service--examining its customers' exterior lighting and replacing any burned-out bulbs. The taxpayer was audited, and the auditor set up tax on the service. The taxpayer argued that it should be relieved of the liability because it could not collect the tax from its customers.
Lighting maintenance is taxable as a janitorial or custodial service, see Rule 3.356(a)(7). The auditor set up tax on only paid receipts (amounts upon which the tax should have been collected and remitted), and the judge could not excuse the taxpayer from its liability. (9509H1375D01)
Almost Partners
Hearing No. 33,475
A printer agreed to purchase a saddle stitcher from Company C if Company C would accept the printer's binder (a piece of equipment) as a trade-in. Company C arranged for the printer to sell the binder to Company A. The paperwork shows that the printer sold the binder to Company A. Twelve days later Company C invoiced the printer for a saddle stitcher. According to the invoice, the printer paid a deposit, an additional amount before the machine was shipped and the balance when the machine was installed. The printer remitted tax on its own return on that portion of the purchase price that represented the difference between the sales price of the binder it sold to Company A and the actual amount it paid Company C for the saddle stitcher. The printer claimed that it traded the binder on the purchase of the saddle stitcher and could deduct the amount it received for the binder from the amount it paid for the stitcher to arrive at an amount subject to tax. The printer explained that Company A and Company C had a long-standing business relationship in which they acted as joint venturers on various equipment sales, that Company C and Company A should be treated as the same entity and that the binder should be treated as a trade-in. Tax Code §151.007(c)(5) provides that the sales price of a taxable item does not include the value of personal property taken by the seller in trade as all or part of the consideration for the taxable item.* The seller must separately identify the excluded trade-in amount on an invoice, contract, sales slip or billing. In this case, the trade-in was not separately identified on the invoice. In fact, the documentation shows two sales--one from Company C to the printer and another from the printer to Company A. The printer owed tax on the full purchase price of the stitcher. ( 9510H1386E05) * In order to reduce the taxable sales price, the trade-in must be the type of item the seller normally sells. For example, a typewriter company that takes a desk as part of the payment for a typewriter must collect sales tax on the retail sales price of the typewriter without any deduction for the value of the desk. In this situation, the desk is a barter, not a trade-in.
LETTERS: SALES TAX
Software Modification
A taxpayer that buys, modifies and then sells software asked if it would qualify for the tax exemptions provided for manufacturers in Tax Code §151.318. Assuming that the taxpayer is not a licensee, then the modification of the software is processing and qualifies as "manufacturing" for purposes of the tax exemption. The taxpayer may claim an exemption from tax on computer hardware, software and printers used by the programmers to code the software. However, if the taxpayer uses this equipment for any purpose other than manufacturing, the taxpayer would have to accrue sales tax on the fair market rental value of the equipment (see "Divergent Use" below). The statute specifically excludes from the exemption property not used in the actual manufacturing, processing or fabrication operation. Equipment used by technical support personnel and technicians is taxable. As a manufacturer, the taxpayer may qualify for an exemption from tax on gas or electricity if a predominant-usage study proves that the gas or electricity purchased was used predominately to power equipment used to modify software for sale or to heat or cool the manufacturing area.
Divergent Use
editor's note--Last December I told you about an amendment to Rule 3.300, the rule on manufacturing. That amendment included a clarification that machinery or equipment purchased on or after January 1, 1995 and on which the full sales tax exemption was claimed, was subject to tax on either the fair market rental value or on the full purchase price when the equipment was used for any purpose other than manufacturing. Machinery and equipment purchased between January 1, 1990 and December 31, 1994, and on which the reduced tax was paid, must be used primarily or predominantly in the manufacturing process. For equipment purchased prior to January 1, 1995, no additional tax is due on a divergent use, provided the divergent use is less than 50 percent of the overall use.Here is a letter on that provision of the manufacturing rule. When equipment that was purchased tax free as manufacturing equipment is used for non-manufacturing purposes, tax is due on the fair market rental value of the equipment for the period of divergent use. (The statute specifically excludes from the exemption property not used in the actual manufacturing, processing or fabrication operation.) To avoid tax payment on the divergent use, a manufacturer may pay tax on the original purchase price of the equipment. Unfortunately, a manufacturer may not use any tax paid on the equipment's fair market rental value for previous divergent use against the tax on the purchase price. Effective January 1, 1995, Tax Code §151.3111(a) exempts from sales tax the repair (including labor and parts) of exempt manufacturing equipment. A supplier or repair person may refund tax collected on exempt repairs and either adjust the amount it reports as "amount subject to tax" on its next sales tax return or amend the return on which the tax was paid. ( 9602L1401A01)
Pump Labeling
On March 22, 1996, we sent letters to gasoline permit holders and gas station dealers telling them that we have revised the ethanol and methanol labels for gasoline pumps. Permit holders may order the free labels by calling 1-800-252-1383. Permit holders will deliver the applicable labels to dealers receiving gasoline containing a mixture of ethanol or methanol.
