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

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FRANCHISE TAX

Apportioning Margin

Apportionment is the key to how much tax an entity will ultimately owe. Once a taxable entity's margin is calculated, the margin is apportioned to Texas using a single gross receipts factor to determine the percentage of business the entity has done in the state. The proper tax rate is then applied to the resulting apportioned (or taxable) margin.

The gross receipts factor or "apportionment" factor is a fraction. The numerator is the entity's gross receipts from business done in Texas and the denominator is the entity's gross receipts from its entire business.

The numerator of the apportionment factor (gross receipts in Texas) is entered in Item 23 on the Franchise Tax Report (Form 05-158) or in Item 11 on the EZ Computation Report (Form 05-169). This amount includes only an entity's gross receipts from business done in Texas. Rule 3.591, which addresses the apportionment of margin, essentially breaks out gross receipts by category (such as receipts from sales of tangible personal property, services, rentals, royalties and other business) and specifies sourcing criteria by type of receipt.

The denominator of the apportionment factor (gross receipts everywhere) is entered in Item 24 on the Franchise Tax Report (Form 05-158) or in Item 12 on the EZ Computation Report (Form 05-169). This amount will generally equal total revenue, the amount entered in Item 10 on both of those forms.

Gross receipts everywhere will not equal total revenue in the following situations:

  • an entity that treats a loan or security as inventory for federal tax purposes reports the gain on the sale of these items as total revenue but reports the gross proceeds on the sale of these items as gross receipts everywhere, as allowed by Tax Code Section 171.106(f), or
  • an entity subtracts from total revenue expenses that have no related revenue (i.e., expenses that are not flow-through funds). For example, gross receipts everywhere are not reduced by the amount a health care provider subtracts from total revenue for the cost of uncompensated care or the amount a law firm subtracts from total revenue for pro bono work.

For more information, see Tax Code Sections 171.103, 171.105, 171.1055 and 171.106.

INSURANCE TAX

Texas Automobile Burglary and Theft Prevention Authority Assessment (ABTPA):
Semi-Annual Payment is Due August 1

The Comptroller's office collects the Automobile Burglary and Theft Prevention Authority (ABTPA) assessment under interagency contract with the Texas Department of Transportation. The assessment is due as prescribed in Vernon's Texas Civil Statutes, Title 70, Chapter 9, Article 4413(37).

All licensed property and casualty insurance companies (including interinsurance or reciprocal exchanges, mutual associations, Mexican Casualty or Lloyd's Plans) that have written any form of motor vehicle insurance in this state as defined in Article 5.01(e), Insurance Code, are required to compute and pay the ABTPA assessment.

Insurers must pay the assessment by August 1 of each year for policies delivered, issued for delivery or renewed from January 1 through June 30. Payment should be made using Form 25-107 (PDF, 61KB) and must reflect the actual assessment due.

Refund requests must be in writing and filed with the ABTPA within six months after the date the assessment is paid as prescribed by Rule 57.51 related to refund determinations.

For more information about the assessment or to request a refund, contact the ABTPA.

If you need help completing these forms, please call our office at (800) 252-1387, or submit a request via Texas Tax Help.

INSURANCE TAX

Volunteer Fire Department Assistance Fund Assessment: Billings Are in the Mail This Month

The Volunteer Fire Department Assistance Fund Assessment billings are in the mail this month and are due August 1.

The Texas Forest Service administers the fund to provide rural fire departments with assistance, training and funding to purchase equipment and train personnel. An assessment on a property and casualty insurer's net direct premiums in specific categories in proportion to the premiums of all licensed companies for these categories funds the program. The total amount of the assessment is $30 million.

All property and casualty insurers licensed to do business in Texas are subject to the assessment if they write homeowners insurance, fire insurance, farm and ranch owners insurance, private passenger auto physical damage insurance, commercial auto physical damage insurance or commercial multi-peril insurance. These types of insurers include stock companies, farm mutual companies, county mutual companies, Lloyd's plans and reciprocal or interinsurance exchanges.

An insurer may recover the assessment by including it as an expense in a rate filing or by directly charging policyholders as provided under Insurance Code Section 2007.005.

