Grab a cup of holiday cheer and cozy in with the Tax Policy News. Interest on unpaid taxes accrues at 12 percent per year. If you don't agree with part of an audit assessment and intend to go through the administrative hearings process, you can pay the portion you don't dispute and avoid interest on that amount. We have a special toll-free number for tax practitioners, 1-800-248-4093, and the Austin number is 512-463-4600. Don't forget we get fewer phone calls on Thursdays and Fridays. Call then and avoid the rush. Adina Whittemore In this issue: Primary use and benefit of tax-exempt entity-Two-Part Test Remodeling realty-Busting Out Remodeling realty-Not an Integral Part License fee-Keeping Up Consumable materials used by contractors-Materials Used to Improve Realty Corporate dissolution-Before the End of the Year Insurance tax-Winds of Change Do you know a better way?-We Are Listening Suggestions for Rules-We're Still Listening Franchise tax rules-3.358, 3.561, 3.562, 3.564 Sales tax rules-3.285, 3.287, 3.296, 3.297, 3.292, 3.310 3.329, 3.333 Automotive oil sales fee rule-3.701 Fuels tax rules-3.171, 3.175, 3.178, 3.178 Hearings: SALES TAX Two-Part Test Hearing No. 28,391 This hearing sets out a two-part test to determine whether improvements made to a facility are for the primary use and benefit of a tax-exempt lessee. 1. The lessee must qualify for exempt status under either Tax Code 151.309 or 151.310; and 2. The lease must be long-term in reasonable relationship to the life of the improvements. The judge recommended that this test be adopted through the rule-making process. (1248D06) Busting Out Hearing No. 30,405 A retailer expanded into a space formerly used by a neighboring store. Real property remodeling is a taxable service; new construction labor is not taxable. Rule 3.357 on real property repair and remodeling defines "new construction" as adding new footage to an existing structure. While the expansion added space to the retailer’s store, stores in a shopping mall or strip center are not typically free-standing buildings. The shops were subdivided units of an integrated whole. That shopping mall or strip center was an existing structure, and expanding into a previously occupied space was taxable remodeling of realty. (1248F03) Not an Integral Part Hearing No. 28,070 A refinery added a new unit, which was an improvement to realty, for a lump-sum price. The new stand-alone unit performed a specific process and was not an integral part of a larger structure. The addition of this stand-alone structure was new construction, not real property remodeling, and the lump-sum charge was not taxable. (1247G02) LETTER:SALES TAX Keeping Up A data processing company pays an annual license fee to use training materials, such as books, video tapes, videodisks, CD-ROMs and computer-based materials. The data processing company pays an additional service fee, which covers shipping and handling and administrative fees. The data processing company returns the materials to the training group when it is finished with them. The annual license fee and the service fee are charges for the rental of the training materials and are taxable. (1236A01) POLICY STATEMENTS:SALES TAX Materials Used to Improve Realty Tangible personal property that is necessary or essential to the performance of a contract to improve realty for an exempt organization is exempt if the property is completely consumed at the job site. That means that, after being used once for its intended purpose, the material is used up or destroyed. Here is a list of "consumables" used at the job site: barricade tape chalk and pens chalk line powder concrete forms that cannot be reused disposable brushes disposable rags drop cloths that cannot be reused form nails form oil gas and electricity "guides" used to draw lines on streets masking tape plastic sheeting sand for blasting sandpaper survey stakes and flags tape (except measuring tape) tree markers welding gas welding rods-may be building materials Materials incorporated into the realty and certain taxable services purchased for use in performing the contract are also exempt from tax. But the service must be performed at the job site, and either expressly required under the contract or integral to the performance of the contract. Machinery and equipment are not exempted, and contractors owe tax on purchases, leases or rentals of machinery, equipment, repair and replacement parts and accessories for the machinery or equipment. Exemption Certificates for Certain Aircraft Purchases Last August I told you that an aircraft purchaser does not have to be a nonresident of Texas in order to claim an exemption from sales tax. In order to claim an exemption on the purchase of an aircraft for use and registration in another state or country, the purchaser must complete a special certificate. The certificate is now available. Ask for form #01-907. POLICY STATEMENT:FRANCHISE TAX Before the End of the Year A corporation must legally dissolve by December 31, 1993, or it will be liable for the 1994 annual franchise tax report. Mergers or withdrawals must be legally effective by December 31, 1993, to avoid liability for the 1994 franchise