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

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FRANCHISE TAX

Filing (or not) Using the Tiered Partnership Election

Editor's note: The information in this article was provided through a link from the Revised Texas Franchise Tax section of our Web site beginning May 5.

There has been much confusion among taxpayers and practitioners concerning the Tiered Partnership Election. The Tiered Partnership Election circle should not be blackened on the franchise tax report merely because an entity owns an interest in another entity that is treated as a partnership or S corporation for federal income tax purposes.

The Tiered Partnership Election (as allowed under Texas Tax Code §171.1015) is not mandatory; it is a filing option for entities in a tiered partnership arrangement. A tiered partnership arrangement is an ownership structure in which any of the interests in one taxable entity treated as a partnership or an S corporation for federal income tax purposes (a “lower tier entity”) are owned by one or more other taxable entities (an “upper tier entity”).

The tiered partnership provision allows the lower tier entity to pass its total revenue to the upper tier entities. The upper tier entities then report this passed revenue with their own total revenue. It is important to note that this provision does not allow the lower tier entity to pass its deductions for cost of goods sold or compensation to the upper tier entities.

As discussed in Rule 3.587(c)(8), the requirements for filing under the tiered partnership provision are:

  • The Tiered Partnership Election is not allowed if the lower tier entity is included in a combined group.
  • All taxable entities involved in the Tiered Partnership Election must file a franchise tax report, a Public Information Report (Form 05-102) or Ownership Information Report (Form 05-167), and the Tiered Partnership Report (Form 05-175).
  • Both the lower and the upper tier entities must blacken the Tiered Partnership Election circle on their tax reports.
  • Total revenue may be passed only to upper tier entities that are subject to the Texas franchise tax.
  • Total revenue must be passed to taxable entities based on ownership percentage.
  • Deductions (cost of goods sold or compensation) may not be passed to upper tier entities.
  • The upper tier entities may file a No Tax Due report (Form 05-163) only if the lower tier entity has less than $300,000 in annualized total revenue before total revenue is passed to the upper tier entities.
  • The upper tier entities may use the E-Z Computation (Form 05-169) only if the lower tier entity has $10 million or less in annualized total revenue before total revenue is passed to the upper tier entities.
  • The upper tier entities may not take a discount greater than the discount that is allowed for the lower tier entity before total revenue is passed to the upper tier entities.

The franchise tax report forms, as well as the instructions for completing 2009 franchise tax reports, can be found in the Texas Franchise Tax Forms section of our Web site.

HOTEL OCCUPANCY TAX

Permanent Resident Exemption

Editor's note: This is the first in a series of articles on hotel occupancy tax exemptions. This article, as well as the next one in the series, will describe the permanent resident exemption.

State and local hotel tax law, in Tax Code Sections 156.101, 351.002(c) and 352.002(c), excludes from hotel tax a person who has the right to occupy a room in a hotel for 30 or more consecutive days.

A person (individual or company) who enters into a written agreement, or provides written notice of intent to stay for 30 or more consecutive days, and then occupies a room for the next 30 days, is exempt from hotel tax beginning the date of agreement or notice.

Since the hotel is liable for tax if a guest fails to stay for 30 consecutive days, the hotel will often collect tax the first 30 days and then later credit or refund the tax to the resident.

Without a written agreement or written notice, the person does not become a permanent resident until the 31st consecutive day of the stay. Tax is due on the first 30 days and the resident is not entitled to a refund. See Rule 3.161(b)(6).

A permanent resident does not have to occupy the same room in the hotel. Also, when a company rents a hotel room, different individuals may occupy the room without affecting the exemption. Any interruption in the right of occupancy, however, voids the exemption.

A hotel's records must support the permanent resident exemption, unlike other hotel tax exemptions which require the Texas Hotel Occupancy Tax Exemption Certificate (Form 12-302) to be completed in order to claim an exemption. Depending on the manner in which the permanent resident qualified, acceptable proof would be a written agreement or notice and the guest folio proving the resident stayed for the next 30 days, or, without written agreement or notice, hotel billing statements indicating payment for 30 consecutive days before the start of the exemption.

INSURANCE TAX

COBRA Subsidy under the American Recovery and Reinvestment Act (ARRA) 2009: Is the Subsidy Portion Subject to Premium Tax?

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that was created to allow certain individuals to temporarily continue health coverage upon termination of employment. COBRA allows eligible workers to maintain benefits under their employer.

Since the employer no longer pays all or a part of the health insurance premium, many of these unemployed individuals cannot afford to continue their health coverage under COBRA. The United States Department of Labor issued a news release on April 1, 2009, regarding COBRA and the reduction of premium costs under the American Recovery and Reinvestment Act (ARRA). ARRA provides a 65 percent federal tax subsidy for a period of up to nine months for the cost of health benefits under COBRA, making the continuation of coverage under this program more affordable for the unemployed and their families. The eligible individuals are responsible for only 35 percent of the COBRA premium for the period of coverage and the remaining 65 percent of the premium is reimbursed through a payroll tax credit.

