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April 2009 TAX POLICY NEWS
a monthly newsletter about Texas tax policy

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FRANCHISE TAX

Filing Requirements for Passive Entities

A partnership or trust that is registered with the Comptroller's office or with the Texas Secretary of State's office must establish its passive status by filing a No Tax Due Information Report (Form 05-163) for the period upon which the tax is based. The passive entity should blacken the circle in Item 1, enter the accounting period in Items 5a and 5b and sign the report. Passive entities are not required to file an Ownership Information Report (Form 05-167).

An entity that filed as passive on the 2008 report will not be required to file a subsequent franchise tax report, as long as the entity continues to qualify as passive. It has come to our attention, however, that some entities that reported as passive on the 2008 report received a 2009 report filing notification letter. Entities that received this notice and remained passive for the 2009 reporting period may disregard the filing notice.

A partnership or trust that qualifies as a passive entity for the period upon which the franchise tax report is based, and is not registered with the Comptroller's office or with the Texas Secretary of State's office, will not be required to register with or file a franchise tax report with the Comptroller's office.

Any passive entity, whether or not it is registered with the Comptroller's office or with the Secretary of State's office, that subsequently loses its status as passive, must file a Nexus Questionnaire (Form AP-114) or a Business Questionnaire (Form AP-224) to register with the Comptroller's office and file a franchise tax report for the period in which the passive status is lost and any subsequent periods until the entity establishes itself once again with the Comptroller's office as a passive entity.

FRANCHISE TAX

Reporting Tips for Combined Groups

The 2008 franchise tax report year was the first for combined reporting. Below are some tips to keep in mind when filing the 2009 combined group report to avoid delays in processing these reports.

  • Taxpayer numbers - Reporting entities should use the taxpayer number assigned by the Comptroller's office or the entity's federal number. To find the taxpayer number, use our Taxable Entity Search. If affiliates do not have their own Comptroller number or federal number, leave the field blank. Do not enter the file number assigned by the Secretary of State, the reporting entity's taxpayer number or a number assigned to any other entity.
  • Extensions - A combined group requesting an extension must complete both an Extension Request (Form 05-164) and an Extension Affiliate List (Form 05-165). The Affiliate List tells us which entities will be reported as a part of the combined group, so we will not expect a separate report from those affiliates. Please note: a combined group required to pay electronically using TEXNET is only required to file an Extension Affiliate List.

    The Affiliate List will be submitted only once: when the extension request is originally filed. Do not submit it again, either with the second extension request or when the report and Affiliate Schedule are filed.

    Before filing the report and the Affiliate Schedule for the November 16 extended due date, please review the Affiliate List submitted with the extension request. The reporting entity must be included on both the list and the schedule. If an entity was included on the Affiliate List but not on the Affiliate Schedule, the combined group will not be in good standing. If an entity was included on the Affiliate List in error, notify our office in writing explaining the error and telling us how the entity will report - separately, or as a part of another combined group. The mailing address is Comptroller of Public Accounts, P.O. Box 13528, Austin, TX 78774.

    Please do not submit a copy of the completed 2008 Affiliate List or Affiliate Schedule to satisfy the 2009 reporting requirements. Even if the 2009 data is identical to the data in 2008, you must use the 2009 forms to report 2009 data.
  • Payments - When making a franchise tax payment, use the name and taxpayer identification number of the reporting entity for the combined group. Payments submitted with the name or taxpayer number of an affiliate could result in a delay in updating the account status.
  • Affiliate List/Affiliate Schedule - The reporting entity should only include on the Affiliate List and Affiliate Schedule those entities that are part of the affiliated group (ownership interest of more than 50 percent) and are unitary. An affiliate that meets both criteria should be included regardless of whether the entity has nexus (physical presence) in Texas. If an affiliate does not meet both criteria, the affiliate should not be included on the Affiliate List or Affiliate Schedule. Therefore, neither the Affiliate List nor the Affiliate Schedule should include any entity where the ownership interest is 50 percent or less. If ownership interest is 50 percent or less in every entity owned, there is no affiliated group and a combined report is not due. Each entity must file a separate report.
  • Nexus - Blacken the circle when the entity does not have nexus (physical presence) in Texas regardless of whether the entity is treated as disregarded for federal or franchise tax reporting purposes. If the nexus circle is left blank, we will assume the entity has nexus and will expect the applicable information report.

We will not close the franchise tax account for an affiliate with no nexus or an affiliate that has ended its existence in its home state, unless the entity submits a Texas Nexus Questionnaire giving us the last date the entity had nexus in Texas or sends a copy of the dissolution or merger documents from their home state.

HOTEL OCCUPANCY TAX

Daily Resort Charge

A hotel golf resort, in STAR document 200812299L, requested confirmation that hotel tax is due on a Daily Resort Charge that is added as a percentage to hotel room and room package charges.

