|February 2009||TAX POLICY NEWS|
|a monthly newsletter about Texas tax policy|
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In this issue...
Mixed Beverage Gross Receipts Tax
Recently Proposed Rules
An amended 2008 Franchise Tax Report may be filed for the following reasons:
- to correct a mathematical or other error in a report;
- to support a claim for a refund;
- to change its method of computing margin to 70 percent of total revenue or, if qualified, to the E-Z Computation
After the due date of the report, an amended report may not be filed to change the method of computing margin to a cost of goods sold deduction or to a compensation deduction.
An amended 2008 Franchise Tax Report must be filed if:
- an entity's taxable margin changed as a result of an Internal Revenue Service audit;
- an entity's taxable margin changed as a result of an audit or other adjustment by a competent authority other than the Internal Revenue Service;
- a taxable entity filed an amended federal income tax return that changed the entity's taxable margin.
In filing an amended report, the taxable entity must:
- type or print on the top of the report the phrase “Amended Report” or “Amended Refund” if the amendment results in an overpayment;
- include a signed letter, with taxpayer name and number, that states in detail the reason for the amended return;
- include enclosures necessary to support the amendment;
- if requesting a refund, include a Power of Attorney, Form 01-137, or other written authorization, if the taxpayer is being represented by an authorized agent;
- if the amendment results in an underpayment, report and pay applicable penalties and interest along with any additional amount of tax shown to be due on the amended report.
See subsection (f) of Tax Rule 3.584 for more information regarding amended reports.FRANCHISE TAX
An Entity's Federal Tax Treatment
Disregarded entities: An entity's treatment for federal income tax purposes does not determine its responsibility for Texas franchise tax. Partnerships, limited liability companies and other entities that are disregarded for federal income tax purposes are considered separate legal entities for franchise tax reporting purposes.
The separate entity is responsible for filing its own franchise tax report unless it is a member of a combined group. If the entity is a member of a combined group, the reporting entity for the group may elect to treat the entity as disregarded and will not unwind its operations from its “parent” entity.
If the reporting entity elects to treat the entity as disregarded, it will be presumed that both the “parent” entity and disregarded entity have nexus in Texas for purposes of apportionment only. Although the disregarded entity is considered to have nexus for apportionment purposes, when completing the Affiliate Schedule (Form 05-166), if the disregarded entity does not have physical presence in Texas, the entity should blacken the no-nexus circle in Item 5. The entity is not required to file a Public Information Report or Ownership Information Report.
Professional associations: While professional associations file as corporations for federal income tax purposes, for Texas franchise tax purposes they are neither a corporation nor an LLC, and thus are required to file the Ownership Information Report, not the Public Information Report, when filing franchise tax reports.FRANCHISE TAX
Combined Groups - Initial and Final Reports
For the period that a combined group exists, the combined group will file only annual reports regardless of whether the reporting entity or any or all of the members of the combined group would have been required to file an initial or final report if filing as a separate entity.
Except as provided below, if an entity is part of a combined group, it will not report its data on a separate initial report, but will include its data with the combined group's report for the corresponding accounting period. The entity should return its Franchise Tax Initial Report Filing Notice to the Comptroller identifying the reporting entity of the combined group.
If an entity was not part of the combined group for any portion of the accounting period that would be covered by its initial report or has an accounting year begin date that is before the accounting year begin date that will be used by the combined group, the entity is required to file a separate initial report for the period that will not be included in the combined report.
Except as provided below, if an entity that ceases doing business in Texas is part of a combined group, the data that should be reported on the final report will be included in the combined group's report for the corresponding accounting period. The entity should use Form 05-359, (Request for Certificate of Account Status) to identify the reporting entity of the combined group.
If an entity was not part of the combined group for any portion of the accounting period that would be covered by its final report, the entity is required to file a final report for the period that will not be included in the combined report.
Exception: If every member of a combined group ceases doing business in Texas, the reporting entity must file a final report for the combined group.
See subsection (k) of recently amended Rule 3.590 for more details regarding initial and final reports for members of a combined group.FRANCHISE TAX
Passive Entities and Pass-Through Rental Income
In November 2008, the Comptroller's office proposed an amendment to Rule 3.582 concerning Margin: Passive Entities. One amendment clarified the Comptroller's interpretation that rental income that flowed from a partnership to a partner as part of distributive income did not lose its character as rent and therefore did not qualify as passive income.