tax report. This applies to corporations with franchise tax reports due in 1993. Before the corporation is allowed to dissolve, withdraw or merge, it must file a final franchise tax report. The final report reflects the corporation's earned surplus for the period beginning the day after the earned-surplus-component period-ending date on the previous report and ending on the date the corporation is no longer subject to the earned surplus component of the tax. For more information see Franchise Tax Rule 3.567, Additional Tax on Earned Surplus. To legally dissolve before January 1, 1994, a corporation must submit a certificate of account status for dissolution, Articles of Dissolution and a $40 filing fee (for the dissolution) to the Texas Secretary of State's office. These documents-and all other appropriate documents-must be properly executed and in the Secretary of State's office by the close of the business day December 31, 1993. In order to get a certificate of account status for dissolution, a Texas-chartered corporation must file a final report and pay all other taxes. The final report and payment of tax due must be submitted with a letter requesting a certificate of account status for dissolution. This may be done by mail or by visiting one of our field offices. All appropriate documents for withdrawals or mergers must be properly executed and in the Secretary of State's office by the close of the business day December 31, 1993. INSURANCE TAX Winds of Change I told you that the Comptroller's office would be handling the collection and administration of certain insurance tax fees and assessments. Here is a list of insurance tax changes: (Don't say I didn't warn you.) * Annual tax reports for independently procured business and the 1993 second half semi-annual surplus-lines tax reports will be due March 1, 1994. * Quarterly tax filings will be changed to semi-annual tax filings and will be due March 1 and August 1. * All maintenance taxes will be due with the annual tax return. * Independently procured business for policies issued effective on or after September 1, 1993, are taxed at 4.85 percent. * For independently procured business and surplus lines business, there is a tax exemption for premiums on risks or exposures that are properly allocated to federal waters, international waters or under the jurisdiction of a foreign government. * We will recognize the federal tax preemption of multi-peril crop insurance reinsured through the Federal Crop Insurance Corporation for policies effective on or after July 1, 1993. * We are revising all insurance tax returns-they will be mailed in mid-January. If you have questions regarding insurance tax filings or changes as a result of the transfer of the tax administration function, call 1-800-252-1387. The Austin number is (512) 463-4068. RENAISSANCE PROGRAM We Are Listening We strive to make this agency efficient and responsive. To accomplish this goal, we have been reviewing agency functions. We are now tackling these three processes: o administrative hearings, o methods of handling correspondence, and o local area network (LAN) personal computer support. We want your input. The hearings and correspondence teams want to hear from folks who have participated directly in the hearings process or who have corresponded with agency employees. The LAN team would like to learn about successful solutions to network support problems. Each team has put together a questionnaire, and these questionnaires- with instructions for downloading-are available on the Window on Government Bulletin Board. Or, call the appropriate team leader and he or she will send you a questionnaire. I've also listed the team leader's nicknames so you can leave them a short message on the BBS. - Window on State Government BBS: Austin (512) 475-1051 or 1-800- 227-8392 - Hearings Team: Tom Poole-Voice (512)463-3939-FAX (512) 475-0900-BBS nickname hteam - Correspondence Team: Carol Ernst-Voice (512)463-3619-FAX (512)475-0433-BBS nickname cteam - PC/LAN Support Team: Steve Bailey-Voice (512)463-4464-FAX (512)475-0378-BBS nickname lteam ADMINISTRATIVE RULES We're Still Listening In October I told you that when a cellular phone is offered for less than 25 percent of its acquisition cost, we presume the transaction is not a "sale." We're drafting a rule that will provide guidelines for determining when a transaction is a sale. In that same issue I told we would be amending Rule 3.294 (j) to allow motor vehicle leasing companies to claim a resale exemption on the purchase of repair or replacement parts for leased vehicles. (We will not be amending (h) and (i) on factoring and assignments.) If you have suggestions on this new rule or on the change to Rule 3.294 on rentals and leases, send your comments to Vic Hinterlang in the Tax Administration Division before January 15, 1993. Franchise Tax These proposed franchise tax amendments and rule were published in the November 12, 1993, issue of the Texas Register. Proposed amendment to Rule 3.558, Earned Surplus: Officer and Director Compensation This proposed amendment is the result of the creation of limited banking associations by the 73rd Legislature, 1993. Proposed