|September 2009||TAX POLICY NEWS|
|a monthly newsletter about Texas tax policy|
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In this issue...
Coin-Operated Amusement Machine Tax
Recently Proposed Rules
Renewal Applications Due by November 30
Renewal applications for a coin-operated amusement machine “General Business License,” “Registration Certificate” and “Repair License” are being mailed in October and are due November 30, as provided by Occupations Code Section 2153.162. Renewal applications, inventory forms and payments postmarked by November 30 will be timely filed. Renewal applications mailed in December must include a $50 late fee.
In addition to the renewal fee, the law requires payment of a $60 Occupation Tax for each coin-operated amusement machine that is “exhibited or displayed on location.” An Occupation Tax Permit sticker (decal) must be affixed to each machine in use.
For information on license and registration fees and tax permits, including a fee schedule, see our Coin-Operated Machines Tax Web page.
Coin-operated amusement machine operators who have not received renewal packets by October 30 should contact the Comptroller's office at (800) 252-1385, or in Austin at 463-4600, to request another renewal packet.FRANCHISE TAX
Destination Management Services and Senate Bill 636
There has been some confusion among taxpayers about which businesses will qualify for the revenue exclusion provided in Senate Bill 636, which was passed during the 81st Legislative Session.
The bill amends Texas Tax Code Section 171.1011 to allow a qualified destination management company to exclude from total revenue payments made to persons providing services, labor or materials in connection with the provision of destination management services.
A qualified destination management company is specifically defined in Section 151.0565 as (among other specifications) a corporation or limited liability company that receives at least 80 percent of its annual total revenue from providing, or arranging for the provision of, destination management services; maintains a permanent nonresidential office; and has at least 80 percent of its clients located outside of Texas.
Destination management services (also defined in Section 151.0565) include an exclusive list of services that must be provided under a qualified destination management services contract if the payments are to be excluded. The destination management services contract must be for at least three destination management services provided in Texas to a client that is not an individual, social club or fraternal organization and that has its principal place of business outside of the county where the services are provided.
Because of the many restrictions and qualifications placed on the destination management services revenue exclusion, most travel agencies will not qualify for this exclusion.INSURANCE TAX
Examination Expenses and Premium Tax Credits
Examination Expenses and Premium Tax Credits
At least once every five years, the Texas Department of Insurance (TDI), or an examiner appointed by the TDI, is required to visit each insurer organized under Texas laws and authorized to engage in the business of insurance in Texas to investigate the affairs and financial condition of the insurer to determine its ability to meet liabilities and comply with Texas laws. See Section 401.051 of the Texas Insurance Code.
These insurers must pay all direct examination expenses incurred by the TDI, including expenses of an examination of the books, records, accounts or principal offices of a domestic insurer whose books and records are located outside Texas. Insurers must pay the examination expenses regardless of whether the examination is made by TDI employees or jointly with the insurance supervisory authority of another state.
Direct examination expenses include travel (food, lodging, and transportation) and miscellaneous expenses incurred by TDI examiner(s) during the examination of an insurer.
Indirect examination expenses include TDI examiner salaries, any costs paid directly by the insurance company under examination to third party examiners hired by the TDI to conduct the examination, the overhead assessment and examination expenses paid to other Texas regulatory agencies.
An insurer may take a premium tax credit for these examination expenses for the tax year during which the examination expenses are paid. Comptroller Rule 3.830(b) allows domestic insurers whose books and records are located outside Texas to claim indirect examination expenses paid during the tax year. Domestic insurers whose books and records are inside Texas, and foreign insurers, may claim direct and indirect examination expenses.
Credit will not be allowed for direct or indirect examination expenses that are paid to another state or that are incurred by a representative of the TDI that are directly attributable to an examination of the books, records, accounts or principal offices of a domestic company located outside Texas, or examination expenses that are paid in a different tax year.
Expenses related to examinations or audits of insurers made by or for a state agency for insurance contract purposes, such as Medicaid experience rebate audits, are not allowed as a premium tax credit.SALES TAX
Court Case: Reynolds Metals Company; Rolling Stock
On April 8, 2009, the Third Court of Appeals decided Reynolds Metals Company v. Combs, No. 03-07-00709-CV, 2009 Tex. App. LEXIS 2466 (Tex. App. Austin Apr. 8, 2009, pet. denied). All appeals have been denied, and the case is final. The issue in this case was whether Reynolds Metals Company's purchase of parts for two ship unloaders that operate on rails qualified for the rolling stock exemption to the Texas sales and use tax as set out in Texas Tax Code Sec. 151.331(a).
