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

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FRANCHISE TAX

Charges to Customers to Recover Texas Franchise Taxes Paid by a Seller

The Texas franchise tax is imposed on most companies that are chartered or organized in Texas or that are doing business in this state. Taxes, like other business expenses such as payroll and insurance, are part of a company's overhead cost of doing business. Many companies incorporate this cost into the prices they charge for their services or goods. A company may, however, choose to charge customers a separately stated fee as a way to recover this cost.

STAR document 201008847L addresses such a charge made by a phone company on billing invoices sent to customers. The Comptroller determined that such a charge, referred to as a “Recovery Charge,” is permissible as long as certain parameters are maintained.

A company choosing to bill customers a Recovery Charge may explain to its customers that the charge is made in order to recoup money paid by the company for taxes imposed on it. The company may not, however, represent the charge as a tax imposed directly on the customer. To this end, the Recovery Charge must not appear in the “Government Fees and Taxes” (or similar section) of the customer's bill, invoice or contract. Further, the company should disclose that the Recovery Charge is not a tax the company is required to collect from its customers by law.

If a company collects amounts that are represented to the customer as being a tax on the customer, then those amounts must generally be paid to the state. See Texas Tax Code Section 111.016(a), which provides that, “any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected.”

The company may use the term “State Cost-Recovery Fee” to describe any charge it assesses to recoup costs of the Texas franchise tax.


It should avoid using any of the following terms (or variations of them) to describe its Recovery Charge:

  • reimbursement;
  • Texas margin fee reimbursement;
  • Texas state margin fee reimbursement;
  • gross receipts;
  • franchise tax;
  • margin fee; or
  • Texas margin fee.
FRANCHISE TAX

Franchise Tax and the Restaurant Industry

This is the third in a series of articles discussing franchise tax as it relates to different industries. The previous articles featured the construction and transportation industries. This month we highlight restaurants.

Tax Rate

Restaurants and bars are generally allowed a tax rate of 0.5 percent if primarily engaged in retail trade as defined in Texas Tax Code Section 171.002(c). Note that under Texas Tax Code Section 171.002(c-1), Texas Tax Code Section 171.002(c)(2) regarding the sale of products an entity produces does not apply to entities described in the Standard Industrial Classification Manual, Major Group 58, Eating and Drinking Places.

Cost of Goods Sold (COGS)

Generally, the COGS provisions apply to entities that sell real or tangible personal property in the ordinary course of business and include all direct costs of acquiring or producing the goods.

Examples of direct costs allowed by Texas Tax Code Section 171.1012(c) are:

  • acquisition of food;
  • equipment (such as such as refrigerators, ovens, stoves, pots, pans, etc.) used to store and prepare the food or the depreciation of such equipment (see Cost of Goods Sold FAQ #24 for Section 179 computation limits);
  • production labor (payments made to food preparers, including IRS Form W-2 wages, IRS Form 1099 wages, temporary labor wages, payroll taxes and employee benefits);
  • rent allocable to the production area (kitchen) only;
  • cleaning and janitorial costs allocated to the production area and food storage area.

Examples of costs related to the goods allowed by Texas Tax Code Section 171.1012(d) are:

  • insurance allocable to the production area;
  • utilities allocable to the production area and food storage area;
  • franchise fees directly associated with the goods produced.

Examples of indirect or administrative overhead costs that are allocable to the acquisition or production of goods and are, therefore, allowed by Texas Tax Code Section 171.1012(f) but limited to 4 percent of all indirect and administrative overhead costs are:

  • supervision of production labor;
  • property taxes allocable to the production area.

Examples of costs that are not allowed as COGS because they are not related to the acquisition or production of the goods or they are specifically disallowed under Texas Tax Code Section 171.1012(e) are:

  • rent allocable to the dining area and other non-production areas;
  • dining area furniture;
  • dishware, silverware, linens;
  • utilities allocable to the dining area;
  • cleaning and janitorial costs allocated to the dining area;
  • payments made for hosts, wait staff and busboys (including any uniforms provided);
  • credit card commissions/fees;
  • mixed beverage gross receipts tax;
  • advertising;
  • officers' compensation.
FRANCHISE TAX

Use That Print Button!