It appears that many taxpayers and tax practitioners had not previously understood this to be the Comptroller's position. Although we believe our interpretation of the statute is correct, we understand that this position may have taken taxpayers and tax practitioners by surprise and resulted in negative consequences to taxpayers.
Therefore, we are pulling the proposed rule amendment for franchise tax reports originally due in 2008 or 2009 to allow taxpayers an opportunity to seek clarification through the Legislature or to consult with their tax practitioner or legal counsel on tax planning.
If no clarification is provided by the Legislature, we will propose the rule amendment for franchise tax reports originally due on or after January 1, 2010.INSURANCE TAX
Certified Capital Company Tax Credits
Tax Year 2008 is the first year that insurers who invested in Program I for Certified Capital Companies (CAPCOs) may take credit against their premium tax for their investment. Although Program I was effective in 2003, the enabling legislation specified that the credits would not begin until the report due March 2, 2009, for the 2008 tax year (see the following article concerning the extension of the due date). The credits are limited to 25 percent per year of the amount of the certified investors' investment.
The credit is included in the preprinted amount on line 24 of the annual premium tax report along with other available credits from the insurers' respective guaranty association and windstorm association credits. Any available CAPCO credits that cannot be applied to the 2008 taxes will be carried forward for use in future years.
The statute allows an insurer to apply the CAPCO credit to its premium tax prepayments beginning with those made in 2009. To avoid being penalized for underpaying their prepayments, it is critical that insurers avoid applying the credits twice, or doubling up in taking credits for any one prepayment.
First: If an insurer uses its prior year net premium tax due for the calculation of its prepayments, the credit would have already been applied in determining the prepayment and should not be deducted a second time from the amount of the prepayment. For this purpose, please refer to Form 25-101, the Texas Semi-Annual Insurance Premium Tax Payment Worksheet (PDF, 73k) instructions for Options I and II.
Second: Another concern is that some insurers will make the mistake of attempting to apply the total amount of the annual CAPCO credit against one of the prepayments. To avoid being penalized, insurers should make sure that the reduction in prepayments for each year does not exceed a total of 25 percent of Program One credits and each prepayment should reflect a maximum reduction of one-half the 25 percent Program One credits.INSURANCE TAX
Premium Tax Due Date Extension
The due date for filing the Annual Insurance Premium tax reports for Licensed Insurance Companies, Health Maintenance Organizations (HMOs), Surplus Lines and Purchasing Groups, including the first 2009 prepayment for licensed companies and HMOs, is being changed to April 1, 2009. Taxpayers may file during this grace period with no late filing penalties. The due date for reporting the Automobile Burglary and Theft Prevention Authority assessment and the Insurance Maintenance, Assessment and Retaliatory Report remains March 2, 2009.MIXED BEVERAGE GROSS RECEIPTS TAX
A number of upscale bars and nightclubs offer a service called bottle service where customers can purchase bottles of alcohol for consumption at their table. The service often includes a reserved table in a prime location, mixers for drinks and a personal attendant.
In STAR document 200808259L, an accountant for a lounge that offers bottle service asked if his client's charge for the reserved table should be included in the lounge's liquor sales; be considered an amusement or other income taxable for sales tax; or be considered non-taxable.
The accountant said the charge for alcohol was calculated by multiplying the number of alcohol shots in the bottle by the applicable mark-up on shots. This amount is included in the lounge's liquor sales and the separate charge for the table is included in miscellaneous service charge income.
Mixed beverage tax law, in Tax Code Section 183.051, imposes tax on the total amount received by a mixed beverage permittee from the sale, preparation or service of alcoholic beverages. The 14 percent tax is also imposed on receipts from the sale, preparation or service of ice or nonalcoholic beverages that are sold or served to be mixed with alcohol and consumed on the premises. See also Rule 3.1001(b), regarding the imposition of mixed beverage gross receipts tax.
A separately stated charge on a customer's bill for a reserved table is not taxable for mixed beverage gross receipt tax, unless the only way to purchase a bottle of alcohol is to pay the table reservation charge.
A separately stated charge for the bottle of alcohol, as well as, any charges related to the service of the bottle of alcohol (e.g., shot glasses, mixers, ice and wait staff) is subject to mixed beverage gross receipts tax.
