|May 2010||TAX POLICY NEWS|
|a monthly newsletter about Texas tax policy|
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In this issue...
Cigars and Tobacco Products Tax
Recently Adopted Rules
Recently Proposed Rules
Calculating the Excise Tax on a Unit of Tobacco Products Containing Multiple Individual Cans or Packages
Texas Tax Code Section 155.0211(d), in part, provides that the total tax imposed on a unit of tobacco products (other than cigarettes and cigars) consisting of multiple individual cans or packages is the sum of the taxes imposed on each individual can or package intended for retail sale or distribution to consumers.
To report and pay the correct amount of tax on units containing multiple individual cans or packages received, distributors must determine whether the manufacturer intends for the tobacco products to be sold to consumers as an individual unit, or as individual cans or packages.
A distributor will be liable for any additional tax due when:
- the tax paid was based on the manufacturer's listed net weight for an individual unit intended for sale to consumers;
- it is later determined that a retailer sold individual cans or packages from the unit to consumers; and
- the tax due on the manufacturers' listed net weight for the unit is less than the sum of the tax due on the manufacturer's listed net weight for each of the individual cans or packages in the unit.
Following are examples to illustrate how to calculate the tax on units of tobacco products containing multiple individual cans or packages.
On Sept. 5, 2009, a distributor receives from a manufacturer, for the purpose of making a first sale in Texas, a unit of chewing tobacco that consists of 10 individual packages of chewing tobacco. Writing on the original unit packaging shipped from the manufacturer clearly states that the manufacturer intends that the complete unit is to be offered for sale to consumers.
Additionally, writing on the original packaging for each of the 10 packages in the unit shipped from the manufacture clearly states that they are not intended to be sold individually. The manufacturer's listed net weight for the unit is 7.8 ounces.
The total tax due for each unit is calculated by multiplying the effective tax rate ($1.10 per ounce and all fractional parts of an ounce) by the manufacturer's listed net weight for the unit (7.8 ounces), for a total tax due per unit of $8.58 ($1.10 x 7.8).
On Dec. 3, 2009, a distributor receives from a manufacturer, for the purpose of making a first sale in Texas, a unit of snuff consisting of 20 individual cans of snuff weighing 1.2 ounces each. There is no writing on the original unit packaging shipped from the manufacturer that indicates the manufacturer intends for the unit to be offered for sale to consumers.
Additionally, there is no writing on the 20 individual cans of snuff that indicates the manufacturer does not intend for the individual cans to be offered for sale to consumers. The effective tax rate for each individual 1.2 ounce can is $1.32 per ounce and all fractional parts of an ounce.
The total tax due for each unit of 20 cans is calculated by multiplying the effective tax rate for each individual can ($1.32) by the total number of individual cans in the unit (20), for a total tax due of $26.40.
On Jan. 14, 2010, a distributor purchases from an importer and receives, for the purpose of making a first sale in Texas, a unit of snuff consisting of 10 individual cans weighing 1.3 ounces each. The product manufacturer is located outside the United States. The products were shipped by common carrier from a federal bonded warehouse to the distributor. There is no writing on the original unit packaging shipped from the manufacturer that indicates the manufacturer does not intend for the individual cans of snuff to be sold to consumers. Because each individual can weighs more than 1.2 ounces, the effective tax rate is $1.10 per ounce and all fractional parts of an ounce.
The tax due for each can is calculated by multiplying the net weight (1.3 ounces) by the effective tax rate ($1.10), for a tax due for each can of $1.43.
The total tax due for each unit of 10 individual cans is calculated by multiplying the tax due on each individual can ($1.43) by the total number of individual cans in the unit (10), for a total tax due of $14.30.
On Aug. 28, 2010, a distributor receives from a manufacturer, for the purpose of making a first sale in Texas, 24 units of snuff. Each unit consists of four individual tubs weighing 12 ounces each. There is no writing on the original packaging shipped from the manufacturer that indicates the manufacturer does not intend for the individual tubs of snuff to be sold to consumers. The total number of individual tubs is 96 (24 units x 4 tubs per unit). Because each individual tub weighs more than 1.2 ounces, the effective tax rate is $1.10 per ounce and all fractional parts of an ounce.
The tax due for each tub is calculated by multiplying the tax rate for each ounce ($1.10) by the total number of ounces in each tub (12), for a tax due of $13.20. The tax due for each unit is calculated by multiplying the tax for each tub ($13.20) by the number of tubs in each unit (4), for a tax due of $52.80.
The total tax due for the 24 units of snuff is calculated by multiplying the tax due on each unit ($52.80) by the total number of individual units (24), for a total tax due of $1,267.20 ($52.80 x 24).
