|March 2010||TAX POLICY NEWS|
|a monthly newsletter about Texas tax policy|
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In this issue...
Hotel Occupancy Tax
Recently Adopted Rules
Recently Proposed Rules
Entities with Foreign Manufacturing Affiliates and Qualification for the 0.5 Percent Tax Rate
We have received several requests for clarification of a taxable entity's eligibility for the retail or wholesale tax rate (0.5 percent) when an affiliated entity is the foreign manufacturer of the goods being sold. The term “taxable entity” includes a combined group. The facts are generally as follows:
- An affiliated group consists of one or more entities domiciled in the United States and a foreign entity. An “affiliated group” is defined in Rule 3.590(b)(1) as entities in which an interest of more than 50 percent is owned by a common owner.
- The foreign entity is a manufacturer that conducts business outside of the US (80 percent or more of the taxable entity's property and payroll are assigned to locations outside the US).
- The US entities are primarily engaged in wholesale or retail trade, as defined in Texas Tax Code Section 171.002(c), and 50 percent or more of items they sell are items that the foreign entity manufactures.
- The foreign manufacturing entity, although part of the affiliated group, is not included in the combined group because the foreign entity conducts business outside of the US, as provided in Texas Tax Code Section 171.1014(a).
Under these circumstances, the taxable entity would not be eligible for the 0.5 percent tax rate. Under the provision in Texas Tax Code Section 171.002(c)(2), “A taxable entity is primarily engaged in retail or wholesale trade only if…less than 50 percent of the 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 also belongs…” (emphasis added).
Although the foreign manufacturing entity is not included in the combined group, the statute specifically provides that it need only be part of the affiliated group to make the taxable entity ineligible for the 0.5 percent tax rate.
Tour Operators and Travel Agencies that Sell Lodging in Texas
Tour operators and travel agencies selling travel packages that include lodging in Texas may or may not be responsible for collecting and remitting hotel occupancy tax to the state of Texas. The specific activities engaged in by the operator or agent, including the terms of any applicable contracts or agreements, determines if the company is acting as an agent in obtaining lodging for customers or is reselling hotel rooms to customers.
In STAR 200910594L, a foreign company asked if tour operators and travel agencies located outside the United States are required to collect and remit Texas hotel occupancy tax. Specifically, the company wanted to know if tax is due on the difference charged customers for a hotel room in Texas and the amount paid to the hotel for the room.
Acting as an Agent
An agent contracts with a client to act on behalf of the client. Comptroller's Hearing No. 32,105 (STAR 9504H1346F01) describes some typical activities engaged in by an agent for hotel tax purposes. The petitioner in this case organized and operated educational music festivals for secondary school students. The company also arranged for lodging for schools with students attending the festival. The company reserved the rooms in the school's name, forwarded payment for the rooms to the hotel after receiving payment from the school, forwarded the school's room assignments to the hotel and charged the school dollar-for-dollar for the hotel rooms (i.e., no mark up on the cost of rooms). If a school cancelled its room reservation, the school's deposit was refunded according to the hotel's cancellation policy.
Based on these facts, the Comptroller concluded the petitioner was an agent for the schools and not a seller of entertainment and lodging: “As for hotel rooms, these accommodations were not bought in a block by the Petitioner and then resold to the schools. The school purchased the hotel accommodations using the Petitioner as their agent.” As an agent for the schools, the petitioner was not required to remit hotel tax to the state.
Some of the factors that indicate a person is acting as an agent and not reselling hotel rooms are: an agent only reserves the number of rooms requested; does not mark up the price of the rooms; and room cancellation policies are those of the hotel and are not set by the agent. Agents pay hotels directly for rooms for their clients, including tax, and the hotels are responsible for remitting the tax. An agent's separately stated charge for services on a client invoice or bill is a commission and not subject to hotel tax.