Mixed beverage gross receipts tax is not calculated by multiplying the number of alcohol shots in the bottle by the applicable mark-up of the shots. Instead, the tax is owed on the total amount received for the bottle of alcohol and related services.
A lump-sum charge to the customer that includes the bottle of alcohol, reserved table and related services is subject to mixed beverage gross receipts tax.
A separately stated charge for a reserved table is, however, subject to sales tax if the venue sells prepared food and the charge for the table is made in connection with the meal sold. For example, to receive a table in a specified location, to receive upgraded service from waiters, etc. in connection with the meal charge, the charge becomes part of the selling price of the meal under Tax Code Section 151.007).
If the charge relates to charges such as an admission fee or cover charge to attend an amusement service or event, the charge is taxable as an amusement service. For example, if the venue is providing a band and charges a table charge to get a seat close to the stage, the table charge is taxable as an admission charge to an amusement event. The venue should collect and remit tax on the charge unless an exemption is applicable. See Tax Code Sections 151.0028 and 151.0101(a)(1) and Rule 3.298.SALES TAX
Firearms Sold by Out-of-State Dealers: Transfer Fees Charged by Texas Dealers
When a gun is purchased from out of state by an individual in Texas, federal law provides that the out-of-state seller must ship the gun to a Texas dealer for transfer to the individual.
Frequently, the Texas dealer will charge the purchaser a transfer fee to cover the costs of paperwork and handling. Because the gun was not purchased from the Texas dealer, the transfer fee does not represent a sale. Therefore, the transfer fee is not taxable.
For example, assume an individual paid $1,500 to an out-of-state seller for a gun. The out-of-state seller shipped the gun to a Texas gun dealer. The customer picked up the gun at the Texas dealer's place of business and was charged a $25 transfer fee by the dealer. The $25 transfer fee is not considered a sale for Texas sales and use tax purposes and therefore is not subject to sales tax.SALES TAX
Home Stagers - Clarification
In the October 2008 issue of Tax Policy News, we presented an article entitled Home Stagers. It set out the tax treatment of various home staging activities. Regrettably, we incorrectly stated that a home stager could issue a resale certificate for furniture or accessories that she purchased for use in her client's home. For purposes of this clarification, we assume that a home stager does not sell furniture and accessories to her clients. Therefore, when a home stager purchases or rents furniture and accessories to use over time with multiple clients or to permanently give them to just one client, these items will be considered an expense connected to the sale of the home stager's nontaxable services, even if the charge for these items is separately stated on an invoice. Therefore, the stager may not give a resale certificate in lieu of paying tax and cannot collect tax from the client on the charge. You may find further information on home stagers in STAR Document 200902268L.SALES TAX
When an item is purchased in this state, but is shipped by the seller out of Texas, Texas sales tax does not apply to the transaction. The seller may, however, collect tax for the state and local jurisdictions to which the item is shipped.
In most states, including Texas, use tax is due on any item purchased out of state and brought into the state for use or consumption. If a seller is engaged in business (has nexus) in the state to which the item is shipped, the seller is usually required to collect that state's use tax.
Currently, as a result of the 1992 Supreme Court decision in Quill Corp v. North Dakota, states are prohibited from requiring sellers to collect tax on interstate shipments, unless the seller has a physical presence or nexus in the state to which the item is shipped. The Court found that the variances in laws between states and the number of taxing jurisdictions in the U.S. imposes too great a burden on remote sellers, violating the fair commerce clause of the U.S. Constitution.
Many sellers, particularly large retailers, will voluntarily collect use tax for states where they do not have nexus as a courtesy to their customers since most states require consumers to remit use tax directly to the state if the seller does not collect that state's tax.
All Texans are responsible for paying use tax when they buy taxable goods and services for use in this state and the seller does not charge Texas sales tax, or does not charge the correct amount of Texas sales tax. Use tax is reported and paid directly to the Texas Comptroller's office.
Making purchases by telephone, e-mail or fax from mail order catalogs and Web sites are typical situations whereby Texas use is due. For example, if you buy a shirt through an online auction from a seller in Ohio who does not charge you sales tax, or a New York electronics store sells you a camera through its Web site and does not charge you sales tax, you owe Texas use tax on the purchased item sent into Texas for use here.