In order to account for the payroll tax credit, the Internal Revenue Service (IRS) revised the Employer's Quarterly Federal Tax Return (Form 941). For more information on the credit and tax provisions in the ARRA, visit the IRS Web site.

To summarize, the federal government does not make a payment directly through the U.S. Treasury for each assistance-eligible individual, the 65 percent premium subsidy is reimbursed through a payroll tax credit, and insurers receive the full amount of premium for the coverage.

Since there are no federal provisions that specifically preempt state taxation, the full amount of the premium is subject to premium tax.

INSURANCE TAX

Court Case Decision - First American Title Insurance Company v. Combs

On May 4, 2009, the U.S. Supreme Court denied certiorari in First American Title Insurance Co. v. Combs, which means the U.S. Supreme Court has declined to review the 2008 decision by the Texas Supreme Court upholding the Comptroller's method of calculating the retaliatory tax for title insurance companies.

The issue in this case was whether Texas properly included only 15 percent of the premium taxes, rather than 100 percent of the premium taxes, paid by a title insurance company in calculating whether the title insurance company owes retaliatory tax, because the other 85 percent of the premium taxes remitted to the state by a title insurance company are actually paid by title agents to the title insurance company.

The Comptroller's method of calculating retaliatory tax was upheld by a state district court via grant of summary judgment in favor of the state on May 18, 2004. The title insurance companies appealed, and the Third Court of Appeals upheld the district court's judgment in favor of the State on June 3, 2005. The title insurance companies filed a petition for review with the Texas Supreme Court which was granted. On May 16, 2008, the Texas Supreme Court issued a 5-4 opinion holding that the Comptroller's interpretation of the retaliatory tax statute did not violate the Equal Protection Clause. The title insurance companies then filed a petition for writ of certiorari with the U.S. Supreme Court. The issue briefed to the U.S. Supreme Court was: When calculating the retaliatory taxes owed by foreign title insurance companies, does the Equal Protection Clause require Texas to credit those companies with premium taxes that they have remitted on behalf of title agents?

On May 4, 2009, the U.S. Supreme Court denied certiorari, which means the U.S. Supreme Court has declined to review the decision by the Texas Supreme Court. In effect, the denial of certiorari upholds the Comptroller's method of calculating the retaliatory tax.

INSURANCE TAX

Multi-State Taxation of Surplus Lines Insurance Business

As an extra to this month's issue of the Tax Policy News, see our Insurance Tax Special Report on Multi-State Taxation of Surplus Lines Insurance Business and the Survey Results from responding states.

SALES TAX

Energy Star Sales Tax Holiday

In addition to the annual August clothing sales tax holiday, Texas shoppers get a break from state and local sales and use taxes during Memorial Day weekend every year on purchases of certain energy-efficient products.

This year, the Energy Star Sales Tax Holiday begins Memorial Day weekend at 12:01 a.m. on Saturday, May 23 and ends at 11:59 p.m. on Monday, May 25.

Energy Star is a joint program of the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Energy (DOE). Earning the Energy Star means a product meets strict energy efficiency guidelines set by the EPA and the DOE.

The products qualifying for the exemption are:

  • air conditioners priced under $6000 (room and central units)
  • clothes washers (but not clothes dryers)
  • ceiling fans
  • dehumidifiers
  • dishwashers
  • light bulbs (incandescent and fluorescent)
  • programmable thermostats
  • refrigerators priced under $2000

Qualifying products display the Energy Star logo on the appliance, the packaging or the Energy Guide label. Clothes dryers are not included in the items qualifying for exemption during the Energy Star holiday because they use similar amounts of energy; therefore, the Energy Star program does not label clothes dryers.

There are no limits on the number of items that may be purchased during the Energy Star Sales Tax Holiday, and an exemption certificate is not required.

This tax-free holiday also applies to some Internet and catalog sales of eligible products. Layaway plans can also be used to take advantage of the sales tax holiday, within certain parameters.

See our FAQs for more information about this sales tax holiday.

To learn more about cutting energy costs, contact the State Energy Conservation Office (a division of the Comptroller's office) at (800) 531-5441, ext. 3-1931, or visit www.seco.cpa.state.tx.us.

SALES TAX

Houston Wire and Cable Company: Cable Reels are Packaging Materials

In 2008, the Third Court of Appeals decided Houston Wire & Cable Co. v. Combs, 2008 Tex. App. LEXIS 1820 (Tex. App. Austin Mar. 12, 2008, pet. denied). At issue in this case is the taxability of wooden reels (or spools) which the taxpayer purchased in bulk from the manufacturer. When the taxpayer resold the cable, it cut the cable to length and wound it onto wooden spools to facilitate delivery to its customers. The trial court found, and the appellate court affirmed, that:

  • the spools were not eligible for the sale-for resale exemption because they (the spools) constituted packaging material (expressly excluded from the sale for resale exemption by 151.302(c)); and
  • the taxpayer was not engaged in manufacturing. The taxpayer did not sufficiently change the physical characteristics of the cable to constitute either processing or fabrication. Instead, the taxpayer's business was more in the nature of prepackaging the product. Thus, the taxpayer was not eligible for the manufacturing exemption of packaging materials set out in 151.318(d).
SALES TAX

New Sales Tax Locator Now Available!