The Daily Resort Charge covers a number of services and amenities, including local, credit card and toll-free telephone calls; fitness center and steam room access; daily newspapers; in-room coffee and tea; on-property transportation; self-parking; nature trails; miniature golf; and gratuities for golf bag handling and housekeeping personnel.

Rule 3.162, regarding the hotel tax base, states that all charges for items or services, other than personal services or charges for the use of a telephone, that are furnished in connection with the actual occupancy of the room are subject to hotel tax. Personal services do not include cleaning or readying a room for occupancy. Personal service charges must be separately stated on the guest folio to be excluded from hotel tax.

Some items included with the Daily Resort Charge are personal services and a number of the items would be subject to sales tax if separately stated on the guest folio. But the fact that the items are lumped together and added as a percentage of the room or room package charge makes the Daily Resort Charge subject to hotel occupancy tax.

INSURANCE TAX

OPTins is Not an Option; WebFile is the Law

The National Association of Insurance Commissioners (NAIC) has implemented a program to facilitate the collection of premium tax forms and payments. This system is called “OPTins,” the Online Premium Tax for Insurance application. OPTins is a Web-based program accessed through an Internet browser. Under OPTins, insurance companies have the ability to submit their quarterly and annual premium tax filings and payments to the states electronically. As members of the NAIC, state insurance departments must request to participate in the program by executing an OPTins License Agreement and must authorize the NAIC to initiate credit entries to the account of the Department of Insurance for payments submitted under the OPTins Product for premium tax collections.

In Texas, as in some other states, the premium tax collection is not handled by the Department of Insurance. These tax collection entities are not considered members of the NAIC and may not request participation or execute agreements with the NAIC.

In 2007, the Texas Legislature passed Senate Bill 377 which authorizes the Comptroller to require a taxpayer who paid $50,000 or more during the preceding fiscal year to file reports electronically during the current fiscal year. The Comptroller's office has developed two free programs that meet electronic filing requirements: WebFile and the Electronic Data Interchange (EDI) system.

WebFile is the system for Sales, Mixed Beverage, Hotel, Motor Vehicle Rental and Insurance Premium tax filers.

The EDI system is for Sales, Direct Pay, Crude Oil, Natural Gas, International Fuels Tax Agreement (IFTA) and Fuels tax filers.

Taxpayers may also comply with electronic filing requirements by using approved commercial EDI software or writing their own program.

WebFile allows all insurance premium taxpayers; licensed companies and miscellaneous organizations, surplus lines agents, purchasing groups and entities who independently procure insurance, to report their tax data and make payments electronically by credit card, electronic check or via TEXNET, the State of Texas Financial Network.

The Comptroller's office has established a secure login portal that allows an individual or authorized representative to set up one user account for single sign-on with access to multiple taxpayer IDs and their related taxes and reporting and paying functions. To log in, you'll need the taxpayer ID number(s) and WebFile number(s) from the preprinted return(s) you received in the mail.

SALES TAX

Blueprints and Reproduction Services Purchased by Architects, Engineers, Contractors and Government Entities

Persons providing nontaxable services must pay tax on all items purchased to perform their service, unless the items otherwise qualify for exemption.

Architects and engineers provide a nontaxable professional service when producing original plans and copies of the original plans for clients. An architect or engineer does not collect sales tax on separately stated charges for copies of blueprints or blueline prints provided to clients per client/architect/engineer agreements. In such circumstances, the service provider must pay sales tax on the purchase regardless of the exempt status of the client.

Contractors are consumers of blueprint or design copies used for a contract to improve real property, even if the contract is with an exempt organization or the contractor separately states the charge for the copies to the owner of the real property. The contractor should pay sales tax on such copies regardless of the exempt status of the client.

Architects, engineers and contractors who sell copies of “stock” or duplicate copies of blueprints and specifications which are not produced specifically for a client under an owner/architect/engineer agreement must collect sales tax on such sales. For example, a person who wishes to bid on a construction project may seek to purchase a copy of the original plans directly from the architect. In that case, the architect may issue a resale certificate for the copies purchased for resale. The architect must then collect tax on the sale of the duplicate copy to the contractor.

For example, an architect who is hired to create a design for a new city building does not collect sales tax from the client. The architect is providing a nontaxable professional service. If the architect goes to a draftsman (who is not an employee of the architect) to draw the blueprint of the building based on the architect's specifications, the draftsman collects sales tax from the architect on the charges for the blueprint and any additional copies of the blueprint. If the architect passes the cost of these blueprints to the client, the architect collects no sales tax from the client because the architect is selling the client a nontaxable service, not tangible personal property. If the architect later sells the “stock plans” of the building that the architect previously designed to a person other than the client, this would simply be a sale of tangible personal property.