If you file your franchise tax reports using WebFile or Smart Forms, be sure to take full advantage of the built-in edits.

While the mathematical computations are done for you as you key in the line items, the most helpful edits are applied at the end, when it's time to print or submit your return.

The PRINT button on the Smart Forms and in WebFile contains edits that allow us to check your return and warn you of any problems, so you can correct them up front, before filing your return. Note: When you're using WebFile, our system will direct you to print a copy for your records before selecting SUBMIT, because you can't print a copy after submission.

Using the print button within the application helps you avoid receiving notices and being in not-good-standing status by checking for:

  • your qualification for the filing method (No Tax Due, E-Z Computation) you selected;
  • valid accounting year dates for the report year you are filing. For combined groups, this applies to the affiliates as well;
  • your selection of the appropriate information report for the entity type;
  • the use of positive and negative numbers in certain fields; and
  • completion of all required fields.

These edits only work when you select the PRINT button within the WebFile application and on the Smart Forms. If you print from your Web browser, you bypass these edit checks entirely.

There is no charge for filing your return using WebFile or the Smart Forms, so when you file, be sure to use the print button within the application. Let the edits work for you!

INSURANCE TAX

What is Surplus Lines Insurance?

Often a prospective insured is unable to purchase insurance from the traditional licensed insurance market and must then turn to the surplus lines or excess market. Surplus lines insurance is coverage that is unavailable through admitted or licensed insurers but which can be legally placed with certain non-admitted companies. These surplus lines companies are based in other countries and in states other than Texas. They are not licensed to sell insurance in Texas but must meet minimum eligibility requirements regarding capital and surplus thresholds. The companies must also be licensed in their home country or state to sell the kind of insurance they place in Texas.

Some examples of risks that licensed insurers may not cover include those that are unusual or difficult to evaluate such as an art collector's priceless paintings, the hands of a concert pianist or the arm of a major league baseball pitcher. They can also be more usual types of risks that admitted or licensed insurers do not insure such as vacant buildings, offshore drilling rigs or liability coverage above what licensed insurers are willing to offer.

The requirements for placing surplus lines business in Texas are:

  • the surplus lines agent must use “eligible” surplus lines insurers from the list maintained by the Texas Department of Insurance;
  • the agent or agency must hold a surplus lines license in the insured's home state;
  • the agent or agency must make a diligent effort to find the needed coverage with a licensed insurer;
  • the policy must contain a disclosure notice that the insurer is not covered by a guaranty association; and
  • the tax and stamping fee must be stated on the policy and collected from the insured.

Surplus lines business is taxed much differently than business in the licensed market. The insurance premium tax in the licensed market is paid by the insurer as an occupation or privilege tax based on the insurer's gross premiums for the state. Surplus lines premium tax is a transaction tax and is collected directly from the insured by the licensed surplus lines agent. As such, the surplus lines insurers do not pay a premium tax.

Sometimes there is more than one agent involved in the placement of coverage. If this occurs, and multiple agents hold surplus lines licenses, the agent that places the business directly with the eligible insurer (referred to as the “agent of record”) is responsible for paying the taxes to the Comptroller. The tax is due March 1 of each year for business from the previous calendar year and the rate is 4.85 percent of the taxable premium.

MIXED BEVERAGE GROSS RECEIPTS TAX

Nonprofit Organization Fundraising Event

A permit from the Texas Alcoholic Beverage Commission (TABC) is required before a person can sell beer, wine or other alcoholic beverages to the public.

When a nonprofit organization hosts a fundraising event where beer or other alcoholic beverages will be sold or served, the organization will often hire a permitted caterer instead of getting its own temporary alcohol permit from the TABC.

