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

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COIN-OPERATED AMUSEMENT MACHINES TAX

Renewal Applications Due by November 30

Renewal applications for a 2011 coin-operated amusement machine "General Business License," "Registration Certificate," "Import License" and "Repair License" are being mailed in September and are due by Nov. 30, 2010. The Coin-Operated Machine Law, in Occupations Code Section 2153.162, provides that renewal applications, inventory forms and payments that are 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 the Coin-Operated Machines Tax section of our website.

Coin-operated amusement machine operators that have not received renewal packets by October 30 should contact our office at (800) 252-1385, or in Austin at 463-4600, to request another renewal packet.



FRANCHISE TAX

Franchise Tax and the Transportation Industry

This is the second in a series of articles discussing franchise tax as it relates to different industries. Last month's Tax Policy News featured the construction industry. This month we highlight the transportation industry.

Nexus

The Texas franchise tax is imposed on each taxable entity that does business in this state or that is chartered or organized here. Transportation company activities that constitute doing business in Texas include, but are not limited to:

  • having employees, independent contractors, agents or representatives in Texas doing the business of the taxable entity;
  • maintaining a place of business in Texas;
  • carrying passengers or freight from one point in Texas to another point in Texas if pickup and delivery (regardless of origination or ultimate destination) occurs in Texas.

Tax Rate

The tax rate is 1 percent for entities in the transportation industry, as defined in Division E of the 1987 Standard Industrial Classification Code.

Total Revenue

Total revenue, as defined in Texas Tax Code Section 171.1011, is tied to the amounts entered on specific lines from the federal return, to the extent the amount entered complies with federal income tax law, minus specific statutory exclusions. The exclusions from revenue for flow-through funds are very narrow and do not include subcontracting payments such as those paid to independent truckers. Additionally, netting the subcontracting payments made to independent truckers from gross receipts is not appropriate under federal tax law.

Cost of Goods Sold

Entities engaged in the transportation business are not eligible to subtract cost of goods sold for their transportation services to determine margin. A deduction for cost of goods sold is generally only allowed on sales of tangible personal property or real property in the ordinary course of business. As defined in Texas Tax Code Section 171.1012(a)(3), tangible personal property does not include services.

Compensation

Allowable costs for the compensation deduction include W-2 wages paid to officers, directors, owners, partners and employees and net distributive income reported to natural persons, limited to $320,000 per person per 12-month period for tax reports due in 2010 and 2011. The compensation deduction also includes certain benefits provided to all personnel to the extent deductible for federal income tax purposes. Amounts reportable to independent contractors on Internal Revenue Service Form 1099 cannot be included in the compensation deduction.

Apportionment

Only receipts from transportation services in intrastate commerce are apportioned to Texas. "Intrastate commerce" means the transportation of passengers or freight from one point in Texas to another point in Texas if both pickup and delivery occur in Texas. Receipts from interstate commerce, where either pickup or delivery occurs outside of Texas, are not Texas receipts and no proration of these receipts is required for the portion of the transportation that occurred in Texas.

Reporting Alternatives

The E-Z Computation may be the best franchise tax reporting method for transportation companies that use 1099 contractors and have $10 million or less in total revenue. With no exclusion from revenue or compensation deduction for payments made to independent contractors and no cost of goods sold deduction allowed for services, the reduced tax rate of 0.575 percent applied to apportioned total revenue may provide the least amount of tax liability.

INSURANCE TAX

Reinsurance Tax Exclusion

In defining taxable premium, the Texas Insurance Code specifically excludes premiums received from another authorized insurer for reinsurance. This exclusion represents the "direct" basis of premium taxation that was adopted by the Legislature in 1939. The reporting of taxable premiums was simplified, making the primary or original insurer responsible for paying the premium tax on the premium.

Under the direct basis, an authorized insurance company reports and is taxed on premiums it received from policyholders for original direct business, and premiums received for reinsurance by the authorized insurance company is excluded from taxation.

The policy of the state regarding this reinsurance exclusion is to avoid double taxation without any loss of revenue to the state. This exclusion is allowed because the original insurer is taxed on the premiums. Such premiums are not eligible for the exclusion unless received from an insurer that is subject to premium tax. Any other interpretation would result in premium leakage from the total base of premiums subject to tax.

Section 222.002(d) of the Insurance Code provides an example of this treatment for tax purposes. The statute considers a stop-loss or excess loss policy that is issued to a health maintenance organization to be reinsurance. Except in this limited situation, stop-loss or excess loss policies are considered direct business and the premium is subject to taxation. The treatment of these policies as reinsurance when they are issued to an HMO is to avoid double-taxation.