Reselling Hotel Rooms
Several factors are considered in determining if a room is being controlled and sold by someone other than the hotel such that hotel tax must be collected and remitted to the state by the hotel room reseller. For example, when a tour operator contracts with a hotel to make hotel rooms available to the public and then marks up the room charge to its customers, the tour operator needs to collect and remit hotel tax to the state on the marked-up room price. Credit may be taken for hotel taxes directly paid by the operator to the hotel on the lower wholesale price of the room. Records must be maintained to link tax paid by customers to the tour operator with tax paid to hotels by the operator.
Other factors considered include whether the tour operator sets its own reservation cancellation policies separate from those of the hotel; whether a customer can cancel a reservation with the hotel or only through the operator; and whether the operator has agreements with the hotel for rooms that may or may not be reserved by customers and what the terms of those agreements are.
Each Situation is Unique
Each situation is considered based on its own factors before a determination can be made that a tour operator or travel agency is acting as an agent in obtaining hotel rooms for clients or is reselling hotel rooms to customers. Other facts, though similar, may result in different answers.
Volunteer Fire Department Assistance Fund
In 2001, the 77th Texas Legislature passed House Bill 2604. This bill created the Rural Volunteer Fire Department Assistance Program to assist volunteer fire departments in paying for equipment and personnel training. The Texas Forest Service of the Texas A&M University System administers this program.
Initially enacted as Chapter 5.102, Insurance Code, the legislation required the Comptroller of Public Accounts to collect an assessment of $15 million per year to generate revenue for the Volunteer Fire Department Assistance Fund (VFDAF). In 2007, the 80th Texas Legislature passed HB 3315 that increased the amount of the assessment to $30 million per year and repealed the expiration of the program that was originally set for 2011.
Each insurer is required to pay a portion of the assessment in the proportion that the insurer's premiums for the period bear to the aggregate premiums in the state for that period for policies of homeowner's insurance; fire insurance; farm and ranch owner's insurance; private passenger automobile physical damage insurance; commercial automobile physical damage insurance; and the non-liability portion of a commercial multiple peril policy. Our office mails billings to each affected insurer for the assessment by the end of May of each year. The assessment is due by August 1.
Insurers are authorized to recover an assessment either by reflecting the assessment as an expense in a rate filing or by directly charging the insurer's policyholders. An insurer that directly recovers an assessment from the insurer's policyholders is required to provide a notice to each policyholder of the amount being recovered. For more information, see Texas Insurance Code Sections 2007.005 and 2007.006 (former article 5.102, section 3(d)) and Volunteer Fire Department Assistance Fund (PDF, 150KB)(Pub.94-169).
The Director of the Texas Forest Service is charged with determining reasonable criteria and qualifications for the distribution of money from the Volunteer Fire Department Assistance Fund and with establishing a procedure for reporting and processing requests for money from the fund. Additional information regarding use of the fund is available by contacting the Texas Forest Service at (979) 458-5540.SALES TAX
Resale Exemptions — “Use in Business” Not a Valid Claim
For Texas tax purposes, a “sale for resale” must meet the strict requirements described in the Texas Tax Code.
Under Texas Tax Code 151.006(1), “sale for resale” means “a sale of tangible personal property or a taxable service to a purchaser who acquires the property or service for the purpose of reselling it in the United States of America or a possession or territory of the United States of America or in the United Mexican States in the normal course of business in the form or condition in which it is acquired or as an attachment to or integral part of other tangible personal property or taxable service.” Section 151.302(b) of the Tax Code imposes the additional requirement that “tangible personal property used to perform a taxable service is not considered resold unless the care, custody, and control of the tangible personal property is transferred to the purchaser of the service.”
A taxpayer who has a Texas Sales and Use Tax Permit bearing a Texas taxpayer number can issue a Texas Sales and Use Tax Resale Certificate (PDF, 76KB) (Form 01-339) for the purchase of taxable items that he will resell. The taxpayer cannot, however, issue a resale certificate, or give a taxpayer number, for the tax-free purchase of taxable items he will not resell. In order for tangible personal property to be considered “resold,” the care, custody and control of the property must transfer from the seller to the purchaser.