MIXED BEVERAGE GROSS RECEIPTS TAX

Successor Liable for Seller's Tax Liability Incurred after Business was Sold

In Hearing No. 48,186, the Texas Comptroller of Public Accounts, through successor liability, assessed mixed beverage tax owed by a business on the purchaser of that business. The liability arose when the Comptroller audited the company after it sold its business to the petitioner.

Texas tax law, in Tax Code Section 111.020, provides that if a person who is liable for tax sells the business or the stock of goods or quits the business, the successor shall withhold an amount of the purchase price sufficient to pay the tax liability. A purchaser who fails to do so is liable for the amount due up to the value of the purchase price.

To avoid successor liability, the purchaser may request from the Comptroller a certificate that no tax is due.

At the hearing, Comptroller staff presented as evidence of successor liability the sales contract between the previous club and the petitioner. The contract provided the petitioner receive all rights, title and ownership of the previous club's physical assets. The assets included cash registers, televisions, tables and bar stools, DJ sound equipment, a microwave oven, office furniture and equipment, glassware and other items used to mix and serve drinks and cleaning equipment (mops, brooms, mop bucket and supplies). In addition, the assets included alcoholic beverages listed on the ending inventory for the Texas Alcoholic Beverage Commission (TABC).

The petitioner contended that it cannot be held liable as a successor unless it used the business name of the original club. The petitioner's president testified that the petitioner had no intent to open and operate a new club as the original club. He stated that the petitioner did intend to buy everything identified in the contract, but after the contract was signed, he discovered the original club did not own all the assets and had rented the tables, bar stools and furniture.

He also testified that the inventory list was prepared for TABC's benefit and the petitioner never received the alcoholic beverages on the list. The TABC prohibited the sale because the petitioner did not have a liquor permit at that time. When the petitioner obtained a permit and moved onto the premises, according to the president, the only alcoholic beverages left were a couple of bottles of beer.

While there was no request for a Certificate of No Tax Due, the president claimed he called the Comptroller's office and was told that the original club had no outstanding liabilities.

When determining whether a business has been sold, Rule 3.7(d), relating to successor liability, provides that the Comptroller examines the transaction to determine what the parties intended to buy and sell. The answer in each situation will depend on the type of business involved, and a sale can occur even if a few assets are transferred.

The Comptroller may assess the successor of a business within four years from either the date the seller sells the business or the date the Comptroller's assessment is made against the seller, whichever occurs later. See Tax Code Sections 111.020(e) and 111.201. Based on this period of limitation, Comptroller's Hearing No. 27,579 had previously held that a successor can be held liable for a predecessor's audit liability even though the predecessor was audited after the business was sold.

The administrative law judge ruled that the contract and the testimony of the petitioner's president established "without a doubt that petitioner intended to purchase the entire business..." The judge continued, "Despite not receiving all assets that were included in the contract, petitioner did in fact acquire every item that [predecessor] actually owned at the club location... The continuation of a similar business at the same location using the entire assets, even if they are few, purchased from the predecessor, even under a different name, is sufficient for petitioner to be the successor under Tax Code Section 111.020."

The administrative law judge recommended that the successor liability imposed against the night club be upheld but the amount assessed be reduced to the purchase price of the business. The Comptroller concurred.

SALES TAX

Boats and Personal Watercraft: No Exemption When Out-of-State Buyer Takes Possession in Texas

Boats are subject to boat and boat motor tax under Chapter 160 of the Texas Tax Code. A boat is defined in Rule 3.741 as any watercraft, other than a seaplane on water, not more than 65 feet in length. This includes federally documented boats, motorboats, sailboats, jet skis, and boats designed to accommodate an outboard motor. Excluded from this definition are canoes, kayaks, rowboats, inflatable rafts or other watercraft designed to be propelled by paddle, oar or pole. These excluded watercraft are taxed under Limited Sales, Excise and Use Tax, unless some other exemption applies.

Tax Code Section 160.021 imposes a tax on every retail sale of a taxable boat or motor sold in this state, unless otherwise exempt. A sale is defined as the transfer of title or possession in Texas for consideration. Therefore, the sale of a boat or any other watercraft that a buyer takes possession of in Texas is subject to Texas boat tax. Chapter 160 does not provide an exemption from tax for boats purchased for titling and/or use outside of Texas when the purchaser takes possession of the boat in this state.