For more information, see the Cigar and Tobacco Products section of our Web site.FRANCHISE TAX
Taxpayers Required to Pay Electronically: First Extended Due Date is August 16
There are special provisions in the franchise tax law regarding filing extensions for taxpayers required to pay by Electronic Funds Transfer (mandatory EFT). The law provides for a first extension, from May 15 to August 15; and for a second extension until November 15.
For 2010, mandatory EFT taxpayers who submitted an extension request by May 17 have an extended due date of August 16 to file their reports or to request a second extension of time to file.
The second extension payment should equal the balance of the amount of tax that will be reported as due on or before November 15. If all the tax due was paid with the entity's first extension request, use WebFile to request the second extension without making a payment, or mail a Texas Franchise Tax Extension Request (Form 05-164) (PDF, 86KB) to the address on the form. A paper form is not required when WebFile is used to request an extension.
If a second extension payment is due:
- Taxpayers who paid $10,000 or more, but less than $100,000 in franchise tax during the preceding state fiscal year may make their electronic extension payment using WebFile (credit card or WebEFT). Taxpayers in this category who are enrolled in TEXNET (PDF, 546KB) can use TEXNET to make their extension payment.
- Taxpayers who paid $100,000 or more in franchise tax during the preceding state fiscal year must use TEXNET to make their electronic extension payment. Use tax type code 13080 and make the TEXNET payment before 6 p.m. Central Time Friday, August 13, the bank business day before the due date.
An extension request (PDF, 86KB) is not required when TEXNET or WebFile is used to make an extension payment. While combined groups using TEXNET must mail us the Texas Franchise Tax Extension Affiliate List (Form 05-165) (PDF, 101KB) with their first extension request, they should not include the affiliate list with the second extension request.
A taxable entity that preserved its business loss carryforward for the temporary credit must claim the credit by the due date of its report. If an entity required to pay electronically does not request the second extension, the extended due date is August 16.
If the entity files a franchise tax report after the extended due date, the temporary credit for this year cannot be applied to the tax due and cannot be carried forward for use in future years because the report was not filed timely.INSURANCE TAX
Legal Services Corporations
Nonprofit Legal Services Corporations
Nonprofit legal services corporations are created for the sole purpose of establishing, maintaining and operating nonprofit legal services plans. These corporations provide free legal assistance to low income individuals and families (generally in civil matters only) for problems confronting the low income community.
Although these corporations are not engaged in the business of insurance, they are subject to direct regulation by the Texas Department of Insurance under Chapter 961 of the Texas Insurance Code. Nonprofit legal services corporations do not pay premium tax; however, they are subject to an annual maintenance tax on the gross revenues received from the issuance of prepaid legal services contracts in this state pursuant to Chapter 260 of the Texas Insurance Code.
For-Profit Legal Services Corporations
For-profit legal services corporations are regulated under Chapter 953 of the Occupations Code. These corporations provide access to a large directory of attorneys who provide legal services such as phone consultations and the review of contracts or documents.
These corporations are not subject to regulation by the Texas Department of Insurance and are not responsible for the payment of either premium or maintenance taxes.SALES TAX
Repairs on "Certified" Pre-owned Motor Vehicles
The purchase of a "certified" pre-owned motor vehicle may include an agreement to cover the cost of any repairs. A dealer selling the vehicle has obtained the certified status by first ensuring that the vehicle meets specific standards and then purchasing an agreement similar to a service contract. The vehicle purchaser may not be aware that the seller purchased a service contract.
Parts used to make any repairs to the "certified" pre-owned vehicle after the vehicle is sold are taxable in the same manner as parts used to make repairs under motor vehicle service agreements. The dealer making the repairs should collect sales tax from the party paying for the repair parts.SALES TAX
Motor Vehicle Maintenance Programs
Some manufacturers provide free maintenance agreements when a motor vehicle is purchased, such as oil changes and the replacement of parts, such as wiper blades. The maintenance is generally performed by an authorized dealer. Because the service is provided by the manufacturer at no additional charge to the vehicle owner (or anyone else), it is handled in the same way as a repair covered under the manufacturers' warranty. The parts are not taxable.
There are, however, optional maintenance contracts available to a vehicle owner where a charge is made. The purchase of this contract is not taxable, but the parts used in performing the service are taxable. The service provider should collect sales tax from the party paying for the service.SALES TAX
Goodwill Repairs/Implied Warranty
When a dealer makes free repairs to a motor vehicle that the dealer sold within seven calendar days of the sale, and the repairs are not covered by any written warranty, then the repairs are deemed to be a repair under an implied warranty and no tax is due on the parts used. If, however, the vehicle was sold "as is" or with similar language, there is no implied warranty and the dealer is responsible for the sales tax on the parts used to make the goodwill repairs even when the repairs are performed within the seven-day period.SALES TAX
A motor vehicle dealer is responsible for sales tax on promotional items provided with the sale of a vehicle. An example is free oil changes that come with the motor vehicle that are not paid for by the manufacturer or under a service contract.SALES TAX
Purchases by Nonprofit Organizations
Certain nonprofit organizations may qualify for exemption from sales and use tax under Texas Tax Code Section 151.310:
- organizations created for religious, educational or charitable purposes;
- organizations qualifying for an exemption from federal income taxes under Internal Revenue Code Sections 501(c)(3), (4), (8), (10) or (19);
- 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 noted in a previous Tax Policy News article, Senate Bill 1199 (81st Legislative Session, 2009, effective Sept. 1, 2009) amended Section 151.310 to change the dates nonprofit organizations may use to determine eligibility for claiming a refund of Texas sales and use tax on their purchases.
