|January 2010||TAX POLICY NEWS|
|a monthly newsletter about Texas tax policy|
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In this issue...
Automotive Oil Sales Fee
Federal Income Tax
Recently Proposed Rules
Reporting Requirements for a Distributor that Sells Automotive Oil through a Location Registered with TCEQ as a Used Oil Collection Center
The Texas Automotive Oil Sales Fee law, in Health and Safety Code Section 371.062, imposes a fee on the first sale of automotive oil in Texas. The fee is one cent per quart or four cents per gallon. Section 371.062(a)(2) defines “first sale” to mean the first actual sale of automotive oil delivered to a location in this state and sold to a purchaser who is not an automotive oil manufacturer or distributor.
The law further states that a “first sale” does not include the sale of automotive oil to a subsequent purchaser who maintains a do-it-yourself used oil collection center or a used oil collection center registered by the Texas Commission on Environmental Quality (TCEQ) at the location where the automotive oil is changed, used, consumed or resold to do-it-yourselfers. A copy of the current TCEQ registration is documentation that a distributor made an exempt sale. See Rule 3.701(b)(2).
In STAR 200911559L, a company sells automobile parts, equipment, oil and transmission fluid to lube centers, car dealerships, parts stores, repair shops and individuals. The company sells more the 25,000 gallons of automotive oil a year and has an automotive oil distributor's permit, as required in Section 371.062(m). All of the distributor's automotive oil is sold at the distributor's location that is also registered as a used oil collection center by the TCEQ. Since sales of automotive oil by a registered used oil collection center are excluded from the fee, the company wanted to confirm it did not need to file the automotive sales fee report.
According to Rule 3.701(f)(2), a distributor of automotive oil must file a quarterly report even when no tax is due. Although automotive oil sold from a location registered with the TCEQ as a used oil collection center is not, by definition, a first sale, the company is a distributor and must file a report. The distributor may report zeros for automotive oil sold at a location registered with the TCEQ as a used oil collection center. TCEQ registrations and sales records showing automotive oil sales were made at the registered location are proof of exempt oil sales. This question was also addressed in STAR 200107377L and 9509870L.
Further information on requirements and exclusions of the automotive oil sales fee is available in the Automotive Oil Sales Fee section of our Web site.FEDERAL INCOME TAX
Earned Income Tax Credit/Advance Earned Income Tax Credit
As part of the Comptroller's campaign to publicize the federal Earned Income Tax Credit (EITC) program, we are asking employers to share the following information with their employees.
The EITC is a special federal tax credit for certain persons who work. The credit reduces the amount of income tax a qualifying taxpayer owes (if any) and is intended to offset some of the increases in living expenses and Social Security taxes.
The Advance EITC allows those taxpayers who expect to qualify for the federal EITC, and who have at least one qualifying child, to receive part of the credit in each paycheck.
For more information, call the Internal Revenue Service at (800) 829-1040, or go to the Earned Income Tax Credit section of our Web site.FRANCHISE TAX
2010 Franchise Tax Forms Are Now Available
The tax forms for franchise tax reports due on or after Jan. 1, 2010, have been updated and are now available on our Web site. The only forms with significant changes are the No Tax Due Information Report (Form 05-163) and the Tiered Partnership Report (Form 05-175).
Changes to the No Tax Due Information Report include:
- removal of the election box for the deduction of cost of goods sold or compensation;
- addition of a box to indicate that the report filed is for a combined group;
- rewording of the qualifying questions as statements;
- elimination of the question regarding the use of the Temporary Credit for Business Loss Carryforwards; and
- addition of a fourth qualification statement regarding Real Estate Investment Trusts (REITs).