The unloaders used a bucket dredge to dig bauxite out of a ship's hold and place it on a conveyor. The unloaders moved on rails to position themselves between the ship's hold and the conveyor on which they placed the bauxite. The unloaders were large, crane-like structures approximately 83 feet high and 82 feet long. The width of the rails on which the ship unloaders operated was 47 feet.
The district court found, and the appellate court affirmed, that as a matter of law, the rolling stock exemption does not apply to Reynolds's ship unloaders.SALES TAX
Hearing Summary: Asset Transfers to Affiliated Companies
In Hearing No. 48,030 (2009), the taxpayer purchased moveable specialized equipment and other equipment which it leased to its affiliate companies for use in their business operations. The taxpayer remitted tax on its lease revenue from the affiliates. Subsequently, the taxpayer permanently transferred the equipment to its affiliated companies for no consideration, which is a divergent use of the equipment. The Comptroller has long considered giving tangible personal property away to be a use of the property. That use is divergent from the exempt use (purchase for leasing) the taxpayer claimed when it purchased the equipment tax free.
Texas Tax Code 151.154(a), states in part, “If a purchaser who gives a resale certificate makes any use of the taxable item other than retention, demonstration, or display,... the purchaser shall be liable for payment of the sales tax....” When the taxpayer purchased the equipment, it had issued exemption certificates in eight of the contested transactions and no certificate of any kind in the other 28 transactions. The taxpayer argued that since it did not actually give vendors a resale certificate, the 36 transfers at issue are not subject to tax on divergent use.
Are the Transfers Subject to Divergent Use Tax?
The Comptroller determined that the taxpayer's interpretation follows the literal reading of the statute. The cardinal rule of statutory interpretation, however, is that effect must be given to what the legislature intended. Even when the statutory language is unambiguous, other factors may be considered to determine the legislative intent. The fact that the taxpayer did not issue a resale certificate when it made tax-free purchases based on the sale-for-resale exemption does not prevent the Comptroller from assessing tax if the taxpayer subsequently made a divergent use of the equipment.
Should the Assessment be Based on Original Purchase Price or Fair Market Rental Value?
The taxpayer contended that, if the equipment is subject to tax for divergent use, then the assessment should be based on the fair market rental value. When the taxpayer transferred the equipment to its affiliate companies, however, it was a permanent transfer. Under the statute, the taxpayer may calculate tax for its divergent use based on the monthly fair market rental value of the equipment, but the tax would be assessed each month the divergent use existed.
Thus, if that choice were made, it would be a costly one. By assessing tax on the original purchase price, Comptroller Staff effectively assumed the taxpayer would have chosen to cap the tax at the original purchase price. The Comptroller determined that the taxpayer's contention is erroneous, and sales tax is due on the original purchase price.RECENTLY PROPOSED RULES
The Comptroller's office filed the following rules with the Texas Secretary of State for publication in the Sept. 18, 2009, issue of the Texas Register. The comment period begins 30 days after publication.
Sports and Events Trust Fund (New Chapter)
Subchapter A, Major Events Trust Fund
§2.102 Request to Establish a Trust Fund
§2.105 Events Generating Over $15 Million in State and Local Tax Revenue
Subchapter B, Events Trust Fund
§2.202 Request to Establish a Trust Fund
Hotel Occupancy Tax
§3.161 Definitions, Exemptions, and Exemption Certificate
State Sales and Use Tax
§3.365 Sales Tax Holiday - Clothing, Shoes and School Supplies
Motor Fuels Tax
§3.432 Refunds on Gasoline and Diesel Fuel Tax
§3.442 Bad Debts or Accelerated Credit for Non-Payment of Taxes
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, Robin Corrigan, Donald Dillard, Jody Frierson, Gary Johnson, Carol McAnnally, Jerry Oxford, Viki Smith, Karen Snyder, Jennifer Specchio and Steve White