SALES TAX

“Caught in the Middle” - Contracts with Exempt Entities: Purchases of Taxable Services, Supplies and Rental Equipment by the “Middleman”

When purchasing real property improvement services, such as new construction or repair and remodeling, exempt organizations defined in Tax Code Section 151.309 or 151.310 commonly employ general contractors or engineering firms for these projects. Frequently, questions arise about the applicability and responsibility for sales and use taxes on taxable items purchased, leased or rented to complete these projects.

For example, assume a city hires a contractor to repair a city road. This contractor will need to rent barricades for use on the job site. The rental of equipment that the contractor will use in the performance of the contract is subject to sales tax. The contractor may not issue a resale certificate to the barricade vendor because the contractor is the end user of the barricades. The contractor is purchasing the barricades for use in completing the job and is not re-renting the barricades to the city. Nor may the contractor issue an exemption certificate to the barricade vendor. The exempt status of the city does not flow through to the contractor. Therefore, the contractor must pay tax on the rental of the barricades.

There are, however, some exemptions that a contractor may claim on purchases necessary to complete a contract for real property improvement for an exempt entity. These exemptions are found in Tax Code Section 151.311(a) and (b).

For example, a contractor may issue an exemption certificate in lieu of paying tax on purchases of taxable items incorporated into the property of the exempt entity and on certain types of consumable items the contractor uses to complete the job. Machinery and equipment is specifically excluded from this exemption. For example, if a contractor needed to rent a backhoe to complete the job, the contractor owes tax on the backhoe rental.

If the contractor wants reimbursement for the rental of the equipment plus tax, the contractor may build the cost of the rental into the pricing of a lump sum contract, or separately state a reimbursement amount for the rental of the equipment plus tax on the equipment. For example, if the cost for rental of the equipment is $10,000 plus $825 tax, the contractor can state on the invoice:

Reimbursement for equipment rental$10,000
Reimbursement for sales tax on equipment rental825
Total reimbursement$10,825

Often, an exempt entity (such as the city in our example above) is reluctant to pay a “tax” reimbursement. The exempt entity should be aware, however, that paying the tax reimbursement is simply paying an expense, or reimbursing the contractor for a cost incurred in completing the contract. The exempt entity is not paying sales tax to the contractor on a purchase for its use that it would normally claim as an exempt purchase.

Nontaxable Services

An exempt entity may purchase nontaxable services, such as an engineering service. The provider of this nontaxable service may, depending on the terms of the contract, seek reimbursement from the exempt organization for costs incurred in performance of the contract, including taxes paid to vendors of taxable items.

For this example, let's assume our city hired an engineer to create the specifications for a new county building to be built on a new parcel of land purchased by the city. To begin the project, the engineer would need to purchase taxable surveying services in order to learn the exact boundaries of the property. Again, the exempt status of the city does not flow through to the engineer so the engineer must pay tax to the surveyor on the charge for boundary surveying.

If the engineering service wants reimbursement for the cost of the surveying plus tax, it may, like the contractor, separately state a reimbursement amount for the surveying, plus tax on the surveying. For example, if the cost of the surveying is $1,000 plus $82.50 tax, the engineer can state on the invoice:

Reimbursement for taxable surveying$1,000.00
Reimbursement for sales tax on taxable surveying82.50
Total reimbursement$1,082.50

As with a contractor, the exempt entity should be aware that, in paying the reimbursement, the exempt entity is not paying sales tax, but, rather, is reimbursing the engineer for sales tax expense incurred to provide the specifications the city desired.

Clearly Identify Reimbursement

As in the examples above, the tax reimbursement must be clearly identified as “reimbursement for sales tax.” If the charge is not clearly identified as a reimbursement, tax is collected in error and must be either remitted to the state by the contractor or nontaxable service provider or refunded to the customer.

Some exempt entities request that bidders delete all state and local sales tax from their bid estimates or invoices. Bidders, however, may owe tax on purchases to complete the work. When preparing payment for the job, exempt entities should take note of the tax obligations imposed by law on contractors and service providers before deleting all tax related charges from the invoice.

SALES TAX

Lab Analysis and Electrocardiograms

In STAR letter 200810293L, a company provided health and wellness screening services for an insurance company. The services consisted of collection and lab analysis of blood samples plus administering and analyzing electrocardiograms. Employees or subcontractors of the health and wellness screening company performed these activities. Even though the people performing the activities were not physicians, the activities are nontaxable medical services, under Rule 3.355(c)(2).

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

For a wealth of tax information sorted by tax type or by subject matter, please visit the Texas Taxes section of our Web site.

Contributors to This Month's Issue

Jeane Acord-Ramirez, Robin Corrigan, Donald Dillard, Jody Frierson, Gary Johnson, Lindey Osborne, Jerry Oxford, Viki Smith, Jennifer Specchio, Karen Snyder, Karen Specht and Steve White

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