Therefore, business owners and operators must pay tax on taxable items used to conduct business such as tools and office equipment, including desk chairs, cash registers and computers, unless the items otherwise qualify for exemption. Businesses must also pay tax on taxable consumable supplies such as staples, paper and pencils; promotional items such as hats, shirts and coffee mugs; and taxable items such as cell phones, pagers and uniforms that are provided to employees.
A business may purchase, with a resale certificate, only items that will actually be resold to a customer in the normal course of business. These items are usually referred to as “inventory.”
For example, a person operating a DJ or karaoke business cannot issue a resale certificate to claim an exemption from tax when purchasing music, videos or sound equipment that will be used to operate the business.
A person may not issue a resale certificate at the time of purchase for a taxable item if the person knows the item is being purchased for a specific taxable use. Any person who intentionally or knowingly presents a resale certificate for the purpose of evading Texas sales or use tax is guilty of a criminal offense. If the tax evaded by the invalid certificate is $750 or more, the offense is a felony. See Tax Code Section 151.707 and Rule 3.285 (f) for more information on the penalties for improperly using resale certificates.SALES TAX
Structural Pest Control Licensing and Regulation Transferred to the Texas Department of Agriculture — Taxability of Service Determined by Activities Performed, Not the Licensing Agency
Structural pest control is generally regarded as the application of pesticides in and around structures; however, a person who performs any of the many activities described in Texas Occupations Code 1951.003 is engaged in the “business of structural pest control” and is thus providing a taxable service. Examples of these activities include identifying or inspecting infestations of insects, termites or other related pests; weeds; rodents, nuisance birds or other undesirable animals that may infest households, railroad cars, ships, docks, trucks, airplanes or other structures or their contents.
Other activities that constitute taxable structural pest control services include identifying or inspecting pests or diseases of trees, shrubs or other plantings in parks or adjacent to residences, businesses or streets. See Pest Control Services (PDF, 1.07MB) (Pub. 94-114) for more information about what constitutes a taxable pest control service.
Prior to Sept. 1, 2007, structural pest control was licensed and regulated by the Structural Pest Control Board. Non-structural pest control services, such as restricted use or state-limited-use pesticides or regulated herbicides for mainly agricultural purposes, were licensed and regulated by the Texas Department of Agriculture (TDA). Non-structural pest control services performed under a license issued by the TDA were not subject to sales tax.
As of Sept. 1, 2007, however, the licensing agency is no longer a determining factor when evaluating whether a person is providing a taxable pest control service. The Structural Pest Control Board was abolished and the Structural Pest Control Service (SPCS) was formed and placed under the authority of the TDA. This change was created by House Bill 2458 during the 80th Legislative Session (2007) and became effective Sept. 1, 2007. The TDA now licenses and regulates all pest control services, including structural pest control.
While the licensing agency was changed by HB 2458, the legislation did not make any changes to the Tax Code. For this reason, activities identified as structural pest control services under Texas Occupations Code 1951.003 continue to be subject to sales tax, even though structural pest control service providers are now licensed and regulated by the TDA.
The law concerning structural pest control activities is still found in the Texas Occupations Code, Subtitle B, Chapter 1951 Structural Pest Control. Regulations are found in Texas Administrative Code; Title 4 Agriculture, Part 1, Chapter 7, Subchapter H Structural Pest Control Service.
For more information, see the Structural Pest Control Service section of the TDA Web site, or call (866) 918-4481. The Austin number is 305-8250.RECENTLY ADOPTED RULES
The following rule adoption was filed with the Secretary of State on March 4, 2010. The publication date is March 26, 2010, effective 20 days after filing.
Cigar and Tobacco Tax
3.121 Definitions, Imposition of Tax, Permits, and ReportsRECENTLY PROPOSED RULES
The following rules were submitted for filing with the Secretary of State. The publication date is April 2, 2010. The comment period is 30 days after publication.
Motor Vehicle Sales Tax
3.75 Refunds, Payments Under Protest, Payment Instruments and Dishonored Payments
3.80 REPEAL Motor Vehicles Awarded as Prizes
3.80 Motor Vehicles Transferred as a Gift or For No ConsiderationABOUT 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