MOTOR VEHICLE TAX

Tax Calculation for Classic Motor Vehicles 25 Years Old or Older

The sale or gift of a motor vehicle 25 years old or older is excluded from the law that requires using the Standard Presumptive Value (SPV) procedure in private-party sales to determine the amount of motor vehicle sales tax due. Instead, tax is calculated on the actual sales price.

Section 152.062 of the Texas Tax Code requires the purchaser and seller to complete a joint statement as to the sales price. This requirement is met by completing an Application for Certificate of Title/Tax Statement (Form 130-U). An acceptable bill-of-sale completed by the seller may be used to document the sales price of a motor vehicle purchased out of state. Under Texas law, a county tax assessor-collector may, as he or she determines necessary, request additional information to verify the sales price.

To document an eligible gift of a classic motor vehicle, the Application for Certificate of Title/Tax Statement (Form 130-U), along with an Affidavit of Motor Vehicle Gift Transfer (Form 14-317) (PDF, 128KB) must be completed by both the donor and the donee.

SALES TAX

Mobile Food Vendors

Mobile food vendors are responsible for collecting state and local sales and use tax on all sales of ready-to-eat food items. A "mobile food vendor" is any person who sells food from a motor vehicle, push cart or any other form of vehicle. Examples of mobile food vendors include food trailers, taco wagons, snow-cone stands, hotdog carts and ice cream trucks. The term also includes vendors who sell ready-to-eat food items at temporary events such as fairs, carnivals, festivals, craft shows and concerts.

All ready-to-eat food items sold by mobile food vendors are subject to sales and use tax. Traditional favorites such as hamburgers, hotdogs, turkey legs and tacos are among the taxable items typically sold by mobile food vendors.

Taxable food items are not limited to those sold on plates; they include food sold on a stick or in a bag such as kabobs, candy apples, corn dogs and popcorn. Tax is also due on the more exotic food items that are becoming increasingly popular on midways such as fried macaroni and cheese, chicken fried bacon and fried cookie dough. All candy products, (including cotton candy, kettle corn and fried candy bars) continue to be taxable when sold by mobile food vendors. Sales of food items filled or prepared with alcoholic beverages, such as liquor-filled candies, are also subject to sales tax.

Sales of bakery items by mobile food vendors are exempt from tax unless the item is sold on a plate, in a bowl or with eating utensils. "Bakery items" are baked goods typically prepared in bakeries such as doughnuts, cookies, cakes, pies and pastries. Although funnel cakes are considered bakery items, they are subject to sales tax since funnel cakes are generally sold on plates. Please be advised that battering and deep frying a food item does not automatically qualify it as bakery item. For example, a Twinkie is an item that is not typically made in bakeries. Twinkies® that are battered and deep fried are taxable, whether sold on a stick, plate or with other eating utensils or not.

Mobile food vendors must obtain a sales tax permit and collect and remit the appropriate local sales and use taxes when operating in Texas. Mobile food vendors can charge a "tax included" sales price, or they may separately state the tax on each customer receipt. Either method is acceptable as long as the customer is aware how the tax is being handled. If tax is included in the sales price, the mobile food vendor must post a sign indicating that the price includes sales tax.

The tax rate is based on the location where the items are sold. For example, vendors selling ready-to-eat food items at one of the many musical festivals in Austin should collect 8.25 percent tax on all taxable sales made at the festival. The sales tax rate collected includes 6.25 percent state tax, one percent Austin city tax and one percent Austin mass transit tax. Please see the "Traveling Salespersons, Itinerant Vendors and Temporary Places of Business" section of our publication Guidelines for Collecting Local Sales and Use Tax (Pub. 94-105) (PDF, 827KB) for additional information about collecting local sales and use tax.

RECENTLY ADOPTED RULES
The following rule adoptions were filed with the Secretary of State on Sept. 23, 2010. The publication date is Oct. 8, 2010, effective 20 days after filing.

Motor Vehicle Sales Tax

Section 3.80 REPEAL Motor Vehicles Awarded as Prizes

Section 3.80 Motor Vehicles Transferred as a Gift or For No Consideration

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 website.

Contributors to This Month's Issue

Teresa Bostick, Robin Corrigan, Reno Daniels, Lisa Davis, Don Dillard, Gary Johnson, Lavonne Key, Carol McAnnally, Jerry Oxford, Viki Smith, Karen Snyder, Jennifer Specchio, Curt Swenson and Steve White

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