Want an easy way to look up a local sales tax rate for a particular address?

Just go to the new Tax Rate Locator on our Local Sales and Use Tax page where you may search for a local tax rate by entering the address and ZIP code of the location. You can then apply our guidelines for collecting local sales and use tax to determine the tax rate that should be charged on a transaction.

A rate search can't get much easier!

SALES TAX

Store Gift Cards and Gift Certificates

No sales tax is due on the sale of a gift card. The actual sale of gift cards is not subject to Texas sales, use or mixed beverage taxes since the card represents an intangible - the “right” to a future purchase. Instead, tax is calculated when a card is redeemed.

When the gift card is redeemed for merchandise either by the original purchaser or another who may have received the card as a gift, the gift card is treated like cash given for the purchase of the item. If the item purchased is taxable, sales tax is due on the full sales price including any amount paid with the use of the gift card.

Gift cards may also be given away by retailers as promotional items. When a retailer gives away a gift card, receiving no consideration from the customer, no sale occurs when the retailer gives away the card or when the customer redeems the card for merchandise.

When the gift card is redeemed, it is treated as a cash discount and any tax due from the customer should be based on the discounted price. For example, ABC retail center gives any customer who spends more than $200 in one trip a gift card valued at $25 that can be redeemed on the shopper's next trip to the store. A customer redeems one of the $25 promotional gift cards when purchasing a $30 t-shirt. The value of the gift card is subtracted from the original sales price of the shirt and tax is due on the final reduced price of $5.

If redemption of the gift card reduces the item's sales price to zero, then no tax is due from the customer. The retailer owes use tax on the amount he paid for the item(s) given away. See the section on promotional items and premiums below.

Promotional gift cards issued by a third-party that can be redeemed at a variety of retail locations are treated as “sold” gift cards. When the gift card is redeemed for merchandise, the gift card is treated like cash given for the purchase of the item. If the item purchased is taxable, sales tax is due on the full sales price including any amount paid with the use of the gift card. For example, ABC retail center is located inside of the XYZ shopping mall. An XYZ promotion gives away $10 gift cards that can be redeemed at any store located in the shopping center to shoppers who complete a survey. A customer redeems one of the $10 promotional gift cards when purchasing a $30 t-shirt. In this transaction the value of the gift card is not subtracted from the original sales price of the shirt and tax is due on the original price of $30.00.

When an individual receives a gift card from a seller for doing something for the seller such as hosting a gathering of friends on the seller's behalf, the individual is compensated by the value of the gift card. When the individual spends the gift card to buy merchandise, he or she is making a purchase. Sales tax is due from the individual on purchases made with the gift card. In addition, the retailer owes sales tax on any taxable items received in the exchange unless a resale or other exemption applies. The transaction is in the nature of barter. The barter of a taxable item is the sale of a taxable item under taxable under Section 151.005(2) of the Texas Tax Code. In a barter transaction, both parties to the transaction owe sales tax on their purchases unless another valid exemption is provided by the Tax Code.

SALES TAX

Welding Rods

Welding rods that melt during the welding process to become part of the joint are incorporated materials, whether used to weld tangible personal property or real property. You may find further information in STAR letter 200904300L.

RECENTLY ADOPTED RULES

§3.588 Franchise Tax

The Comptroller's office proposed an amendment to Rule 3.588 concerning the calculation of the cost of goods sold in determining margin under the revised franchise tax. The proposed amendment includes: addition of language to clarify that the election to capitalize or expense certain costs may not be changed after the later of the due date of the report or the date the report is filed; addition of language allowing a beginning inventory to taxable entities that elect to capitalize costs; deletion of language that did not allow costs related to excluded revenue to be included in the determination of the cost of goods sold while adding language to clarify that only expenses that have been excluded from total revenue may not be included in the determination of the cost of goods sold; clarification of how and when a taxable entity elects to deduct the cost of goods sold to determine margin; and addition of language from the statute that disallows as storage costs certain costs specifically disallowed in the statute.

Notice of the proposed amendment was published in the November 7, 2008, issue of the Texas Register. The adopted rule will be published in the May 15, 2009, issue of the Texas Register.

§3.641 Pari-Mutuel Wagering

The Comptroller's office proposed an amendment to Rule 3.641 concerning pari-mutuel wagering. The proposed amendment allows the association to file the pari-mutuel wagering forms and reports to the Comptroller by electronic transmission. Subsection (b)(4), (6), and (7) were amended accordingly. Also, subsection (e)(4) was amended for consistency in referencing the statute.

Notice of the proposed amendment was published in the March 27, 2009, issue of the Texas Register. The adopted rule will be published in the May 22, 2009, issue of the Texas Register.

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, Bea Loera, Carol McAnnally, Don Neal, Jerry Oxford, Nina Roberts, Viki Smith, Karen Snyder, Jennifer Specchio and Steve White

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