At press time we did not have enough information to give you comprehensive summaries of legislation affecting Texas taxes. I'll give you information about tax-related bills passed by the Legislature as soon as I have the details. As always, we welcome your comments and suggestions as we amend our current rules and develop new rules to reflect legislative changes in the tax laws.

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. Please call then and avoid the rush.

--Adina Harrell

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In This Issue:
Food Products, Rule 3.293--Drink to Your Health
Telecommunications Service, Rule 3.344--You Rang?
Rule 3.5, Waiver of Penalty or Interest
Rule 1.13, Initiation of an Expedited Hearing
Rule 1.39, Dismissal of Case
Rule 3.86, Destroyed and Repaired Motor Vehicles

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HEARINGS: SALES TAX

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Drink to Your Health
Hearing No. 35,034
First Issue: Exempt food products or taxable dietary supplements

A direct sales organization sold powdered drink mixes to independent salespersons, who either used the products themselves or sold them to the general public. The direct sales company packaged and promoted its drink mixes as dietary supplements with therapeutic benefits. However, when the company was audited, it argued that the drink mixes were exempt food products because they have a high nutritional value, substantial fruit elements (one of the mixes contains 25 percent fruit juice), and make a substantial contribution to the user's diet.

Although Tax Code §151.314 exempts food products, that section also specifies that the term "food products" does not include medicines, tonics, vitamins, and medicinal preparations in any form or packaged soft drinks and diluted juices.

Rule 3.293 further explains that:

A substance will be treated as medicinal or as a tonic if the substance has no nutritional value, or the quantities of food elements in the substance are small and its contribution to any diet is small, or the substance has substantial nutritional value but the substance is marketed, labeled, and promoted to the public as being
therapeutic; ...

The judge ruled that the taxpayer's drink mixes are taxable, upholding prior hearings decisions that have taxed juice drinks that are not 100 percent fruit juice (diluted juices) and powdered drink mix dietary supplements that are not substituted for a complete meal.

Second Issue: Direct sales company's tax responsibility

The direct sales company further claimed that the auditor should not have assessed tax on the company's suggested retail price for the drink mixes. It argued that its independent salespersons often sold the products for less than the suggested retail price or purchased the products at a discounted price for their own use. But the company did not have records documenting the discounted sales price or sales to the salespersons for their own use.

The judge upheld the audit assessment, citing Rule 3.286, which requires a direct sales organization to collect and remit the sales tax on products sold by the organization's independent salespersons. He explained that the company could have remitted the tax on the discounted price if it could have proved that such sales were made. (9703144H)

You Rang?
Hearing No. 32,374
First Issue: Sales price of taxable items

A telecommunications service provider purchased long distance and local telephone services and resold these services to its customers along with additional services. The additional services included the design, implementation, and maintenance of the office communications; management of communication systems; and voice-mail systems and services. In connection with the services sold to its customers, the taxpayer often sold telecommunications equipment, such as telephones, internal telephone lines, and voice-mail hardware.

The taxpayer charged an order-processing fee when a customer placed a service order. For example, if a customer called the taxpayer to request three additional phone lines, the taxpayer charged the customer an order-processing fee, as well as a fee for installing the phone lines.

Tax Code §151.007 provides that:

(a) Except as provided by Subsections (c) and (d) of this section, "sales price" or "receipts" means the total amount for which a taxable item is sold, leased, or rented, valued in money, without a deduction for the cost of: . . .

(2) the materials used, labor or service employed, interest, losses, or other expenses; . . .
(b) The total amount for which a taxable item is sold, leased, or rented includes a service that is a part of the sale . . .

The judge held that sales tax was due on the total charge for the telecommunications services and related equipment, including the order-processing fee.

Second Issue: Telecommunications services

The taxpayer also provided a centralized voice-mail service where incoming telephone calls were recorded and stored for subsequent retrieval by subscribers. Subscribers paid a flat periodic fee for the use of this system. The taxpayer argued that voice-mail services are not taxable because they are expressly excluded from the definition of telecommunications services.

Tax Code §151.0103 defines telecommunications services as:

. . . the electronic or electrical transmission, conveyance, routing, or reception of sounds, signals, data, or information utilizing wires, cable, radio waves, microwaves, satellites, fiber optics, or any other method now in existence or that may be devised, including but not limited to long-distance telephone service. The storage of data or information for subsequent retrieval or the processing, or reception and processing, of data or information intended to change its form or content are not included in "telecommunications services."

The definition of telephone answering services in Section 151.0102 states:
"Telephone answering services" means the receiving and relaying of telephone messages by a human operator. The term does not include the automated receiving and relaying of telephone messages included within the definition of "telecommunications services" under Section 151.0103.

The judge ruled that the taxpayer's charges for voice-mail services are taxable, upholding prior hearings decisions that have taxed such services as telecommunications services. These decisions have referred to the language in the sales tax law defining telephone answering services. The definition specifies that the automated receiving and relaying of telephone messages is included within the definition of "telecommunications services" and therefore taxable. (9612928H)

ADMINISTRATIVE RULES

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The following proposed rule amendments were published in the May 27, 1997 issue of the Texas Register, 22 TexReg 4565-4566.

General Rules
Proposed amendment to Rule 3.5--Waiver of Penalty or Interest

The proposed amendment makes minor changes to the rule to clarify the comptroller's procedures for penalty and interest waiver.

Practice and Procedure
Proposed amendment to Rule 1.13--Initiation of an Expedited Hearing

This rule is being amended to delete references to rules which have been repealed.

Proposed amendment to Rule 1.39--Dismissal of Case

This rule is being amended to provide for the dismissal of cases in which specific grounds for relief have not been raised or in which the only grounds raised cannot be ruled upon in a contested case, e.g. the constitutionality of a statute.

Motor Vehicle Sales and Use Tax
New Rule 3.86--Destroyed and Repaired Motor Vehicles

This new rule was proposed in the December 24, 1996 issue of the Texas Register (21 TexReg 12394).

Senate Bill 1445, 74th Legislature, 1995 amended the Tax Code §152.001, effective January 1, 1996, to exclude from the definition of a motor vehicle a destroyed or salvage vehicle. This new rule defines a motor vehicle and a destroyed vehicle and explains the taxability of a repaired motor vehicle.

ABOUT THE NEWSLETTER:

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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.

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Tax Policy News is on the Comptroller's website, <www.window.state.tx.us>. You can also find many of the documents summarized in this newsletter, the latest versions of tax rules and the tax code, and other Comptroller's publications.

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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.

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For a copy of a proposed rule or if you have a question about a proposed rule, write to Karey Barton in Tax Policy Division, 111 West 6th St., Austin, TX 78701-2913, or e-mail-- <tax.help@cpa.state.tx.us>.

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