In STAR letter 201002876L, a nonprofit 501(c)(3) organization hired a caterer to sell mixed drinks at a fundraising event. A business will be donating $5,000 to the nonprofit organization. The nonprofit organization will pay the caterer $5,000 to purchase beer. The caterer will give the beer away at the same fundraiser where it is also selling mixed drinks.

The caterer asked if it is liable for the 14 percent mixed beverage tax on the beer that will be given away since the beer will be purchased using the caterer's mixed beverage license.

The caterer will not be liable for mixed beverage gross receipts tax if the following conditions apply:

  • The donated beer is given to persons 21years of age or older without restrictions;
  • There are no tickets sold or provided that can be redeemed for the donated beer. For example, if the price of entrance includes two tickets that can be redeemed for two beers, mixed beverage tax would be due on the portion of the entry fee attributable to the service of the “donated” beer; and
  • Records must prove the $5,000 used to purchase the beer was donated for that purpose. For instance, a copy of a letter from the nonprofit organization thanking the business for the $5,000 donation that was given to the caterer to purchase beer given away at the fundraising event.

Records must separately document the beer that is given away from the liquor and any other beer that is sold or served at the event. The mixed beverage gross receipts tax base for liquor and other beer served at the event must follow the guidelines in Rule 3.1001(e), regarding nonprofit organizations holding fundraising and other special events.

Any of the beer not given away is the property of the nonprofit organization. The organization will owe use tax on the remaining beer, unless it is later given away at a fundraising event.

MOTOR VEHICLE TAX

Determining Eligibility for the Motor Vehicle Tax Exemption for Orthopedically Handicapped Persons

The motor vehicle tax exemption for orthopedically handicapped persons found in Tax Code Section 152.086 is limited. Eligibility for the exemption is determined by the type and expected duration of the handicap.

Sales or use tax is not due on motor vehicles purchased and permanently modified for an orthopedically handicapped person to drive, as well as when a purchased vehicle will be used to transport an orthopedically handicapped individual.

The individual providing the basis for the exemption must have the orthopedic handicap at the time the motor vehicle is purchased for the exemption to apply. The vehicle also must be driven by, or used for the transportation of, an orthopedically handicapped person at least 80 percent of the time. See Rule 3.84.

The type of handicap is critical; not all handicaps are orthopedic in nature. For exemption purposes, an “orthopedically handicapped person” is an individual who has limited movement of body extremities and/or loss of physical functions. The physical impairment must be such that the person is either unable to operate, or be reasonably transported in, a motor vehicle that has not been specially modified. Thus, while a person who is blind or deaf, for example, may need special attention where transportation is concerned, these conditions do not trigger the exemption because they are not orthopedic conditions. Moreover, a person who may have a certain percentage of loss in physical function, but who can still operate a vehicle without the necessity of modifying it, does not qualify for the exemption.

Although the exemption describes “limited movement of body extremities,” an orthopedic handicap is not limited to injuries of the extremities. That is, a person may lose the use of an extremity for various reasons (such as amputation, spinal injury or emphysema); but it is the limited movement that causes the exemption to apply, not the source of the malady.

The exemption is limited where orthopedic injuries and conditions are concerned. While a person may temporarily lose the use of an extremity, as in the case of a broken leg or a case of pneumonia, for instance, the exemption will not typically apply in those circumstances. The exemption will apply only in cases where the prognosis for the duration of the orthopedic handicap is at least as long as the useful life of the vehicle purchased.

The Comptroller will use five years (the useful life of an automobile according to the instructions for Internal Revenue Service Form 4562, Depreciation and Amortization) as a reasonable measure when determining whether an orthopedic condition qualifies for the exemption.