The only change to the Tiered Partnership Report is the addition of a field for entry of the lower tier entity's total revenue amount before the tiered partnership election.FRANCHISE TAX
Proposed Amendments to the Passive Entities Rule Are Withdrawn
The proposed amendments to Rule 3.582 regarding the treatment of pass-through rental income as active income and the clarification of what constitutes an active trade or business have been withdrawn.FRANCHISE TAX
Clarification of Certain Eligibility Requirements for the 0.5 Percent Tax Rate
Tax Code Section 171.002(c)(2) does not allow the 0.5 percent tax rate to taxable entities engaged in retail or wholesale trade if 50 percent or more of the entity's total revenue from activities in retail or wholesale trade comes from the sale of products it produces or products produced by an entity that is part of an affiliated group to which the taxable entity belongs.
Many retail and wholesale taxpayers have questioned whether the modifications they make to goods acquired for resale rise to the level of production and may, therefore, make them ineligible for the 0.5 percent tax rate.
Rule 3.584(d)(3) was amended recently to clarify that, in determining if an entity is eligible for the retail/wholesale (0.5 percent) tax rate, a product is not considered to be produced if the taxpayer's modifications to the acquired product do not increase the sales price of the product by more than 10 percent.
Example 1: A taxable entity is a retailer in the business of selling baseball caps that are embroidered at the shop to a customer's specifications. The entity purchases the baseball caps from a manufacturer and sells them, without embroidery, for $10 each. An embroidered cap sells for $18. The entity is considered to be the producer of the embroidered caps since the modifications made to them increases the sales price by 80 percent. If the sale of the embroidered caps accounts for 50 percent or more of the entity's total revenue, the entity would not be eligible for the 0.5 percent tax rate because 50 percent or more of the entity's total revenue comes from the sale of products it produces.
Example 2: A taxable entity is a retailer in the business of selling men's dress shirts. The dress shirts sell for $60 each. A customer may purchase a dress shirt that is personalized with a monogram for $65. Monogramming the shirt is not considered production because the modifications made to the shirt increase its sales price by less than 8.5 percent. This retailer will not lose its eligibility for the 0.5 percent tax rate because of its shirt monogramming activities.
The loss of an entity's eligibility for the 0.5 percent tax rate does not affect the entity's eligibility to deduct the cost of goods sold to determine margin. Retailers, wholesalers and producers (and any entity that sells real or tangible personal property in the ordinary course of business) may elect to deduct the cost of goods sold to determine margin.
Electronic Reporting and Paying of the Automobile Burglary and Theft Prevention Authority Assessment
The October 2009 Tax Policy News article “Insurance Tax Electronic Reporting Update” provided information on the electronic reporting and paying of insurance premium taxes using the Comptroller's online WebFile system. The December 2009 Tax Policy News advised taxpayers that the Maintenance, Assessment and Retaliatory report can now be filed and paid using the WebFile system.
We are pleased to announce that the Comptroller's office now provides a Web-based tax reporting option for taxpayers to file and pay the Automobile Burglary and Theft Prevention Authority (ABTPA) assessment. While the electronic filing of premium tax is mandatory for taxpayers who paid $50,000 during the preceding fiscal year, at this time, the electronic filing of the Maintenance, Assessment and Retaliatory report and the ABTPA assessment is voluntary for all taxpayers. We hope this option will make it easier for taxpayers to file their reports at one time. You may register once and file reports for multiple taxpayers.
The Comptroller's electronic reporting and payment options are available 24 hours a day, seven days a week. Use these services to save time, money and paper. Voluntary electronic filers who report twice using the Webfile system will no longer receive paper forms. We will send an e-mail to the address registered with the Webfile system to remind taxpayers of upcoming tax filing deadlines.
To log in, you will need the taxpayer ID number and WebFile or RT number. Your RT numbers are different for each type of tax - you will have one number for premium tax, one for maintenance tax and another for the ABTPA assessment. The numbers are printed in the top left corner of the tax report forms that we mail to you. For additional information, see the WebFile section of our Web site.
Taxpayers who paid $100,000 or more in the preceding state fiscal year must electronically transmit payments via the TEXNET system. You must enroll in the TEXNET system prior to use, so contact us early to ensure you don't miss your deadline. Call us toll free at (800) 531-5441, ext. 33010 with questions regarding TEXNET.