Items bought in another country are also subject to Texas use tax. For example, if you buy something in Mexico that you bring back to Texas, you owe use tax on the purchase price.
Local use taxes may also be applicable if not collected by the seller. For example, assume you live in Houston and buy an item for $200 from a seller in a part of Texas with no local taxes. The seller would only be responsible for charging you the state sales tax of $12.50, or 6.25 percent of the selling price. Because the item will be shipped or used in Houston, the 1 percent City of Houston tax and the 1 percent Houston Mass Transit Authority taxes are applicable. You would owe additional local use taxes of $4.SALES TAX
New GSA Smart Card
The former federal GSA SmartPay program expired on November 29, 2008. It has been replaced by the new GSA SmartPay 2 program. The new GSA SmartPay 2 cards are in use effective November 30, 2008. Purchases made by employees using the GSA SmartPay 2 cards are exempt from Texas state and local sales and use taxes if:
- the credit cards state on their face “UNITED STATES OF AMERICA, GSA SmartPay 2, FOR OFFICIAL U.S. GOVERNMENT PURCHASES ONLY, U.S. GOVERNMENT TAX EXEMPT;”
- the cardholders are authorized to make purchases for official government purposes only; and
- the purchases are paid for directly by the U.S. Government.
The federal number on such credit cards will not affect Texas retailers' ability to accept the credit card or the U.S. Government's exempt status. Texas Tax Code 151.309 exempts governmental entities from sales and use tax.
Note that a federal government employee may make a tax-free purchase of prepared food or similar items only if he or she is purchasing the food as an authorized agent of the federal government and presents either a properly completed exemption certificate, a Centrally Billed Account GSA Smart Card or an official purchase voucher.
A federal employee may not purchase a restaurant meal or other prepared food items tax free on his or her own behalf, even if the federal employee is traveling on official business. See Rule 3.322 (f)(5) and (6).SALES TAX
Skybox and Suite Rentals
Our office has been asked for guidance on the taxability of charges for the use of skyboxes and luxury suites at sports arenas and stadiums.
These taxable charges also include admission charges to view an amusement event from a skybox or suite.
Some sports franchises initially did not tax these charges, believing the lease of the skybox or suite constituted a nontaxable rental of realty.
However, the lease agreements we have reviewed provided that no tenancy, leasehold estate or easement was created by the leases, and the leases did not allow any other use of the skybox or suite other than for the purposes of viewing the amusement event. Therefore, the Comptroller's interpretation of a taxable admission is that the charge for the use of a skybox or suite facility to view an amusement is part of the total charge for the amusement service. See Comptroller's Decision No 42,539 (2004) STAR document 200406701H.
We recognize that the stadium or arena where a taxable event is held may be owned by a legal entity other than the provider of the amusement service.
Therefore, the lease of the skybox or suite may be sold by a legal entity other than the provider of the amusement service.
However, this does not change the taxability of the charge for the lease of the skybox or suite if it is for viewing a taxable amusement event.
The charge for the lease of the skybox or suite is subject to sales tax, as is the ticket required to view the event.
This taxability determination also applies if a municipality owns the facility and leases the skybox or suite.
For example, assume City A owns a stadium at which sporting events, concerts and other taxable amusement events occur.
If City A leases a skybox to a season ticket holder to view professional basketball games, then leases the same sky box to the same or a different person to view a musical concert, and then leases the skybox to the same or different person to view a children's ice show, City A is selling taxable admissions to all three amusement events. The exemption in Tax Code Section 151.3101(a)(1) for certain amusement services is not applicable because City A is not the exclusive provider of the amusement events as required by that section under the facts of this example.SALES TAX
Tax-Free Sales: It's a New Calendar Year
Generally, nonprofit organizations are required to collect sales tax on sales of taxable items and services. There are, however, some exceptions.
For example, a nonprofit religious, educational or charitable organization, or an organization exempted under Internal Revenue Code, Section 501(c)(3), (4), (8), (10), or (19) that applies for and receives sales tax exemption on its purchases, based upon criteria established in Texas Tax Code Section 151.310(a)(1) and (a)(2) and each bona fide chapter of those qualified organizations is permitted to hold two one-day, tax-free sales each calendar year. This exemption is found under Texas Tax Code Section 151.310(c).