For example, a person who has a hip joint replaced and is expected to recover from the surgery within six months will not qualify for the exemption (less than five years' useful life of the vehicle). By contrast, a person with a spinal injury, causing loss of function to the lower extremities with little prospect of recovery, will qualify for the exemption (more than five years' useful life of the vehicle).

SALES TAX

Court Case Summary: Southern Plastics, Inc. v. Combs
Solid Industrial Waste Does Not Include All Waste Produced by a Manufacturing Facility

On July 1, 2009, the Third Court of Appeals affirmed the district court's grant of summary judgment for the Comptroller in Southern Plastics, Inc. v. Combs, Cause No. 03-08-00149-CV, 2009 Tex. App. LEXIS 5107 (Tex. App. – Austin July 21, 2009). The case is now final.

The taxpayer operated a plant where it manufactured plastic closures, such as caps and lids, which it sold to companies that manufacture household products. It was audited for the period between Nov. 1, 1999, and Oct. 31, 2002. During this period, the taxpayer had contracted with the city of Kilgore to periodically remove and dispose of certain waste from its plant. There were essentially four sources of waste removed by the city: waste from the manufacturing process, discarded wrapping or packaging materials, damaged wrapping and packaging materials and office waste, including refuse from food and beverages consumed in the lunch room. The waste was commingled and the taxpayer paid a single fee for its removal.

The taxpayer subsequently requested a refund of sales taxes paid on those amounts, alleging the waste was industrial solid waste, the removal of which is not taxable under Tax Code Section 151.0048 and Rule 3.356. The taxpayer had not issued an exemption certificate to the city and did not produce any records establishing how much of the waste removed by the service provider during the audit period was industrial solid waste.

After the audit, the taxpayer conducted two one-week studies to try to determine the amount of industrial solid waste versus garbage. The Comptroller denied the refund claim because of the lack of adequate records and because the Comptroller concluded that much of the waste was garbage, the removal of which is taxable as a real property service, and not industrial solid waste.

Rule 3.356(a)(3)(E) defines industrial solid waste in accordance with how the term is defined in Health and Safety Code, Chapter 361, but specifically excludes from the definition industrial solid waste which meets the definition of garbage or municipal solid waste. The Comptroller, in multiple rulings and policy statements (such as STAR documents 9008L1038E08 and 9601H1390B11), has interpreted “industrial solid waste” under rule 3.356(a)(3)(E) to be limited to waste generated by the “actual manufacturing process” and to exclude shipping refuse or office waste. The taxpayer alleged that the Comptroller improperly interpreted the term “industrial solid waste” and based its claim on its interpretation of the phrase “resulting from or incidental to a process of manufacturing” contained in the definition of industrial solid waste in Health and Safety Code Section 361.003 (16).

The district court granted summary judgment for the Comptroller.

On appeal, the taxpayer argued that it had been entitled to summary judgment because all but a de minimis portion of the waste was industrial solid waste and the Comptroller did not establish her entitlement to summary judgment on that claim.

In overruling the taxpayer's arguments, the Third Court of Appeals first addressed the Comptroller's recordkeeping requirements outlined in Rule 3.356(h) for taxpayers who dispose of both taxable and nontaxable waste. The Court upheld the Comptroller's construction of the “books and records” requirement of Rule 3.356(h) to preclude reliance on the taxpayer's two after-the-fact, one-week studies (or similar attempts to replicate the composition of the taxpayer's waste during the audit period).

The court then held that the Comptroller's interpretation of Rule 3.356(a)(3)(E) as to what constitutes nontaxable industrial solid waste was not plainly erroneous or inconsistent with the regulation, particularly in light of Tax Code Section 151.0101(b)'s mandate that the Comptroller has “exclusive jurisdiction” to interpret the statutory definitions of taxable services. The Court held that the Comptroller's conclusion that not all of Southern Plastics' Class 2 industrial solid waste “results from” or is “incidental to” the plant's manufacturing processes under Rule 3.356(a)(3)(E) was not plainly erroneous or inconsistent with the regulation.

