June 1995 At press time we did not have enough information to give you the comprehensive, ever-popular Legislative Update. I'll give you information about tax-related bills passed by the Legislature as soon as I have the details. Currently, we mail preprinted franchise tax returns in April, strategically timed to arrive soon after the federal income tax marathon. By mailing the reports in April we give taxpayers 30 days to complete the forms. (In the past, we've found that some forms tend to disappear when we mail them too early.) However, some folks have commented that they would like to have the forms sooner. If you prepare franchise tax returns, please take a minute to let me know when you would like us to mail the preprinted forms. For example, would you rather receive the forms in February, April or sometime in-between? (I know you would rather not deal with franchise tax at all. Although I don't have all the details about the bills passed during this Legislative Session, I can tell you this much-franchise tax is still around.) 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: Section 151.320, definition of a magazine-First Class Service Rule 3.291, acceptance of exemption certificate-Trust No One Chapter 157, book transfer of interstate vehicles-Truckin' Chapter 191, transfer of attorney tax-Goodbye Rule 3.295, electricity used in cotton gins-Quick Study Commerce clause, summary of Oklahoma Tax Commission v. Jefferson Lines-Aboard IFTA, applications mailed-Apply Now Insurance tax rule repealed-Rule 3.807 and Rule 3.808 Insurance tax rule adopted-Rule 3.826 Sales tax rule amendments adopted-Rule 3.319 and Rule 3.90 Hearings: Sales Tax First Class Service Hearing No. 32,684 Under Tax Code section 151.320, no tax is due on magazine subscriptions of six months or longer if the magazines are mailed second class. The publication also must meet the definition of a magazine as set out in the rest of that exemption. In this hearing, a publisher claimed that subscriptions to its publication were exempt from tax because the publication was a magazine and the magazines were mailed to subscribers using second class mail. To prove its case, the taxpayer mailed a complimentary copy of the magazine to the attorney for the Tax Division. The publication was mailed using a presorted first-class mail postage-paid permit belonging to the taxpayer. This complimentary copy did not prove that the taxpayer's magazine subscriptions were exempt from tax. The taxpayer then submitted a copy of the first page of the August 1994 issue of the publication showing "Second Class Postage Paid...(Second Class Permit Pending)." This August 1994 issue did not prove that the magazines sold under subscription during the audit period, which covered periods prior to August 1994, were distributed via second class mail. The taxpayer did not show that its publication was distributed via second class mail during the audit period. Therefore, the magazines were not exempt. (9504H1346B08) Trust No One Hearing No. 32,297 A subcontractor accepted a properly completed exemption certificate from a general contractor on a lump-sum contract to construct a new building. Before providing the certificate, which claimed that the job was tax exempt under Tax Code 151.311 (an improvement to realty for an entity exempt under section 151.309 or section 151.310), the general contractor repeatedly assured the subcontractor that the project was tax exempt and that the subcontractor should not pay tax when purchasing materials for the job. The subcontractor paid tax on all of its materials until it received the certificate. At that time the subcontractor stopped paying tax on materials it acquired for the job. During a routine audit of the subcontractor, an auditor assessed tax on the tax-free purchases made in connection with this job because the auditor determined that the general contractor's customer was not an exempt entity. The taxpayer argued that it had accepted the exemption certificate in good faith and should not be held liable. Under Rule 3.291, a contractor is responsible for requesting additional evidence of exempt status if the validity of the exemption is not clear. In this case, because the name of the general contractor's customer appeared to be that of a for-profit entity, the subcontractor should have continued to pay tax on materials for the job or requested additional documentation of the exempt status of the customer. The judge agreed that the validity of the exemption was unclear and that the subcontractor could not have accepted the certificate in good faith. The auditor was correct in assessing tax on items purchased to complete the job. (9503H1344C04) Hearing: Interstate Motor Carrier Tax Truckin' Hearing No. 32,711 An out-of-state taxpayer that owned and operated a fleet of trucks purchased the stock of one of its competitors, who also owned and operated a fleet of trucks. The newly acquired company remained a separate corporation, but the taxpayer transferred to its books the value of trucks and trailers belonging to the acquired company. The taxpayer then began to depreciate the vehicles on its books and for federal income tax purposes. We audited the taxpayer, and the auditor assessed interstate motor carrier tax on the net value of the trucks and trailers. The taxpayer argued that it had merely combined functions and systems, including accounting systems. It had not transferred title to the trucks into its name. Therefore, there was no change in actual ownership of the trucks. The judge did not agree. The taxpayer had merged the trucks into its own fleet and had its employees operating the vehicles. The net book value of the vehicles was transferred to the taxpayer's books, and the taxpayer had depreciated the trucks on its income tax