Insurance report forms will be mailed January 29. The due date for licensed insurer premium tax, maintenance tax and the ABTPA assessment reports, the unauthorized insurance premium tax report and the surplus lines premium tax report is March 1.INTEREST RATES
Interest Rates for 2010
Delinquent taxes accrue interest beginning on the 61st day after the due date until paid.
This year, the interest rate is 4.25 percent, or 0.01164 percent per day.
Refund claims filed with the Comptroller's office accrue credit interest at either Treasury Pool rate or Prime +1, whichever is less. The Treasury Pool interest rate this year is 1.574 percent or 0.00431 percent per day.
For more information about how the interest rate is applied, as well as the interest rates for this year and previous years, please see the Interest on Credits and Refunds and on Tax Due section of our Web site.SALES TAX
Court Case: Verizon North, Inc.; Software
On May 22, 2009, the Third Court of Appeals decided Verizon North, Inc. v. Combs, Cause No. 03-08-00151-CV, 2009 Tex. On Nov. 20, 2009, the Texas Supreme Court denied the taxpayer's petition for review, and the case is now final.
The taxpayer claimed that software it purchased was not a computer program and, therefore, was not tangible personal property that is taxable. Comptroller Rule 3.308(b)(1) defines “computer program,” in part, as “a set of instructions sold as a completed program.” The taxpayer claimed that the software was not a “completed program” since, after the taxpayer purchased it, the software was modified and customized in order to perform the functions for which it was purchased.
The court determined that, while the software was incomplete as to the specific functions for which the software was purchased, Rule 3.308(b)(1) requires that software be a completed program as sold. Because the software, following installation, was ready for use in accordance with standard installation procedures and capable of performing multiple functions, was described by the taxpayer as “off-the-shelf” software, and capable of being run as a computer program without further programming, the court concluded that the software was “complete as sold” and, therefore, met both the statutory and rule definitions of a computer program.SALES TAX
Hearing Summary: ATV Used in the Care of Horses not Held for Sale
Hearing No. 101,289, 2009
The taxpayer is an individual who cares for abused horses on her 25-acre tract of land. She also produced grass for feeding the horses. The taxpayer purchased an all terrain vehicle (ATV) which she used exclusively to help her complete various tasks as she cared for the horses. She paid sales tax on the purchase of the ATV, but later obtained from the seller an Assignment of Right to Refund (Form 00-985) and requested a refund of the sales tax. The Comptroller denied the refund.
At the administrative hearing, the taxpayer claimed she was entitled to the agricultural exemption under Tax Code Section 151.316 (a)(7) and Rule 3.296 (a)(5) because the ATV was used exclusively in caring for the horses. The taxpayer showed that her land was designated for special agricultural appraisal for property tax purposes by her local appraisal district. The Property Tax Code defines agricultural use to include producing crops for animal feed or raising or keeping livestock. See Tex. Tax Code Ann. Sec. 23.51(2). As noted in the decision, however, the agricultural sales tax exemption “is not triggered by qualifying for the special appraisal.”
Tax Code Section 151.316(a)(7) exempts “machinery and equipment exclusively used or employed on a farm or ranch in the building or maintaining of roads or water facilities or in the production of: food for human consumption; grass; feed for animal life; or other agricultural products to be sold in the regular course of business.” [Emphasis added.] Section 151.316 (c)(1), states that a “'farm or ranch' includes one or more tracts of land used, in whole or in part, in the production of crops, livestock, or other agricultural products held for sale in the regular course of business.” [Emphasis added.]
The Comptroller determined that because the taxpayer did not sell horses or any other agricultural product, her ATV purchase did not satisfy the requirements of the agricultural equipment exemption set out in Tax Code Section 151.316(a). The Comptroller upheld the denial of the sales tax refund.SALES TAX
Sales Tax Deductions on Federal Income Tax Returns
Texans who itemize deductions on their federal income tax are able to deduct state and local sales taxes when they file their 2009 income tax returns. Additional deductions are allowed for taxes on some big-ticket items such as cars and boats. The state sales and use tax of 6.25 percent applies to most purchases of tangible personal property and taxable services. You may also deduct any local sales and use taxes paid on these purchases.
