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February 2010 TAX POLICY NEWS
a monthly newsletter about Texas tax policy

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Please help us by completing our quick online survey on electronic reporting and filing of taxes. This survey contains only seven short questions and should take you less than two minutes to complete.

A SPECIAL “THANK YOU” TO WEBFILERS

We've talked about WebFile in our publications and mailings, in our speeches and on our Web site, as a fast, easy and secure way to file and pay your sales taxes. And you've listened.

On January 20, all businesses with a sales tax permit had a tax report due, whether they filed monthly, quarterly or just once a year. The month leading up to this year's due date has been the most successful WebFiling season ever: 211,561 sales tax returns were filed using WebFile.

Some businesses are required by law to file electronically, but most of our WebFile customers do so voluntarily. We hope using WebFile saved you a little time in addition to that postage stamp.

Visit e-Services to learn more about our electronic reporting programs, as well as our other convenient online services.

And thank you for using WebFile!

ENERGY EFFICIENT APPLIANCE REBATE PROGRAM

Replace Old Appliances and Save Money

To coincide with this year's Earth Day festivities, Texas will implement a one-time mail-in rebate program to help people replace older, inefficient appliances with qualified, new Energy Star appliances purchased between April 16 and April 25, 2010. This is a separate program from the state's annual Energy Star Sales Tax Holiday held during Memorial Day weekend.

The State Energy Conservation Office (SECO) will be administering the rebate program using funds awarded from the American Recovery and Reinvestment Act of 2009. Customers can reserve their rebates by calling a toll-free number or registering online approximately two weeks before April 16, 2010, and must provide proof of appliance replacement. Customers can also obtain a bonus rebate by providing proof that their old appliances were recycled through a SECO partner retailer or recycling facility.

After the reserved mail-in rebates are awarded, any remaining funds will be rebated to consumers on a first-come, first-served basis. Shoppers will be limited to two appliance rebates and two recycling rebates per household.

It is not necessary to have a rebate reservation to send in a rebate application; however, rebates will not be guaranteed.

The rebate program will only apply to purchases made once the program officially begins in April; it will not be retroactive.

Details on how to reserve a rebate will be available on our Web site and on SECO's Energy Efficient Appliance Rebate Program Web site page closer to the program launch date. In the meantime, sign up for our Appliance Rebate e-mail alerts.

To qualify for an Energy Star label, an appliance must meet rigorous energy efficiency and water efficiency standards set by the federal government. These appliances use less energy and less water than regular appliances and help consumers save money on their utility bills.

Products eligible for the rebate program include:

  • refrigerators;
  • freezers;
  • clothes washers;
  • dishwashers;
  • room air conditioners;
  • gas condensing water heaters;
  • gas storage water heaters;
  • gas tankless water heaters;
  • electric heat pump water heaters;
  • solar water heaters;
  • central air conditioners; and
  • air source heat pumps.

A list of rebate amounts is available on the SECO Web site. For more information about the program, see SECO's Energy Efficient Appliance Rebate Program FAQs.

Note: This rebate program does not affect the amount of sales tax due on a new appliance purchase. Since the rebates are paid directly to consumers, the rebates do not reduce the sales or lease price of a new appliance, even if the customer recipient of the rebate assigns their right to the revenue to a retailer or finance company. Accordingly, sales tax is due on the total sales price of any new appliance purchased under this program.

FRANCHISE TAX

IRC Section 179 Expense Deduction Limits

An Internal Revenue Code (IRC) Section 179 expense deduction is allowed for taxable entities that elect to deduct cost of goods sold (COGS) to compute their margin. Only taxable entities that sell real or tangible personal property in the ordinary course of business are eligible to deduct COGS. Allowable costs include depreciation and IRC Section 179 expense deductions that are related specifically to equipment used in the production of goods.

“Internal Revenue Code” is defined in Texas Tax Code Section 171.0001(9) as the Internal Revenue Code of 1986 in effect for the federal tax year beginning on Jan. 1, 2007, not including any changes made by federal law after that date. Therefore, for Texas franchise tax, any increase or decrease in the Section 179 expense deduction is tied to the IRC Section 179 in effect as of Jan. 1, 2007. The changes in the Section 179 expense deduction allowed by the Small Business and Work Opportunity Act of 2007 and the American Recovery and Reinvestment Act of 2009 do not apply to franchise tax reports.