A Texas boat dealer is not required to collect and remit Texas boat and boat motor sales tax on the sale of taxable boats or boat motors that are:

  • shipped or delivered to a point outside of Texas, provided the shipment or delivery is made by the seller by means of the facilities of the seller (seller's vehicle);
  • delivered by the seller to a common carrier for shipment to a person at a point outside Texas; or
  • delivered by the seller to a forwarding agent for shipment to a location in another state of the United States or its territories or possessions.

The selling dealer must be able to document the out-of-state shipment or delivery by means of trip tickets, bills of lading, shipping receipts, etc.

Any dealer who sells a taxable boat or motor at retail to a person who takes possession of the boat in Texas is required to retain in its possession copies of the following documents:

  • a copy of the receipt for title application, registration and boat or boat motor tax issued by the Texas Department of Parks and Wildlife or local county tax assessor-collector, if the selling dealer was responsible for titling, registering and paying the sales tax on the boat or boat motor for the buyer; or
  • a copy of the joint affidavit signed by both the selling dealer and purchaser stating the time of the sale and the value in dollars of the total consideration paid for the boat or boat motor; a written statement signed by the purchaser that indicates the date on which the selling dealer provided to the purchaser all documents necessary to title, register and pay the sales tax for the boat or boat motor; and a statement that the selling dealer advised the purchaser that the purchaser must pay sales tax to the Department of Parks and Wildlife or a local county tax assessor-collector, if the selling dealer does not title, register and pay the sales tax on the boat or boat motor for the buyer.

In the event the selling dealer failed to execute and deliver to the purchaser a joint affidavit and any other documents necessary to register the taxable boat or motor, the selling dealer can be held liable for the amount of the sales tax due. See Texas Tax Code Sections 160.042, 160.043 and 160.046.

SALES TAX

Camps for Children

Camps for children, including day camps and boarding camps, are not amusement services. The same is true of instruction for any sport or musical discipline. Therefore, charges for children's camps or for instructional classes in sports or music are not taxable. See STAR Document 8709L0838G06 for further information.

SALES TAX

Hearing Summary: Restaurant Grill Vent Hoods

Cleaning Services on Vent Hoods

In Hearing No. 48,097 (2008), the taxpayer operated a restaurant. He purchased cleaning services for the vent hoods that covered the restaurant's grills. The hoods were trade fixtures that were not permanently affixed to the building and could easily be removed. (Note: "Trade fixtures" are defined in Black's Law Dictionary, 8th Edition as "removable personal property that a tenant attaches to leased land for business purposes, such as a display counter.") As a result, the vent hoods were tangible personal property as opposed to real property. The cleaning of tangible personal property is a taxable service under Texas Tax Code Section 151.0101(a)(5).

Section 151.3111(a) exempts taxable services performed on qualifying tangible personal property that is exempt from sales tax. Therefore, if the vent hoods were qualifying exempt tangible personal property, the cleaning services were exempt.

Were the Vent Hoods Exempt?

The grills themselves were exempt cooking equipment under Section 151.318(a)(2), which exempts tangible personal property directly used in the manufacturing of tangible personal property for sale (such as food) if the use of the property is necessary to the manufacturing and causes a chemical or physical change to the product being manufactured. Although the exemption for services to manufacturing equipment that is tangible personal property extends to the component parts and accessories of the equipment (STAR Document 9905450L), the vent hoods were not a component part of the exempt grills. As stated above, they were attached to the building, rather than to the grills.

If the vent hoods themselves had caused a chemical or physical change to the product being manufactured, they would have been exempt under Section 151.318(a)(2). The vent hoods, however, caused no chemical or physical change to the product being manufactured.

If the vent hoods had been shown to be necessary to a pollution control process, they would have been exempt under Section 151.318(a)(5), which exempts tangible personal property used in the manufacturing of tangible personal property for sale if the use of the property is necessary to a pollution control process. Vent hoods, however, are not considered pollution control equipment. See STAR Documents 9905450L and 200209463L.