SALES TAX

Tax-Free Purchases of Items Donated to Qualified Nonprofit Organizations

Generally, purchases made by individuals that are paid for with the individual's own funds are not exempt from sales tax. Tax Code Section 151.155(e), however, allows an individual, business or other entity to purchase taxable items that will be donated to a qualified exempt organization tax free, even when the purchaser pays for the item with personal funds.

The purchaser must present a valid and properly completed sales tax exemption certificate (Form 01-339/back) (PDF, 79KB) to the seller in order to claim the exemption. The exemption certificate must state that the taxable item is being purchased for donation to an exempt organization and must clearly identify the organization that will receive the donation.

If the purchaser uses the item before donating it, the exemption is lost and tax is due. A purchaser cannot claim a sales tax credit or refund of tax paid on an item that was first used and then donated to a qualifying exempt organization.

A qualified exempt organization is an organization that has been granted sales tax exemption under Tax Code Section 151.309 or 151.310(a)(1) or (2) and includes the following:

  • the federal government, including political subdivisions, agencies and departments of the United States and all branches of the U.S. military;
  • Texas state and local government entities, including all agencies and departments of the State of Texas and any county, city, school district, special district or other political subdivision of the State of Texas;
  • nonprofit organizations created for religious, educational or charitable purposes;
  • nonprofit organizations qualifying for an exemption from federal income taxes under Internal Revenue Code Sections 501(c)(3), (4), (8), (10) or (19); and
  • volunteer fire departments, youth athletic organizations and chambers of commerce.

For example, a teacher or parent can purchase a computer tax free with personal funds to donate to a public school. To document the exempt purchase for the seller's records, the purchaser/donor must complete a sales tax exemption certificate and state on the certificate that the taxable item is being purchased for donation to a qualified exempt organization. The purchaser/donor must clearly identify the exempt organization that is accepting the donated item. See Rule 3.287(e)(5), relating to exemption certificates.

Similarly, a permitted taxpayer who removes an item from inventory in order to donate it to a qualifying exempt organization is not required to accrue or pay sales or use tax on that item. Tax Code Section 151.154(e) allows a seller to remove items from a valid tax-free inventory and donate those items to a qualified exempt organization without becoming liable for the tax, provided that the only use the seller made of the item prior to donation was for retention, demonstration or display. See Rule 3.285(e)(5), relating to resale certificates.

SALES TAX

'Tis the Season — Holiday Goods and Services

Holiday Decorations

Holiday Trees, Greenery and Flowers

In general, sales tax is due on sales of Christmas trees, mistletoe, holly, poinsettias and other greenery.

Tax is not due, however, on trees, greenery and flowers sold during a tax-free sale by an organization that is exempt from sales tax on the Comptroller's records.

For more information on sales by exempt organizations, see Exempt Organizations: Sales and Purchases (Pub. 96-122) (PDF, 405KB) and Rule 3.322.

Renting Decorations

If a decorator uses his or her own decorations, the rental charge and installation are taxable as the rental of tangible personal property.

Tree Decorating

When the customer provides the decorations, the charge to decorate a tree is not taxable.

When a decorator both sells or rents the decorations to the customer and decorates the tree, the total charge is taxable.

Home Decorating

Charges to decorate a residence are not taxable when the customer provides the materials.

If a decorator sells or rents the materials to the customer and provides the decorating service, the total charge for the materials and labor is taxable.

Decorating an Office or Other Nonresidential Structure

The labor charge to remodel nonresidential real property is taxable. “Remodeling” includes activities such as painting, running electric or other cables and installing permanent fixtures in real property. So when a decorator installs permanent hangers or other fixtures as part of the decorating service, the charge is taxable. When a decorator sells or rents the decorations to the customer and installs the decorations, the total charge is taxable.

If a decorator uses decorations provided by the customer and merely installs the decorations in the building without remodeling it, the charge is not taxable.