Franchise Tax Returns
They're coming. The franchise tax return packet--return, no tax due report, request for extension, public information report and instructions--is on its way.
Policy Statement: Franchise TaxA copy of the corporation's Texas Franchise Tax Public Information Report must be sent to each officer or director named in the report and not currently employed by the corporation or by a related corporation. For purposes of the report, a related corporation is one that is required to be listed in section B or C of the report.
ADMINISTRATIVE RULES
Editor's note--Although, on the surface, administrative rules seem technical and dry, they serve an important function--they provide guidelines for tax collection and remittance. If you think a proposed rule will affect you or your clients, don't hesitate to ask us for a copy and to send us your comments.
Franchise Tax
Repeal of Rule 3.411--Banking Corporations
We repealed this rule so that it can be replaced with a new Rule 3.560, concerning banking corporations. Proposed Amendment to Rule 3.541--Exemptions
This proposed amendment reflects changes in the tax law made by Senate Bills 373 and 644, 74th Legislature and also conforms with existing policy the definitions of corporations qualifying for franchise tax exemption as religious, educational or charitable. New Rule 3.560--Banking Corporations.
We adopted this new rule with changes to the text as proposed in the November 24, 1995 issue of the Texas Register (20 TexReg page 9834). We corrected the title of the rule referred to in subsection (f)(1). Proposed New Rule 3.575--Annual Extensions/Electronic Funds Transfer
The proposed new rule provides information concerning annual report extension requirements for corporations that are required by law to pay their franchise tax by electronic funds transfer. Proposed New Rule 3.576--Earned Surplus: Allocation
This new rule is the result of new Tax Code §171.1061 and applies to reports originally due on or after January 1, 1994. All income is presumed to be unitary income. The following factors will be considered in determining whether income is unitary: centralization of management, functional integration and economies of scale. Income may only be allocated when it is an investment. If Texas is the corporation's commercial domicile and it is determined that an item of income is non-unitary, with the exception of dividends and interest, the income, less related expenses, will be allocated to Texas. Conversely, if the corporation's commercial domicile is not in Texas and an item of income is non-unitary and is not allocated to Texas, the allocation must be less related expenses. Non-unitary income and its related expenses must be excluded in determining apportioned earned surplus.
Hotel Occupancy Tax
Proposed Amendment to Rule 3.161--Definitions
This proposed amendment clarifies the definitions of charitable, educational or religious organizations that qualify for exemption from hotel tax. These definitions will be consistent with the definitions in proposed amendments to Franchise Tax Rule 3.541 and State Sales and Use Tax Rule 3.322. Under the proposed amendment, a charitable organization is an organization devoting substantially all of its activities to the alleviation of poverty, disease, pain, and suffering by providing food, clothing, drugs, treatment, shelter or psychological counseling directly to indigent members of society with its funds derived primarily from sources other than fees or charges for its services. If the organization engages in any substantial activity other than the described activities, it will not qualify for exemption under this provision. No part of the net earnings of the organization may benefit any private party or individual other than as reasonable compensation for services rendered to the organization. Some examples of organizations that do not meet the requirements for exemption as charitable organizations are fraternal organizations, lodges, fraternities, sororities, service clubs, veterans groups, mutual benefit or social groups, professional groups, trade or business groups, trade associations, medical associations, chambers of commerce and similar organizations. Even though not organized for profit and performing services that are often charitable in nature, these organizations do not meet the definition of "charitable" under this provision. An educational organization is defined as a nonprofit organization or governmental entity whose activities are devoted solely to systematic instruction, particularly in the commonly accepted arts, sciences and vocations, with a regularly scheduled curriculum, using the commonly accepted methods of teaching, a faculty of qualified instructors and an enrolled student body or students in attendance at a place where the educational activities are regularly conducted. No part of the net earnings of the organization may benefit any private party or individual other than as reasonable compensation for services rendered to the organization. Entities that are defined in the Education Code, §61.003, as "institutions of higher education" are recognized for exemption under this provision. State and private universities and colleges are included in the definition of "institutions of higher education." An organization that has activities consisting solely of presenting discussion groups, forums, panels, lectures or other similar programs may qualify for exemption under this provision, if the presentations provide instruction in the commonly accepted arts, sciences and vocations. The organization will not be considered for exemption under this provision if the systematic instruction or educational classes are incidental to some other facet of the organization's activities. Some examples of organizations that do not meet the definition of an educational organization are professional associations, business leagues, information resource groups, research organizations, support groups, home schools and organizations that merely disseminate information by distributing printed publications. A