Tax Policy News
A Summary of Texas Tax Policy

April 1998

In December, I told you about our on-line research system, which we're implementing in phases. I'm pleased to announce that "phase two" is now available. This phase allows users access to over 14,000 tax policy documents. The Internet address is <http://aixtcp.cpa.state.tx.us/star>. Please take a minute to explore this site and enjoy!
Annual franchise tax reports are due May 15. If you use a preprinted return for another taxpayer, donít forget to draw a line through the scan line (under the mailing address) when you change the taxpayer number.
If you or one of your clients purchased insurance from an insurance company not licensed in Texas, you may need to file an "independently procured" insurance tax report. Check out Independently Procured Insurance for more details.
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

In This Issue:
Independently Procured Insurance
Rule 3.285, Service Essential To The Provision Of A Taxable Service--Wanna Bet?
Rule 3.346, Tax on Catalogs Shipped Into Texas--At Your Direction
Tax Code §151.048, Service Purchased by Developer--Anticipation
Rule 3.322, Motor Vehicle Parking Sold to Exempt Organization--Lot of Parking
Rule 3.286, Reliance on "Tax Included" Representation--Tax Included Contracts
Coastal Protection Fund--Land Office Certifies Fund Below Minimum
Rules--Franchise
Rules--Practice and Procedure


REMINDER: INSURANCE TAX

Independently Procured Insurance
Under the insurance tax law, there is a premium tax on insurance that is "independently procured" from an insurance company not licensed in Texas. The purchaser of the independently procured insurance is responsible for remitting this tax to the state. The tax is 4.85 percent of the portion of the premium attributable to Texas risks or exposures and is due on May 15 for insurance with an effective date in the previous year.
A purchaser owes this tax if:
For more information or for a copy of a Texas Annual Insurance Tax Report (form no. 25-103), which is used to report the tax, call 1-800-252-1387.


HEARINGS: SALES TAX

Wanna Bet?
Hearing No. 34,872
Issue: Service Essential to the Provision of a Taxable Service
A totalisator system records racetrack wagers, keeps track of winning tickets, and computes payoffs. These services are taxable data processing services.
A racetrack was audited, and the auditor assessed tax on the totalisator services. The racetrack did not agree and requested an administrative hearing.
During the hearing, the racetrack argued that it should be able to buy the services tax free for resale because admission to the racetrack is a taxable amusement service and the totalisator services were essential to the operation of the racetrack. To prove this point, the racetrack pointed out that according to Texas Racing Commission rules, racetracks must use a totalisator system in order to conduct pari-mutuel betting and that a Texas racetrack cannot sell admission tickets for pari-mutuel wagering unless the racetrack uses totalisator services.
Rule 3.298(f)(2) provides :
(f) Taxable item sold or transferred with amusement service.
(1) Sellers of service may issue a resale certificate in lieu of tax to suppliers of tangible personal property only if care, custody, and control of the property is transferred to the client. For example, a taxpayer purchases padlocks to transfer to customers when lockers are rented. The padlock is transferred to customers, and the customers use the padlock when renting the locker. Taxpayer may purchase the padlock tax free by issuing a resale certificate. Tax is due on the total amount charged the customer, including amounts for the padlock and for the services.
(2) A resale certificate may be issued for a service if the buyer intends to transfer the service as an integral part of taxable services. A service will be considered an integral part of a taxable service if the service purchased is essential to the performance of the taxable service and without which the taxable service could not be rendered.
(3) A resale certificate may be issued for a taxable service if the buyer intends to incorporate the service into tangible personal property which will be resold. If the entire service is not incorporated into the tangible personal property, it will be presumed the service is subject to tax and the service will only be exempt to the extent the buyer can establish the portion of the service actually incorporated into the tangible personal property. If the buyer does not intend to incorporate the entire service into the tangible personal property, no resale certificate may be issued, but credit may be claimed at the time of sale of the tangible personal property to the extent the service was actually incorporated into the tangible personal property.
(4) Any item, such as machinery or equipment, purchased to be used in the providing of an amusement service is not an item transferred with an amusement service and is subject to sales tax.
The judge explained that an admission ticket entitles a person to watch the races. In order to place a bet, a person must enter into a separate transaction, and this transaction is not subject to sales tax. The totalisator services are an integral part of the pari-mutuel wagering, but not an integral part of the races, the amusement service. (9801149H)