Following are the limits for Section 179 expense from the IRC as it existed on Jan. 1, 2007, that can be included in the COGS deduction for Texas franchise tax reports:

Franchise Tax Report Year For Accounting Years Ending in Amount
20082007$112,000
20092008$115,000
20102009$120,000
20112010$  25,000
HOTEL OCCUPANCY TAX

Charitable, Educational and Religious Exemptions

Editor's note: This is the fourth in a five-part series of articles on hotel occupancy tax exemptions. The first article in the May 2009 Tax Policy News defined a permanent resident and discussed the basics of the exemption; the second article in the August 2009 Tax Policy News covered the rental of a range of hotel rooms; the third article in the November 2009 Tax Policy News described government exemptions.

Texas state hotel tax law exempts charitable, educational and religious organizations from payment of the six percent state hotel occupancy tax. While a charitable, educational and religious organization, as defined in Rule 3.161, is exempt from state hotel occupancy tax, it must pay any local hotel tax imposed.

Charitable
A charitable organization is a nonprofit organization that devotes all, or substantially all, of its activities to providing food, clothing, drugs, shelter or psychological counseling directly to indigent and similarly deserving individuals. The organization's funds must be derived primarily from sources other than fees or charges for its services.

Charitable organizations do not include fraternal organizations or social, professional and business groups. An organization that is exempt under Section 501(c)(3) of the Internal Revenue Code does not necessarily mean the organization is a charitable organization for hotel tax purposes.

Educational
An educational organization is a nonprofit organization or government entity that provides systematic instruction in the commonly accepted arts, sciences and vocations.

Included are independent school districts, public or nonprofit private elementary and secondary schools and Texas institutions of higher education (public and private colleges, universities, junior colleges and community colleges). Except for institutions of higher education, an educational organization does not have to be from Texas to qualify.

Examples of organizations that do not qualify as educational include professional associations, research organizations, support groups and home schools.

Religious
A religious organization is a nonprofit organization that is an organized group of people regularly meeting for the primary purpose of holding, conducting and sponsoring religious worship services, according to the rites of their sect. Religious organizations include nonprofit churches and their guiding or governing bodies.

Missionary organizations, bible study groups and churches made up of only family members do not qualify as religious organizations.

Employees and nonemployees
An employee traveling on official business on behalf of a charitable, educational or religious organization is also exempt from the six percent state hotel occupancy tax. The manner of payment does not affect the exemption. On the other hand, a person who is not an employee that is traveling for an exempt organization must pay the hotel directly with the exempt organization's funds (organization check, organization credit card or direct billing to the organization).

A completed Texas Hotel Occupancy Tax Exemption Certificate (PDF, 66KB) (Form 12-302) must be presented to the hotel to claim an exemption. Certificates may be accepted in good faith when presented with supporting documentation required by Rule 3.161(c).

INSURANCE TAX

Automobile Burglary and Theft Prevention Authority (ABTPA) Assessment

The Automobile Burglary and Theft Prevention Authority (ABTPA) assessment is governed under Title 70, Chapter 9, Article 4413 (37), Section 10, Vernon's Texas Civil Statutes and by Title 28, Part 1, Chapter 5, Subchapter A, Division3, Rule 5.205, Texas Administrative Code. The statute requires each licensed insurance company that writes any form of motor vehicle policy as defined by Article 5.01 (e), Insurance Code, to pay a fee of $1.00 per motor vehicle year for the ABTPA. The definition of “motor vehicle” stated in Article 5.01 (e), Insurance Code, includes trucks and truck-tractors or any vehicle trailer or semi-trailer pulled or towed by a motor vehicle.

When the Automobile Burglary and Theft Prevention Authority assessment was originally enacted in 1991, the assessment applied only to policies that provided primary liability coverage. Under the original law, if a motor vehicle was covered by separate policies for physical damage and liability, the motor vehicle would be subject to the fee under the liability policy but not the physical damage policy.

Several years ago this statute was amended to apply to any motor vehicle policy as defined in Article 5.01(e), Insurance Code. Under the amended statute, the fee would be assessed twice in the same year for the same vehicle if the physical damage and liability were on separate policies. Excluded from the definition of motor vehicle are mechanical breakdown policies, garage liability policies, non-resident policies, and policies that provide only non-ownership or hired auto coverage.