It is important to note that the change imposed by this legislation also affects a nonprofit organization's ability to claim a valid exemption from sales tax at the time of purchase. Now, the effective date of the sales and use tax exemption for organizations qualifying under Section 151.310 is the earlier of:
- the date the organization successfully applied to the Comptroller's office 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 retroactive to the date of federal exemption (such as the date of a 501(c)(3) designation) or other date that may have been used previously.
This change applies only to purchases made on or after Sept. 1, 2009. The Comptroller will continue to honor exemption claims made by entities qualifying for exemption under Section 151.310 on items purchased before Sept. 1, 2009.
Applying for Exemption
We will notify the organization if the application is approved.
After an organization has successfully applied for exempt status, it may claim an exemption from tax when purchasing, leasing or renting taxable (PDF, 405KB) items for the organization's use, if the items are necessary to the organization's exempt function, by providing a properly completed exemption certificate (PDF, 76KB) to the seller.
Claiming the Exemption Before and After Sept. 1, 2009
The following examples illustrate how the provisions of SB 1199 apply to purchases made by nonprofit organizations before and after Sept. 1, 2009. In the examples, purchases otherwise satisfy statutory requirements for exemption, and no audit liability assessment dates are in effect.
|Exemption by the Comptroller||08/01/09|
|Result||Purchases on or after 07/01/09 are exempt.|
Reason: Since the organization successfully applied for exemption before Sept. 1, 2009, its exemption for purchases begins on July 1, 2009, the date of its 501(c)(3) federal exemption.
|Exemption by the Comptroller||12/15/09|
|Result||Purchases on or after 07/01/09 through 08/31/09 are
Purchases on or after 09/01/09 through 12/14/09 are taxable.
Purchases on or after 12/15/09 are exempt.
Reason: Before Sept. 1, 2009, the exemption is retroactive to the date of its 501(c)(3) federal exemption. The exemption does not apply to purchases made between Sept. 1, 2009, and Dec. 14, 2009, because the Comptroller did not grant exemption until Dec.15, 2009.
SB 1199 Provisions Not Applicable to Governmental Entities
The following federal and Texas governmental entities and organizations are exempt from Texas sales tax under Texas Tax Code 151.309:
- the federal government including political subdivisions, agencies and departments of the United States and all branches of the U.S. military;
- Texas public schools, colleges and universities;
- Texas state and local government entities including all agencies and departments of the State of Texas and any county, city, school district or other political subdivision of the State of Texas;
- federal credit unions organized under 12 United States Code, Section 1768; and
- federally recognized Native American Indian tribes.
These entities are not required to apply for exempt status. For the entity to be listed on the Texas Tax-Exempt Entity Search; however, the entity would need to contact our office.
A government entity's purchase voucher is sufficient proof of exempt status; an exemption certificate is not required on purchases made by federal or Texas state or local government entities.
Foreign governments and governmental agencies from other states are not exempt from Texas sales and use tax.
Sales to Nonprofit Organizations - Seller Responsibilities
Accepting a Claim for Exemption
Sellers must collect tax unless a valid exemption certificate, resale certificate (PDF, 76KB) or government purchase order issued by a governmental entity exempted under Section 151.309 is provided.
Sellers are not required under Texas law to accept a claim for exemption, but may do so by accepting, in good faith, a properly completed exemption certificate.
If the retailer does not accept the certificate, the organization can request a properly completed Assignment of Right to Refund (Form 00-985) (PDF, 20KB) from the seller so the organization can request a refund of the tax directly from the Comptroller.
Good Faith Acceptance of Exemption Claims and Refunds
A seller may accept a certificate in good faith if the certificate is complete, states a valid reason for exemption on its face, is issued at the time of sale and if the seller lacks actual knowledge that the certificate is not valid. A seller cannot be held liable if they accept a properly completed exemption certificate in good faith at the time of the sale from a customer if it is later determined that the certificate was issued fraudulently or in error.