The vent hoods did qualify for exemption under 151.318(a)(10) which exempts tangible personal property used in the manufacturing of tangible personal property for sale, if necessary to comply with federal, state, or local laws or rules that establish requirements related to public health. The Texas Department of State Health Services (DSHS) requires food establishments to provide mechanical ventilation "if necessary to keep rooms free of excessive heat, steam, condensation, vapors, obnoxious odors, smoke, and fumes." Moreover, a local food ordinance provides that all cooking equipment in restaurants "shall be provided with a ventilation hood." Additionally, STAR Document 200204008L states that a vent hood covering food-processing equipment, such as a grill or fryer, qualifies for exemption under Section 151.318(a)(10). A vent hood or fan covering a steam table used to maintain food at serving temperatures does not qualify because it is not used during the actual manufacturing operation as required in Section 151.318(a)(10).

Cleaning Services Were Exempt

The vent hoods in the taxpayer's restaurant were qualifying exempt tangible personal property on which taxable services are exempt under Section 151.3111(a). Accordingly, the Comptroller found that the cleaning services for the vent hoods were exempt.

SALES TAX

School Supplies Added to Sales Tax Holiday!

For several years, shoppers in Texas have been given a break from state and local sales and use taxes on purchases of most clothing, footwear and backpacks during our annual three-day sales tax holiday in August.

Effective this year, thanks to House Bill 1801 passed by the 81st Texas Legislature, shoppers also get a sales tax break on school supplies priced less than $100 purchased for use by a student in an elementary or secondary school.

The following is an all-inclusive list of qualifying school supplies (if priced less than $100):

List of Qualifying Items List of Qualifying Items (cont.)
  1. Binders
  2. Book bags
  3. Calculators
  4. Cellophane tape
  5. Blackboard chalk
  6. Compasses
  7. Composition books
  8. Crayons
  9. Erasers
  10. Folders (expandable, pocket, plastic and manila)
  11. Glue, paste and paste sticks
  12. Highlighters
  13. Index cards
  14. Index card boxes
  15. Legal pads
  1. Lunch boxes
  2. Markers
  3. Notebooks
  4. Paper (loose leaf ruled notebook paper, copy paper, graph paper, tracing paper, manila paper, colored paper, poster board and construction paper)
  5. Pencil boxes and other school supply boxes
  6. Pencil sharpeners
  7. Pencils
  8. Pens
  9. Protractors
  10. Rulers
  11. Scissors
  12. Writing tablets

The new exemption applies only to school supplies priced less than $100 that are purchased for use by elementary or secondary school students. The exemption does not include computers, software, textbooks or similar items not included on the list above.

No Exemption Certificate (PDF, 76KB) is required — with one exception. If the purchaser is buying the supplies under a business account, the retailer must obtain an exemption certificate from the purchaser certifying that the items are purchased for use by an elementary or secondary school student. "Under a business account" means the purchaser is using a business credit card or business check rather than a personal credit card or personal check; is being billed under a business account maintained at the retailer; or is using a business membership at a retailer that is membership based.

Clothes, Shoes and Backpacks

In addition to the school supplies identified above, most clothes and shoes (including boots) that sell for less than $100 continue to qualify for exemption during the sales tax holiday. The tax holiday does not extend to clothing and shoe rentals. Backpacks sold for less than $100 for use by elementary and secondary students are also eligible for the holiday. A backpack is a pack with straps one wears on the back. The exemption during the sales tax holiday includes backpacks with wheels, provided they can also be worn on the back like a traditional backpack, and messenger bags. The exemption does not include items that are reasonably defined as luggage, briefcases, athletic/duffle/gym bags, computer bags, purses or framed backpacks. Ten or fewer backpacks can be purchased tax-free at one time without providing an exemption certificate to the seller.

Tax is still due on sales of athletic and protective clothing and footwear not normally worn except during an athletic activity or as protection. For example, since basketball shoes are worn for many activities other than basketball, they can be sold tax free during the tax holiday. On the other hand, spiked golf shoes are rarely worn except when playing golf, so they are not exempt from tax.

Additionally, tax is still due on sales of luggage and accessories such as jewelry, handbags, umbrellas, wallets, watches and similar items; and services such as tailoring, altering, cleaning or monogramming, even if performed on qualifying items purchased during the sales tax holiday weekend.

This year's tax holiday begins at 12:01 a.m., Friday, Aug. 21, 2009, and ends at midnight on Sunday, Aug. 23, 2009.

For more information about taxable and nontaxable clothing and footwear items, see our publication, Sales Tax Holiday.

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, Carol McAnnally, Jerry Oxford, Viki Smith, Karen Snyder, Jennifer Specchio and Steve White

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