Current Rule 28 TAC §5.205, from the Texas Department of Insurance authorizes insurers to pass-through or recoup the assessment from policyholders. This rule does not address the application of the assessment to a particular type of policy. It references each motor vehicle policy as defined in 43 TAC §57.48. This rule defines motor vehicle for purposes of calculating the ABTPA fee and refers to Article 5.01(e), Insurance Code as the authority for determining motor vehicle policies. For more information, please see our Automobile Burglary and Theft Prevention Authority Notice (PDF, 126KB) (Pub. 98-538).

The assessment is only collected on motor vehicle policies. Policies that cover cargo only are not subject to the assessment.

SALES TAX

News Content Does Not Equal Newspaper

The sale of newspapers is exempt from tax under Texas Tax Code 151.319(a). A newspaper is defined in the statute as “a publication that is printed on newsprint, the average sales price of which for each copy over a 30-day period does not exceed $1.50, and that is printed and distributed at a daily, weekly, or other short interval for the dissemination of news of a general character and of a general interest.” For this reason, tax is not due on the sale of many local newspapers, such as the Austin American-Statesman.

For Texas sales tax purposes, however, not all publications that contain news items and are printed on newsprint are “newspapers.” In order for a publication to be considered a newspaper exempt from sales tax, it must meet all criteria outlined in the statute, including having an average sales price, based on the price shown on the publication's cover or masthead, of less than $1.50 per day. Publications that have an average daily price exceeding $1.50 are not considered newspapers for the purpose of the sales tax exemption. For example, the daily per-issue price of both the Wall Street Journal and the New York Times, as printed on the publications' mastheads, is $2.00, and the Sunday edition of the New York Times is $6.00. Because the average daily price of both publications is above $1.50, neither of these publications qualifies as a newspaper for Texas sales tax purposes. The sale of these publications, whether sold on a per issue or subscription basis, is therefore, taxable.

SALES TAX

Some Words on Advertising, Free Publications and the Manufacturing Exemption

A customer does not owe sales tax on the purchase of advertising space in a publication such as a magazine or newspaper. This is true for space in free publications, as well as those that are for sale. A customer does, however, owe tax to an advertising agency or graphic artist on a charge for the ad itself, in the form of “finished art,” that the customer or the agency places in the publication. See Rule 3.312 relating to graphic arts and Rule 3.321 related to advertising agencies.

Although both are publications, a free magazine has different tax responsibilities from those of a free newspaper. The publisher of a free magazine is not considered a manufacturer since its product is not for sale. For this reason, the publisher does not receive manufacturing exemptions on equipment and materials it uses to produce the free magazine and must pay tax on these items.

A newspaper, however, as defined under Tax Code 151.319(f)(2), includes “a publication …for the dissemination of news of a general character and of a general interest that is printed on newsprint and distributed to the general public free of charge at a daily, weekly, or other short interval.” (Newsprint is the low-cost, off-white paper normally used to print newspapers.) Under Tax Code 151.318(t)(2), newspaper publishers qualify for manufacturing exemptions.

For this reason, the publisher of a free newspaper may claim the manufacturing exemption on qualifying equipment and supplies as set out in Rule 3.300 related to manufacturing. Free newspaper publishers may also claim an exemption for packaging supplies as provided in Rule 3.314 relating to wrapping and packaging. Persons printing newspapers may accept an exemption certificate in lieu of the sales tax from the publisher. Under 151.319(f), an advertisement is “news of a general character and of a general interest.” A free publication printed on newsprint and containing only advertisements, therefore, is a newspaper if it is distributed to the general public at a daily, weekly or other short interval. Because it is a newspaper, its publisher is entitled to receive the manufacturing exemptions mentioned above.

RECENTLY ADOPTED RULES

The following rule adoption was filed with the Secretary of State on February 4, 2010. The publication date is February 19, 2010; effective 20 days after filing.

State Sales and Use Tax

Section 3.333 Security Services

The following rule adoption was filed with the Secretary of State on February 5, 2010. The publication date is February 19, 2010; effective 20 days after filing.

Hotel Occupancy Tax

Section 3.163 Refund of Hotel Occupancy Tax

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

Teresa Bostick, Robin Corrigan, Don Dillard, Jody Frierson, Gary Johnson, Carol McAnnally, Jerry Oxford, Viki Smith, Karen Snyder, Jennifer Specchio and Steve White

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