No seller may claim good faith, however, when the certificate is taken after the transaction occurs. Therefore, due to the changes made by SB 1199, sellers, when handling refund claims made by nonprofit organizations qualifying for exemption under Section 151.310 for purchases made on or after Sept. 1, 2009, are now responsible for verifying the organization's exempt status and its effective date before issuing the refund. Sellers can use the Texas Tax-Exempt Entity Search to verify this information.SALES TAX
Improving Realty for a Nonprofit Organization — Verify Before You Buy!
A "contract for an improvement to realty," as defined by Rule 3.347(a), includes a contract to erect, construct, alter or repair any building or other structure, as well as to furnish and install property (including tangible personal property) which after installation becomes real property.
Persons improving realty under a contract with a qualifying exempt organization may claim an exemption from tax on the purchase of certain taxable items used in the performance of the contract according to Texas Tax Code Section 151.311.
The exemption applies to:
- materials incorporated into the realty;
- consumable supplies that are necessary and essential for the performance of the contract and completely consumed (if after being used once for its intended purpose it is used up or destroyed) at the job site; and
- taxable services that either the exempt contract expressly requires the contractor to provide or purchase, or that are integral to the performance of the contract. These taxable services include trash hauling (including dumpster rental), pest control services, building or grounds cleaning, and janitorial or custodial services.
The exemption does not apply to tools, machinery and equipment (including repair and replacement parts) a contractor or service provider uses to improve realty for an exempt entity.
The service provider may issue an exemption certificate (PDF, 76KB) to suppliers in lieu of tax when purchasing qualifying items. This exemption certificate must show the provider as the purchaser and must identify the exempt entity for whom the improvements are made and the project for which the items are purchased.
Obtain Verification of Exempt Status Before Making Purchases
As previously noted, a contractor may claim an exemption under Tax Code Section 151.311 when purchasing taxable items for use under a contract to improve realty for an organization that is exempt under Sections151.309 or 151.310. But, contractors should not assume that their customer qualifies for exemption under Section 151.310 (religious, charitable and educational organizations). If the Comptroller determines that the organization is not exempt, the contractor is liable for all taxes, penalties and interest that accrue upon such purchases.
Therefore, before claiming the exemption, a person providing real property improvement services to a nonprofit organization should obtain verification that the organization is registered with the Comptroller's office as an organization exempt from Texas sales and use tax. The Texas Tax-Exempt Entity Search can be used for this purpose or the nonprofit organization can provide the service provider with a copy of a communication (letter or e-mail) of sales and use tax exemption from the Comptroller that is addressed to the customer. The service provider should retain a copy of the verification in his records.
An exemption certificate issued by a nonprofit organization to a contractor is not sufficient to prove that the contractor is eligible to claim exemption on his purchases under Section 151.311. The contractor should verify that the nonprofit organization is registered with the Comptroller as an exempt organization before claiming an exemption under Section 151.311.
A contractor/service provider who fails to properly obtain verification of exempt status for an organization claiming exemption under Section 151.310 before making purchases tax-free under Section 151.311 may be held liable for any tax due on items used in the performance of the contract if the Comptroller subsequently determines that the nonprofit organization is not exempt.
For example, assume a contractor enters into a contract with a nonprofit organization to build a new structure but fails to obtain verification of the organization's exempt status before beginning the project. The contractor, assuming that the organization is exempt from sales tax, claims exemption from tax under Section 151.311 when purchasing taxable items for use in the contract. Audit verification subsequently determines that the nonprofit organization has not obtained sales tax exempt status from the Comptroller; therefore, the contractor's claim for exemption under 151.311 for items used in the performance of that contract is disallowed and the contractor will be held liable for any tax due, plus penalty and interest, if applicable, on those items.
These provisions do not apply to contracts with government entities. Service providers and contractors don't need to charge tax when improving realty for governmental entities (federal, Texas state and Texas local government organizations and Texas public schools) exempt under Section 151.309. A government entity's purchase voucher is sufficient proof of exempt status and an exemption certificate is not required.RECENTLY ADOPTED RULES
The following rule adoption was filed with the Secretary of State on May 07, 2010. The publication date is May 21, 2010. Effective 20 days after filing.
Sales and Use Tax
Section 3.315 Motor Vehicle Parking and StorageRECENTLY PROPOSED RULES
The following rule was submitted for filing with the Secretary of State. The publication date is June 4, 2010. The comment period is 30 days after publication.
Motor Fuel Tax
Section 3.443 Diesel Fuel Tax Exemption for Water, Fuel Ethanol, Biodiesel, Renewable Diesel, and Biodiesel and Renewable DieselABOUT 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
Robin Corrigan, Jody Frierson, Gary Johnson, Lavonne Key, Carol McAnnally, Jerry Oxford, Jacob Salisbery, Viki Smith, Karen Snyder, Jennifer Specchio, Curt Swenson and Steve White