At Your Direction
Hearing No. 36,175
Issue: Tax on Catalogs Shipped Into Texas

An out-of-state retailer sold its products to customers in Texas via catalogs given to customers free of charge. The catalogs, which were printed outside of Texas, were mailed to customers in Texas. When the retailer was audited and assessed tax on the catalogs mailed into Texas, the retailer requested an administrative hearing.
During the hearings process, the parties agreed that although the retailer did not have stores in Texas, it did have substantial presence in this state, as it had an agency relationship with a company in Texas that accepted and processed orders from the retailer's customers. However, the retailer argued that it did not owe tax on the catalogs because:
1) it did not own catalogs in Texas and 2) it did not use the catalogs in Texas.
In the administrative hearings decision, the judge explained that under the terms of Rule 3.346, use tax is due on taxable items purchased outside of Texas by a person engaged in business in Texas if the taxable items are delivered at the direction of the purchaser to recipients in Texas. In this case, the retailer directed the shipment of the catalogs to recipients in Texas.
The judge wrote:
The interpretation of the rule in this case is consistent with the United States Supreme Court's decision in D. H. Holmes. Co. v. McNamara, 486 U.S. 24 (1988), even though the Louisiana statute at issue in D. H. Holmes explicitly referred to distribution as a taxable use. There is no indication in the decision that the taxpayer would have prevailed if the Louisiana statute had not specified "distribution" as a taxable use. Rather, the Supreme Court upheld the imposition of a Louisiana use tax because the four-prong test for determining the validity of a state tax that touches interstate commerce under Complete Auto Transit v. Brady, 430 U. S. 274 (1977), was satisfied.
In Complete Auto Transit the Court articulated a four-prong test that applies here in determining the validity of the imposition of use tax on Petitioner's promotional material. The individual prongs of the test are:
(1) the taxpayer's activity must have a substantial nexus with the taxing state;
(2) the tax must relate fairly to the services and benefits provided by the state;
(3) the tax must not discriminate against interstate commerce; and
(4) the tax must be fairly apportioned to the local activities of the party to be taxed.
The first prong was satisfied as the retailer had conceded that it was engaged in business in Texas and had substantial nexus with Texas. Second, the tax was fairly related to the services provided by Texas because Texas provides essential services and benefits for the retailer. The Texas use statute does not discriminate against interstate commerce because it is designed to compensate the state for revenue lost when residents purchase goods out of state for use in Texas. Finally, Texas sales or use tax is fairly apportioned because Texas provides a credit against its use tax for sales tax that has been paid to other states. Because the imposition of the use tax against the retailer satisfied the four-prong test, the tax was properly assessed on the cost of retailer's catalogs shipped to Texas recipients. (9802188H)


LETTERS: SALES TAX

Anticipation
Issue: Real Property Service Purchased by Developer Who Does Not Build Homes
Rule 3.356 defines surveying (a taxable service) as:
Activities performed to determine or confirm the boundaries of real property, or to determine or confirm the location of structures or other improvements in relation to the boundaries of the property by the use of relevant elements of law, research, measurement, analysis, computation, mapping and land description. Examples include, but are not limited to, boundary recovery, residential surveying, lot surveying, title surveying, as-built title surveying, and right-of-way surveying. The term does not include activities performed after taxable surveying has been completed to search the surveyed area for items of archaeological or historic significance.
Tax Code §151.0048 excludes from the list of taxable services landscaping, lawn care, pest control, surveying, waste removal services, and building and grounds cleaning performed for home builders and developers when the service is part of the improvement to realty of a new residential structure or an improvement immediately adjacent to the new structure and used in the residential occupancy of the structure.
In this situation, a developer had a boundary survey completed for acreage that the developer sold to another developer. The land was sold with the understanding that it would be a residential subdivision.
Although the survey determined the boundaries of lots intended for residential use, the survey was not part of the improvement to realty of a new residential structure. Therefore, the survey did not qualify for the exclusion in §151.0048. (9802180L)