Window Painting

Charges to paint holiday pictures and messages on nonresidential windows are taxable as the taxable remodeling of a nonresidential structure. The paint used to perform the service can be purchased tax free by issuing a properly completed resale certificate (PDF, 57KB) since the paint is transferred to the care, custody and control of the purchaser in the course of performing the taxable service.

Painting residential windows is the nontaxable repair or remodeling of residential real property; as such, the incorporated materials are taxable, but labor is not. The type of contract (lump-sum or separated) between the contractor and the customer determines how tax is handled on materials. See Rule 3.291.

Separated Contract – Contractors working under a separated contract make separate charges for materials and for labor. Under a separated contract, the contractor is considered the seller of the incorporated materials (such as paint), and tax is due on the separately stated charge for materials. No tax is due on the separated stated charge for labor.

Lump-sum Contract – A lump-sum contract is a contract in which the agreed upon contract price is one lump-sum amount and in which the charges for incorporated materials are not separately stated from labor charges. Under a lump-sum contract for residential window painting, the contractor is considered the consumer of all materials and must pay tax to suppliers at the time of purchase, based on the tax rate in effect at the supplier's place of business. The contractor does not collect sales tax on the charge to the customer.

Holiday Foods

Bakery Products

Bread, rolls, cakes, cookies and other bakery products are not taxable unless they are sold with plates or eating utensils.

Prepared Meat

Prepared meat, such as turkey and ham, kept hot and ready to eat is taxable whether sold whole or cut into pieces.

A smoked turkey or ham that is not kept hot is taxable only if sold with eating utensils.

A charge to a customer to smoke a turkey or ham owned by the customer is not subject to tax.

Prepared Holiday Meals

A complete holiday meal (such as turkey with all the trimmings) that is sold hot and ready to eat is taxable. If the meal needs further preparation or heating, it is not taxable.

Other Holiday Items and Services

Firewood

The sale of firewood is taxable as the sale of tangible personal property.

Chopping down a tree or cutting up a fallen tree (other than in a disaster area) is a taxable real property service.

Charges for stacking wood after a tree has been cut and charges to remove a tree or debris are also taxable.

Gift Wrapping

When the store that sold a taxable item also wraps the item for the customer, the gift wrapping charge is taxable as the sale of a service in conjunction with the sale of a taxable item.

Gift wrapping is not a taxable service when an item is purchased at one store and the customer takes it to another store to be wrapped.

It is important to note that sellers may not purchase packaging and wrapping supplies tax free for resale, even if the seller separately states a charge to customers for those supplies. Therefore, sales tax is due on the purchase price of gift wrapping supplies used by persons providing gift wrapping services, regardless of whether the person who provides the service must collect tax on the gift wrapping charge or not. See Rule 3.314(d).

Layaways

A handling fee charged by a retailer to put an item on layaway is not subject to sales tax. Similarly, a cancellation fee charged by a retailer on a canceled layaway purchase is not taxable. A restocking fee is not taxable.

Facility Rentals

Renting a hall, ballroom, pavilion, patio or similar facility for holding a party, banquet or other event is not taxable if:

  • the facility is not located in a building that has sleeping accommodations;
  • the rental is not connected to the sale of a taxable item such as prepared food; or
  • the rental does not include or constitute access to an amusement service.

For example, renting a room in a museum is not taxable if the museum does not provide food or drinks for the event, and if the rental does not allow event attendees access to the museum exhibits.

Facility Rentals When Food or Amusement Services Are Provided

Renting a hall, room or similar facility that is not located in a building that has sleeping accommodations is subject to sales tax if the rental is connected to the sale of prepared food or an amusement service.

If food is prepared and served or otherwise provided by the facility hosting the event, sales tax is due on the entire charge to the client, including charges for such items as entertainment, decorations, linens, parking, security, or transportation, even if separately stated. See Rule 3.293 for more information. For example, sales tax is due on the rental of a restaurant party room if the restaurant provides food for the event.