amendment to Rule 3.561, Enterprise Zones Subsection (j) was added to provide guidelines for corporations receiving an enterprise zone designation after August 31, 1993, in accordance with legislation enacted by the 73rd Legislature, 1993. Proposed Rule 3.562, Limited Liability Companies This proposed rule contains guidelines for determining the taxable capital and earned surplus of limited liability companies. Proposed Rule 3.564, Services for Regulated Investment Companies: Apportionment This new rule contains guidelines for determining the apportionment of receipts from services to regulated investment companies for taxable capital and earned surplus purposes. State Sales Tax Tax Code §151.707 was amended effective September 1, 1993, setting out specific penalties for intentionally or knowingly issuing invalid exemption or resale certificates. These amendments proposed in the October 8, 1993, issue of the Texas Register state those penalties. Proposed amendment to Rule 3.285, Resale Certificate; Sales for Resale Proposed amendment to Rule 3.287, Exemption Certificates Proposed amendment to Rule 3.296, Agriculture, Animal Life, Feed, Seed, Plants, and Fertilizer As a result of a recent change in the tax law, this proposed amendment, published in the October 8, 1993, issue of the register, exempts tangible personal property installed as a part of an underground irrigation system on farms and ranches. Proposed amendment to Rule 3.297, Carriers A change to 151.328 provides a new procedure for claiming a sales tax exemption when purchasing an aircraft for registration and use outside Texas. This amendment sets out the new procedure and exemption certificate for claiming the exemption and was published in the October 8, 1993, issue of the Texas Register. Amendments to these rules explain the new limited exemption for labor to repair tangible personal property damaged within a disaster area. They were published in the November 12, 1993, issue of the Texas Register. Proposed amendment to Rule 3.292, Repair, Remodeling, and Restoration of Tangible Personal Property Proposed amendment to Rule 3.310, Laundry, Cleaning, and Garment Services Proposed amendment to Rule 3.329, Enterprise Projects This amendment reflects changes to §151.429 that allow a sales tax refund for jobs retained, as well as jobs created, by an enterprise project. Look in the November 12, 1993, issue of the Texas Register for the text of the amendment. Rule 3.333, Security Services Under this amended rule, there is no distinction between guarding, surveillance and courier services-all these services require a license under Texas Civil Statutes, Article 4413(29bb), Private Investigators and Private Security Agencies Act. There is a new subsection on the provision of temporary security services and a discussion of multistate benefit of services. The text of the amendment was proposed in the August 3, 1993, issue of the Texas Register (18 TexReg 5059). Automotive Oil Sales Fee Proposed amendment to Rule 3.701, Reporting Requirements A recent change in the Health and Safety Code clarifies when an importer is liable for the fee. The amendment was proposed in the November 12, 1993, issue of the Texas Register. Fuels Tax Rule 3.171, Records Required; Information Required We adopted this amendment without changes to the proposed text as published in the October 1, 1993, issue of the Texas Register (18 TexReg 6729). The 73rd Legislature, 1993, amended the Tax Code, Chapter 153, to add a new permit classification called a "jobber." The amendment advises jobbers of the records necessary for the purchase, sale and use of gasoline and diesel fuel. Rule 3.175, Liquefied Gas Tax Decal This amendment was adopted with changes-for clarity and consistency-to the proposed text as published in the October 1, 1993, issue of the Texas Register (18 TexReg 6730). The letter of exemption has been retitled letter of exception. The 73rd Legislature amended the fuels tax law to exempt commercial transportation companies providing transportation services to public school districts from prepaying the liquefied gas tax. Commercial transportation companies providing transportation services to public school districts do not have to obtain decals for vehicles used to provide these services. Rule 3.178, Trip Permit in Lieu of Interstate Trucker Permit This amendment changes the trip permit fee to $50. Rule 3.180, Signed Statement for Purchasing Diesel Fuel Tax Free This amendment increases the amount of diesel fuel that can be purchased tax free in a single delivery with a signed statement. Repeal of Rule 3.197, Permits for Distributors and Suppliers This repeal was proposed in the October 1, 1993, issue of the Texas Register (18 TexReg 6732). 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. If you want a copy of one of the documents summarized in this publication, please send your request in writing to the MTIS Section, 111 West 6th St., Austin, TX 78701. 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 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. If you have a question about a proposed rule, write Vic Hinterlang in Tax Administration (same address). --- END ---