Lot of Parking
Issue: Motor Vehicle Parking Sold to Exempt Organization

A tax-exempt organization operated a hospital and related facilities and purchased parking services for its employees, e.g., doctors and nurses.
In this situation, the parking services relate to and support the exempt purpose of the organization and are exempt from sales tax under Tax Code §151.310(a). (9803186L)

Tax Included Contracts
Issue: Purchaser's Reliance on "Tax Included" Representation

In Texas, the seller and the purchaser are both liable for sales or use tax on a taxable transaction. During an audit, a purchaser must have proof that it paid tax on a taxable purchase, or the auditor will assess tax on the transaction. Under Rule 3.286, a seller may include tax in the price of the taxable item, but the seller must give the purchaser a written statement that the purchase price includes tax.
Rule 3.286 sets out the guidelines for "tax included" sales in subsection (d)(3):
(3) The amount of the sales tax must be separately stated on the bill, contract, or invoice to the customer or there must be a written statement to the customer that the stated price includes sales or use taxes. Contracts, bills, or invoices merely stating that "all taxes" are included are not specific enough to relieve either party to the transaction of its sales and use tax responsibilities. The total amount shown on such documents will be presumed to be the taxable item's sales price, without tax included. The seller or customer may overcome the presumption by using the seller's records to show that tax was included in the sales price. Out-of-state sellers must identify the tax as Texas sales or use tax.
A contractor asked if it could count on "tax-included" language added to its contracts with its subcontractors.
First, it is important to note that some subcontractors may provide taxable and non-taxable services under the same contract. Rules 3.356 and 3.357 require that when this happens, the contractor and subcontractor must break out the charges for taxable work from the charges for non-taxable work. In other words, both parties should have documentation of the amount charged for taxable services and the amount allocated to nontaxable services.
Next, although we have recognized that a retailer may hold out that a charge for a taxable item includes tax and that a receipt from such a retailer will protect the purchaser from subsequent assessment, an exception to this general rule exists when the purchaser either knows or has reason to believe that the seller does not have a sales or use tax permit. In this situation, the purchaser may be held liable for the tax. (9709240L)


ANNOUNCEMENT: COASTAL PROTECTION FUND

Land Office Certifies Fund Below Minimum
The General Land Office has certified that the Coastal Protection Fund has fallen below the minimum balance allowed by law.
Therefore, by law, the coastal protection fee will be reinstated effective May 1, 1998. Crude oil transferred through a marine terminal on or after May 1, 1998 will be subject to the 2-cents-per-barrel fee.
Each marine terminal operator or owner of crude oil who is registered with the Comptroller to report the fee must file a coastal protection fee report every month. The fee is due on the last day of the month following the transfer. For example, the May report will be due on June 30, 1998.
We will suspend the fee again when the General Land Office certifies that the fund has reached the maximum balance as provided by law. For more information, call 1-800-252-1384.


ADMINISTRATIVE RULES

Franchise Tax
Amendment to Rule 3.545--Extensions
We adopted this amendment without changes to the proposed text as published in the October 17, 1997 issue of the Texas Register (22 TexReg 10249).