Eligible taxpayers can claim the sales and use tax deduction in one of two ways: they can keep receipts and claim the actual amount of taxes paid, or they can use the tax tables provided by the IRS.
Taxpayers who built a new home or improved their home in 2009 may be able to deduct sales taxes paid on the materials used in the real property improvement. Labor is not taxable for new construction or residential repair and remodeling.
In order for a homeowner to be eligible for such a deduction, the homeowner must have purchased the materials directly from, and paid tax to, the building materials supplier, or worked with a contractor under a separated contract. “Lump sum” (one price) contracts are not eligible for the deduction. This is because, under Texas Tax Code Section 151.056(a), a contractor performing a contract for a lump sum price covering both the performance of the service and the furnishing of the necessary material is considered the consumer of all materials incorporated into the project. As the consumer, the contractor pays the sales tax on materials and does not collect tax from the customer. See Rule 3.291. Since the customer did not pay tax to the contractor, the customer cannot deduct the tax on the federal income tax return.SALES TAX
Senate Bill 1199 and Sales Tax Refunds for Nonprofit Organizations
Senate Bill 1199 (81st Legislative Session, 2009) amended Tax Code Section 151.310 by adding Subsection (f) to read:
(f) For purposes of obtaining a refund of or claiming a credit for taxes paid under this chapter on the basis of an exemption under this section, an organization is not considered exempted from the taxes imposed by this chapter before the earlier of:
(1) the date the organization applied for the exemption with the comptroller; or
(2) the date of assessment of the organization's tax liability by the comptroller as a result of an audit, as applicable.
This means that effective Sept. 1, 2009, nonprofit organizations qualifying for exemption from Texas sales and use tax under Tax Code Section 151.310, will not be exempt from Texas sales and use tax before the earlier of the date the organization successfully applied to the Comptroller of Public Accounts for exemption, or the date of assessment of the organization's tax liability by the Comptroller as a result of an audit. Effective dates will no longer be made retroactive to the date of federal exemption or other date that previously may have been used.
Organizations affected by the legislation include:
- organizations created for religious, educational or charitable purposes;
- organizations qualifying for an exemption from federal income taxes under Section 501(c)(3), (4), (8), (10) or (19), Internal Revenue Code;
- nonprofit organizations engaged exclusively in providing athletic competition among persons under 19 years old;
- volunteer fire departments; and
- chambers of commerce or convention and tourist promotional agencies representing at least one Texas city or county.
As a result of these changes, a nonprofit organization is not eligible to receive refunds for purchases made on or after Sept. 1, 2009, if the purchase is made prior to the postmark date of its application for exemption or the date of an assessment of sales tax liability as a result of a comptroller audit, whichever is earlier. For purchases made prior to Sept. 1, 2009, the laws previously in effect will apply and in some cases, refunds may be available subject to the four year statute of limitation. These provisions apply to sales and use taxes paid by an organization directly to the Comptroller's office or to vendors, and to refund claims filed with the Comptroller's office or with vendors. These provisions do not apply to governmental entities exempted under Tax Code Section 151.309.
The Comptroller's Texas Tax-Exempt Entity Search may be used to verify the effective date of an organization's qualification for exemption.
Following are examples of how the new law will affect refund requests.
Qualifying Applications Before Sept. 1, 2009
If the postmark date of the qualifying application for exemption, or the date of assessment of the organization's tax liability by the Comptroller as a result of an audit, is prior to Sept. 1, 2009, the refund or credit may be issued for any Texas sales tax paid during the period of exemption subject to the four-year statute of limitations. As an example, assume ABC nonprofit organization was created in 2005 and received designation as a 501(c)(3) organization (exempt for federal income tax purposes) in November 2005. The group registered as an exempt organization with the Comptroller's office effective Dec. 12, 2005. Since the group registered with the Comptroller's office as an exempt organization before Sept. 1, 2009, it is eligible for a refund of Texas sales and use taxes paid to suppliers within the four-year statute of limitations.