religious organization is a nonprofit organization that is an organized group of people regularly meeting for the primary purpose of holding, conducting and sponsoring religious worship services, according to the rites of their sect. The organization must be able to provide evidence of an established congregation showing that there is an organized group of people regularly attending these services. No part of the net earnings of the organization may benefit any private party or individual other than as reasonable compensation for services rendered to the organization. An organization that supports and encourages religion as an incidental part of its overall purpose or one whose general purpose is furthering religious work or instilling its membership with a religious understanding will not qualify for exemption under this provision. Some examples of organizations that do not meet the requirements for exemption under this definition are conventions or associations of churches, evangelistic associations, churches with membership consisting of family members only, missionary organizations and groups who meet for the purpose of holding prayer meetings, Bible study or revivals. Amendment to Rule 3.163--Exemptions
We adopted this amendment with changes to the proposed text as published in the December 12, 1995 issue of the Texas Register (20 TexReg 10572). House Bill 2129, 74th Legislature, eliminated the hotel occupancy tax exemption for the State of Texas, state employees, who are not provided a special exception under the General Appropriation Act, and federal employees. This amendment deletes these groups from the hotel tax exemptions and describes the hotel tax exemption photo identification used by state employees exempted under the General Appropriation Act. Marriott International, Inc., Hilton San Antonio Airport and Conference Center and Texas Hotel And Motel Association recommended additional language to subsection (e) to further clarify direct payment to a hotel by the federal government. We agreed with the comments and changed subsection (e) to add credit cards issued only in the name of the federal government and the VISA I.M.P.A.C. credit card to the examples of direct payment. We also made non-substantive grammatical corrections in the rule title and subsection (c). Amendment to Rule 3.164--Exemption Certificate
This amendment was adopted without changes to the proposed text as published in the December 12, 1995 issue of the Texas Register (20 TexReg 10573).New Rule 3.166--Refund of Hotel Occupancy Tax
Here's another hotel tax rule adopted with changes to the proposed text as published in the December 12, 1995 issue of the Texas Register (20 TexReg 10573). As a result of House Bill 2129, 74th Legislature, the State of Texas and most state employees are required to pay the hotel occupancy tax to the hotel. The state agency paying the tax or reimbursing an employee for tax paid may request a refund of these hotel taxes from the state, city or county. The bill also required the Comptroller to develop the form and information necessary to claim a refund of municipal and county hotel taxes.
Motor Vehicle Sales Tax
Proposed New Rule 3.74--Seller Responsibility
Senate Bill 1445, 74th Legislature, amended the tax law effective January 1, 1996 to require licensed motor vehicle dealers to collect motor vehicle tax on sales and remit that tax to the appropriate county tax assessor-collector. This proposed new rule sets out the responsibilities of motor vehicle dealers.
Practice and Procedure
New Rule 1.13--Initiation of an Expedited Hearing
This new rule gives a taxpayer the option of choosing an expedited hearing.
State Sales and Use Tax
Proposed Amendment to Rule 3.322--Exempt Organizations.
Tax Code §151.309 was amended to exempt sales, leases or rentals of taxable items to a state or governmental unit of a state that borders Texas only to the extent that the bordering state reciprocates and exempts Texas or a political subdivision of the State of Texas. This proposed amendment also clarifies the definitions of religious, educational or charitable organizations. For details on the "clarification," see hotel tax Rule 3.161. Proposed Amendment to Rule 3.329--Enterprise Projects
This proposed amendment implements changes enacted by House Bill 2065, 74th Legislature. An enterprise project may file for a refund of the state tax paid on electricity and natural gas used in a business and for a refund of tax paid on labor to refurbish buildings in an enterprise zone. An enterprise project designated after August 31, 1995 may not apply for refunds until September 1, 1997. The maximum amount of refunds to projects designated after August 31, 1995 is $8 million.
About the Newsletter:
This newsletter is designed to keep you informed. Tax questions can be complicated, so use these summaries as guidelines only. If you have a specific tax question, you may call or write us. The toll-free number for tax practitioners is 1-800-248-4093. The Austin number is 512-463-4600.For a copy of a publication or a rule
For a copy of a publication or an adopted rule, write to Account Maintenance Division, Microfilm and Retention Section, 111 E. 17th Street, Austin, Texas 78774-0100. The fax number is 512-475-0397. Or, you may call our Forms Hotline, 1-800-252-1389.For a copy of a proposed rule
For a copy of a proposed rule or if you have a question about a proposed rule , write Karey Barton in Tax Policy Division, 111 West 6th St., Austin, TX 78701-2913.For a copy of a document
If you want a copy of one of the documents summarized in this publication, please send your request in writing to the Policy Dissemination Section, 111 West 6th St., Austin, TX 78701-2913. If you're in a hurry, our fax number is 512-475-0900--we fill requests on a first-come, first-served basis. Don't forget to include the microfiche number shown in parentheses at the end of each summary. Depending on the number of documents and the number of pages, there may be a fee. If so, we'll bill you.
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