Amendment to Rule 3.549--Taxable Capital: Apportionment

This amended rule includes a provision for revenues from trademarks, franchises, and licenses and a provision for receipts from services performed by a defense readjustment project in a defense economic readjustment zone.
Subsection (e)(30)(B) in the proposed amendment, published in the December 26, 1997 issue of the Texas Register (22 TexReg 12702), used the word "allocate," which was incorrect. In the adopted version, "allocate" has been replaced by the word "apportion."

Amendment to Rule 3.555--Earned Surplus: Computation

This amendment was proposed in the October 17, 1997 issue of the Texas Register (22 TexReg 10249). It provides for an updated definition of the Internal Revenue Code.
When we adopted the amendment we made a few changes to the proposed text. First, subsection (b)(2) used the word "section," which was incorrect. In the adopted version, the word "chapter" replaces "section." In addition, subsection (h) now includes a reference to investments in defense economic readjustment zones, in accordance with House Bill 226.

Amendment to Rule 3.561--Enterprise Zones and Defense Economic Readjustment Zones

This amendment covers the franchise tax benefits applicable to defense economic readjustment zones. It was adopted without changes to the proposed text.

Amendment to Rule 3.568--Changes in Corporate Organization

We adopted this amendment without changes to the proposed text. It reflects recent legislation that requires certain entities seeking to dissolve or withdraw from Texas to obtain from the Comptroller a certificate that franchise taxes have been paid.

Amendment to Rule 3.575--Annual Extensions/Electronic Funds Transfer

This amendment requires a taxpayer to base its extension payment on the amount of tax reported as due on the previous annual report as of May 14 of the current year, in accordance with Senate Bill 861, 75th Legislature. It was adopted without changes to the proposed text.


Practice and Procedure
Please send your comments on these proposed amendments to Mike Borkland, Chief Hearings Attorney, Legal Services Division, P.O. Box 13528, Austin, Texas 78711.

Proposed amendment to Rule 1.10--Acceptance or Rejection of Position Letter; Motion To Dismiss Petition or Set for Hearing
Proposed amendment to Rule 1.14-- Notice of Setting
Proposed amendment to Rule 1.15--Taxpayer's Reply to the Position Letter
Proposed amendment to Rule 1.16--Response of the Tax Division
Proposed amendment to Rule 1.42--Definitions
Proposed amendment to Rule 1.5--Initiation of a Hearing

These proposed amendments incorporate provisions in Chapters 154 and 155 of the Tax Code.
A taxpayer may request a redetermination hearing by sending the agency a written request for redetermination. The time limit for filing a request is 30 days for a deficiency determination and 20 days for a jeopardy determination. A request pursuant to the Tax Code §154.309 or §155.186, must be made within 15 working days of the receipt of the determination. The request must include a statement of grounds that sets out in detail the reasons the taxpayer does not agree with the determination. If the statement of grounds is not received within the time limit or an extension of the time limit granted prior to the expiration of the time limit, a hearing will not be granted and the taxpayer must pay the determination and request a refund before any objection to the determination can be considered.
An oral hearing under the Tax Code §154.1142 or §155.0592 will be automatically set unless a response is received within 15 calendar days of the receipt of the notice of violation(s). If the permit holder does respond within 15 days, it may either make the required payment and move to dismiss the hearing or move to set the case for oral hearing.


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.

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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, the tax code from Texas Legislative Council, and other Comptroller's publications.

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You can view and/or print many of the documents summarized in this newsletter by visiting our policy research system on the Internet <http://aixtcp.cpa.state.tx.us/star>. If you want a paper, fax, or email 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. Our e-mail address is <tax.help@cpa.state.tx.us>. Our fax number is 512/475-0900--we fill requests on a first-come, first-served basis. When requesting a copy of a document , don't forget to include the number shown in parentheses at the end of each summary. Depending on the number of paper documents you request and the number of pages in each document set, there may be a fee. If so, we'll bill you.

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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.

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 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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Carole Keeton Strayhorn
Texas Comptroller of Public Accounts 		Window on State Government
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