Organizations registered with the Comptroller's office prior to Sept. 1, 2009, are only eligible for a refund of sales taxes paid on purchases retroactive to the effective date of the organization's exemption from federal taxation or the four-year statute of limitations, whichever is more recent.
For example, assume XYZ Association received designation as a 501(c)(3) organization on June 19, 2007, and registered with the Comptroller's office as an exempt organization effective Aug. 31, 2009. Since the association was registered with the Comptroller's office before Sept. 1, 2009, it is eligible for a refund of all Texas sales taxes paid retroactively to June 19, 2007, the effective date of its 501(c) designation. The association cannot apply for a refund of sales taxes paid prior to June 19, 2007, even if the purchases were made within four years of the date the refund is requested.
Qualifying Applications After Sept. 1, 2009
If the postmark date of an organization's qualifying application for exemption, or the date of assessment of the organization's tax liability by the Comptroller as a result of an audit, is after Sept. 1, 2009, the organization cannot request a refund of Texas sales taxes paid on purchases made on or after Sept. 1, 2009, but prior to the postmark date of qualifying application for exemption.
Since, the new law became effective Sept. 1, 2009, it applies only to purchases made on or after Sept. 1, 2009. Therefore, an organization qualifying for exemption from sales tax under Tax Code Section 151.310 can still seek a refund of Texas sales taxes paid on purchases made prior to Sept. 1, 2009, retroactive to the effective date of the organization's exemption from federal taxation or the four-year statute of limitations, whichever is more recent.
As an example, assume RST nonprofit organization was created in 2007 and received designation as a 501(c)(3) organization (exempt for federal income tax purposes) in April 2007. The group did not, however, submit an application as an exempt organization with the Comptroller's office until Sept. 3, 2009. Since the group did not apply for exemption with the Comptroller's office before Sept. 1, 2009, it can only receive a refund of sales tax paid on purchases made on or after Sept. 3, 2009, the postmark date of its application for exemption with the Comptroller's office, and on purchases made between the April 2007 effective date of the organization's 501(c) designation and Aug., 31, 2009. The organization is not eligible for a refund of taxes paid on purchases made Sept. 1 or Sept. 2, 2009.
For more information about Texas taxes and nonprofit organizations, see our publication Exempt Organizations: Sales and Purchases (Pub. 96-122) (PDF, 405KB) and the Guidelines to Texas Tax Exemptions section of our Web site.
Tax-Free Sales: It's a New Calendar Year
In general, nonprofit organizations are required to collect sales tax on their sales of taxable items and services. A nonprofit religious, educational or charitable organization, or an organization exempted under Internal Revenue Code, Section 501(c)(3), (4), (8), (10), or (19) may apply for and receive exemption from sales tax on its purchases, based upon criteria established in Texas Tax Code Section 151.310(a)(1) and (a)(2). Once exempt, the organization and each of its bona fide chapters 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 described above, 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.RECENTLY PROPOSED RULES
Cigar and Tobacco Tax
The Comptroller's office filed the following rule with the Texas Secretary of State for publication in the January 15, 2010, issue of the Texas Register. The comment period is 30 days from publication.
Section 3.121 Definitions, Imposition of Tax, Permits, and Reports
Motor Vehicle Sales Tax
The Comptroller's office filed the following rules with the Texas Secretary of State for publication in the January 22, 2010, issue of the Texas Register. The comment period is 30 days from publication.
Section 3.79 Standard Presumptive Value
Section 3.84 Exemption for Orthopedically Handicapped Person
State Sales and Use Tax
The Comptroller's office filed the following rule with the Texas Secretary of State for publication in the Jan. 22, 2010, issue of the Texas Register. The comment period is 30 days from publication.
Section 3.326 Carbon Dioxide Capture and SequestrationABOUT 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
Teresa Bostick, Robin Corrigan, Don Dillard, Jody Frierson, Gary Johnson, Carol McAnnally, Jerry Oxford, Viki Smith, Karen Snyder, Jennifer Specchio and Steve White