A qualified organization, that has obtained sales tax exemption as set out in the previous paragraph, must designate in its records prior to the sale which two one-day sales will be exempt that calendar year. This may require careful planning and coordination for organizations that operate on a fiscal year basis. For example, PTAs, PTOs and other school groups commonly plan events based on school years rather than calendar years. When planning fundraising activities for a new school year, the school groups should verify the number of tax-free fundraisers conducted by the organization during the prior school year that occurred during the current calendar year.
If a qualified exempt organization collects sales tax on a sale, the tax must either be remitted to the state or refunded to the purchaser. The organization cannot collect the tax and keep it under the tax-free sale provision.
“One day” means 24 consecutive hours. If a designated tax-free sale or auction exceeds a consecutive 24-hour period, the organization may not hold another tax-free sale or auction that calendar year. If two or more groups hold a one-day tax-free sale together, the event counts as one tax-free sale for each participating organization. Each of those organizations is then limited to one additional tax-free sale during the remainder of the calendar year.
During a designated tax-free fundraising event, the qualifying exempt organization may sell taxable items free of tax as long as the sales price does not exceed $5,000. If an item is donated to the organization, however, and is not sold back to the person who donated the item, then the item may be sold tax-free regardless of the sales price. This means the sale of donated items during a designated tax-free fundraising event may be exempted even if the sales price of a donated item is greater than $5,000 as long as it is not sold back to the person who donated the item. Additionally, if an item is made by an exempt organization and sold at one of the organization's one-day tax-free sales or auction, then the item is exempt regardless of the sales price.
A qualifying exempt organization may take orders over an extended period of time before delivery is made and this event can still count as a one-day tax-free fundraiser as long as the items are either delivered to purchasers on a single day or received by the selling organization from a third party vendor on a single day. A sale occurs when title or possession of the item transfers to the purchaser. In the case of items that are preordered and generally prepaid (e.g., yearbooks), the organization can transfer title to the items as soon as it receives the order. Therefore, the date the items are delivered by the vendor to the seller can be designated as the “one day” for the purposes of the tax-free sale.
Additionally, items sold on the spot on a day that is held out to be one of the organization's tax-free days is perfectly acceptable and does not cause the pre-ordered sales to lose the exemption.
The tax-free fundraising provisions described apply only when a qualified exempt organization is the seller of the items. There is no exemption from the collection of sales tax when a qualified exempt organization raises funds by acting as a sales representative or commissioned sales agent for a for-profit retailer. In this case, the group receives a commission for selling candy, gift-wrapping, Christmas ornaments, candles or similar items. The for-profit retailer, not the exempt organization, is considered the seller and consequently the tax-free sale provision does not apply.
The exempt organization must collect sales tax on the taxable sales and forward the tax collected to the for-profit retailer, who reports and remits the tax. An alternative would be for the for-profit retailer to include a statement in the catalogs and order sheets that the selling price includes Texas sales or use tax on taxable items. This type of fundraising activity does not count against the two one-day tax-free sale days available to qualifying exempt organizations.RECENTLY PROPOSED RULES
Cigar and Tobacco Products Tax
§3.121 - Definitions, Imposition of Tax, Permits, and Reports
The Comptroller's office has proposed an amendment to Rule 3.121 concerning cigar and tobacco products tax. The amendment provides a definition of affiliate, clarifies the definition of manufacturer's list price and renumbers subsequent subsections.
Notice of the proposed amendment was submitted for filing with the Secretary of State's office. The publication date is February 20, 2009. There will be a 30-day comment period which ends March 23, 2009.ABOUT THE NEWSLETTER
The Comptroller's office publishes this newsletter to keep you informed about state taxes. Tax questions can be complicated, so please use these summaries as guidelines only.
For a Copy of a Proposed Rule
For a copy of a proposed rule or information about a proposed rule, write to Bryant Lomax, Tax Policy Division, 1700 North Congress Avenue, Austin, Texas, 78701-1436, or submit a request via Texas Tax Help.
For Publications, Rules or Other Tax Information
Contributors to This Month's Issue
Jeane Acord-Ramirez, Sherry Anderson, Robin Corrigan, Donald Dillard, Jody Frierson, Gary Johnson, Lindey Osborne, Jerry Oxford, Viki Smith, Karen Snyder, Jennifer Specchio, Karen Specht and Steve White