returns. These actions were all evidence of a change in ownership. The fact that the titles had not been transferred was not sufficient to overcome the other evidence. The judge concluded the auditor was correct in assessing interstate motor carrier tax on these vehicles. (9502H1342E01) Legislative Update: Attorney Tax Good-bye Effective June 1, 1995 The Legislature transferred the authority to administer and collect attorney occupation tax to the Supreme Court. This bill also authorizes the Supreme Court to suspend the license of anyone who does not pay the tax. Send attorney tax payments to the State Bar of Texas. If you have any questions concerning the tax, you can call the State Bar at 1-800-583-8070. (Senate Bill 403-see "For a Copy of a Senate Bill or House Bill" for information on how to get a copy of this bill.) Letters: Sales Tax Quick Study Under Tax Code section 151.317(c)(2)(A)(i), no tax is due on electricity used to operate machinery and equipment that process tangible personal property (except ready-to-eat food) for sale as tangible personal property. Rule 3.295, on natural gas and electricity, explains how to determine if tax is due when the gas or electricity is used for both exempt and taxable purposes and is measured by a single meter. The gas or electricity is either totally exempt or totally taxable depending on the predominant use of the utility measured by that meter as determined by an engineer's utility usage study. In the past, studies of cotton gins have shown that the overwhelming use of gas and electricity by cotton gins was for processing. We reviewed utility studies performed on large and small cotton gins. The exempt use of gas was 98 percent, and the exempt use of electricity was over 91 percent. Based on these studies, we will no longer require a utility usage study for a cotton gin to prove exempt use of gas or electricity during ginning season. (9505L1346F14) Court Case: All Taxes Aboard! Oklahoma Tax Commission v. Jefferson Lines, Inc., 115 S. Ct. 1331 (April 3, 1995). An interstate bus company did not collect Oklahoma sales tax on bus tickets sold in Oklahoma for transportation services originating in Oklahoma and terminating outside Oklahoma. When the company went bankrupt, Oklahoma filed a claim in bankruptcy court for uncollected sales taxes. The bankruptcy court, federal district court and court of appeals all denied Oklahoma's claim, ruling that the Oklahoma sales tax was an unconstitutional imposition upon interstate commerce. The U.S. Supreme Court reversed the lower courts, holding that Oklahoma's sales tax on interstate bus tickets was constitutional because it met all four prongs of the test imposed by Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). In upholding the tax, the court reviewed the entire history of commerce clause jurisprudence, which culminated in the formulation of the four- pronged test of Complete Auto Transit. According to that case, a state tax that affects interstate commerce is constitutional provided the tax is imposed upon an activity with substantial nexus with the taxing state, is fairly apportioned (i.e., the state taxes only its fair share), does not discriminate against interstate commerce, and is fairly related to the services provided by the taxing state. First, the court noted that the sale of the bus tickets occurred wholly within Oklahoma, and that the service originated there. That satisfied the first prong of the test. Next, the court discussed apportionment at great length. Whereas the court had earlier struck down an unapportioned gross receipts tax imposed on a bus company (Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653 [1948]), the Jefferson Lines court held that sales taxes are different from gross receipts and income taxes. As a rule, sales taxes are imposed on a buyer of a taxable item, not the seller. The court went on to say that a sales tax on transactions that occur within the taxing state may be upheld even if some prior or subsequent related activity occurs in another state. In other words, even though the buses in issue in this case operated in states other than Oklahoma, it was perfectly permissible for Oklahoma to tax the entire value of the sale of a bus ticket that occurred within its borders. The court further noted that the vast majority of states allow credit against their use taxes for sales taxes lawfully imposed by and paid to another state on the same transaction, thus alleviating the risk of multiple taxation on the purchaser. The court also said sales taxes on services, such as bus transportation, should be treated no differently than sales taxes on goods. In addition, the court said that, although the tax could be apportioned among the states by a reasonable method (e.g., miles traveled in Oklahoma v. miles traveled everywhere), Complete Auto Transit did not compel Oklahoma to apportion the sales tax at all. The court concluded that the remaining two prongs of the test were also met. First, Oklahoma's tax did not discriminate against interstate commerce; all bus ticket sales were taxed at the same rate without regard to whether the buses completed their journeys outside Oklahoma. The court said "the potential for interstate movement after the sale has no bearing on the reason for the sales tax." Lastly, the court held that Oklahoma provided sufficient governmental services to meet the final prong of the test. Oklahoma's provision of a "civilized society" and police and fire protection were justification enough for the imposition of the tax on a service transaction consummated within the state. Two justices dissented, writing that there was no difference between the Oklahoma sales tax and the gross receipts tax at issue in Central Greyhound Lines. The dissenters felt that the court should have followed that precedent instead of distinguishing between gross receipts/income and sales taxes. Editor's note: This case is interesting because it is one of the few Supreme Court cases to apply the Complete Auto Transit test to a sales tax on services, and because the court held that sales taxes on services do not necessarily have to be apportioned among the states. Under Texas law (unlike the Oklahoma law described in this case), the sales tax applies to only the value of the "Texas benefit" derived from a service purchased here, but used elsewhere, in whole or in part. See Texas Tax Code Section 151.330(e). That law exempts from sales tax the value of the benefit of a taxable service that can reasonably be allocated to a state other than Texas. The Comptroller's administrative rules on taxable services contain more information about how to allocate benefit of service among Texas and other states. Taxpayer Notification: Fuels Tax Apply Now We mailed International Fuel Tax Agreement (IFTA) applications to interstate truckers, fuels tax distributors, suppliers and users operating as interstate truckers. Truckers who are based in Texas and operate in participating states or Canadian provinces may apply for IFTA permits. There are no license or decal fees for a Texas-based carrier. However, a trucker who does not want an IFTA permit must obtain trip permits to travel through participating states or provinces. Contact those states for information regarding their trip permit requirements. Publications The following publications were recently revised: Publication #: 94-112 Date Revised: May 1995 Title: Landscaping Services Publication #: 96-237 Date Revised: June 1995 Title: Sales Tax Update Publication #: 98-346 Date Revised: June 1995 Title: Electronic Tax Filing System Agreement Information Administrative Rules Insurance Tax Adopted Repeal of Rule 3.807-Late Payment of Premium Tax Liability During Any Quarterly Prepayment Tax Period Adopted Repeal of Rule 3.808-Underpayment of Quarterly Premium Tax These rules were repealed because this information was incorporated into Rule 3.826, Tax Return and Prepayment Due Dates and Penalty and Interest for Failing to Report or the Underreporting of Tax. Rule 3.826-Tax Return and Prepayment Due Dates and Penalty and Interest for Failing to Report or Underreporting of Tax This new rule was proposed in the January 24, 1995, issue of the Texas Register (20 TexReg 328). The adopted text was changed to correct a typographical error in the proposed text. The rule specifies the due dates for tax returns and premium tax prepayments and explains the application of penalty and/or interest for failing to make payment, underpaying, underreporting or failing to file a report. Sales Tax Amendment to Rule 3.319 Prior Contracts We adopted an amendment to this rule without changes to the proposed text as published in the February 14, 1995, issue of the Texas Register (20 TexReg 1009). One amendment in subsection (a)(2) deletes the requirement that both parties sign the contract. The second amendment in subsection (b)(1) excludes two-party contracts from the prior contract exemption when the exemption is enacted under enabling legislation that allows the exemption when the items are used for or in the performance of a contract. The Comptroller is required to make this change in order to comply with the Texas Supreme Court decision in Calvert v. British-American Oil Producing Company, 397 S.W.2d 839. This position applies retroactively to ensure continuity in the Comptroller's application of this decision. The third amendment in subsection (c)(4) allows the prior contract exemption for contracts with "open price terms." We received a comment pointing out that the wording in the preamble to the proposed version, citing a change in subsection (d), was in conflict with subsection (d) in the body of the rule, which did not reflect a change. The language in the body of the rule is correct-notices of prior contracts or bids do not need to be sent to the Comptroller. Motor Vehicle Tax Amendment to Rule 3.90-Motor Vehicles Purchased for Use Outside of Texas This amendment was proposed text in the February 21, 1995, issue of the Texas Register (20 TexReg 1259). We adopted the proposed text without changes. Under the amended rule, a purchaser claiming an exemption from motor vehicle sales tax because the vehicle is purchased for use exclusively outside of Texas must give the seller a Texas Motor Vehicle Sales Tax Exemption Certificate as described in subsection (e) of the rule. Registering a vehicle in Texas creates a presumption that the vehicle will be used in Texas. 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. 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 Joe A. Galvan, Jr., in Tax Administration, 111 West 6th St., Austin, TX 78701. 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 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 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. Court cases We don't keep copies of court cases. You may request copies of cases summarized in Tax Policy News from the clerk of the appropriate court. For a copy of a senate or house bill If you want a copy of a House bill, call 512/463-1144; for a copy of a Senate bill, call 512/463-0252. Reader Survey Here's your chance to tell me what you think (about this newsletter). I'll incorporate any suggestions that I can. Even if you don't have any suggestions or comments, you still need to fill out the mailing address information below. Under State law, an agency may send periodicals only to those who request the periodicals. In other words, you need to let me know-by completing the form below-if you want to continue to receive the Tax Policy News. Name: Company Name: Address: City/State/Zip: -- END --