Sales of amusement services are subject to sales tax. This includes admissions to live or recorded performances, spectator sports, participatory sports and games, party boat excursions and similar activities. It also includes facility rentals that allow access to amusements, such as a swimming pool, skating rink, sports court or specific type of sports field to participate in a sport. For example, sales tax is due when renting a movie theatre for screening a film or renting an ice skating rink for a party. See Rule 3.298.

Facility Rentals in a Building with Sleeping Accommodations

Hotel occupancy tax is due when renting a room in a building that has sleeping accommodations, even if the venue serves food or provides access to an amusement service with the room rental. For example, the rental of a party room in a hotel which allows guests access to the hotel's water park is subject to hotel occupancy tax, even if the hotel caters the party. If the hotel charges one price for food and room rental, hotel occupancy tax is due on the entire charge. See Rule 3.293(j).

Resale Exemption Not Allowed

When a third-party caterer (i.e. outside caterer hired by the person throwing the party) rents a hotel banquet room for a client's event, the caterer must pay hotel tax on the room rental and cannot issue a resale certificate. Sales tax is then due on the entire amount charged to the caterer's client, including a charge by the caterer for reimbursement of hotel tax. See Rule 3.293(k).

Miscellaneous Fees and Charges Connected to Facility Rentals

Furniture and Equipment Rentals

Generally, the rental of tangible personal property such as tables, chairs and similar items is subject to sales tax. But, when a contract for the lease or rental of nontaxable real property includes the lease or rental of furniture or equipment, no sales tax is due on the amount charged to the tenant for the lease or rental of the tangible personal property, even if separately stated. Sales tax is due, however, at the time such tangible personal property is acquired by the owner or manager of the real estate.

The rental or lease of tangible personal property, which is separate and distinct from a contract for the rental or lease of real property, is subject to sales tax. For example, renting tables and chairs, or a moonwalk or other inflatable game from a party supply company is taxable. A person who is required to collect tax on the lease or rental of tangible personal property may buy such property tax free for resale.

See Rule 3.294 for more information.

Cleaning Charges

Generally, cleaning and janitorial services are taxable real property services. Therefore, a cleaning fee charged in connection with the rental or lease of a party room or other facility, other than a hotel, is subject to sales tax, even if the facility rental is not taxable.

A charge by a hotel to clean a hotel room, however, is a charge to clean and ready a room for occupancy, and hotel tax is due on the cleaning charge. See Rules 3.356 and 3.162, respectively.

Set-Up Fees

Sales tax is due on a set-up fee charged in connection with the sale of prepared food. For example, a caterer or hotel should collect sales tax on a set-up fee when providing meals. See Tax Code Section 151.007. When not providing food, a hotel should collect hotel occupancy tax for a set-up fee on the rental of a hotel room. See Rule 3.162.

For bar set-up fees, the mixed beverage permittee owes mixed beverage gross receipts tax on the fee. See Rule 3.1001(c)(7).

Bartender and Corkage Fees

Bartender and corkage fees are subject to either sales tax or mixed beverage gross receipts tax, depending on the type of alcohol permit held by the person providing the alcoholic beverages.

For instance, if the provider holds a wine and beer retailer's permit, then sales tax is due on the bartender or corkage fee. If the provider has a mixed beverage permit, the provider owes mixed beverage tax on the bartender or corkage fee. See Rule 3.1001(c)(7).

Service Charges and Gratuities

A voluntary tip or gratuity is not taxable.

A mandatory gratuity or service charge, however, may or may not be taxable. A mandatory gratuity is not taxable only when clearly identified as such, is no more than 20 percent of the sales price and is disbursed to qualified employees.

For more information on the taxability of gratuities, see Rules 3.337 and 3.1001.

Entertainment/DJ

A fee charged by a singer, band, clown, DJ or similar entertainer to perform at an event is not taxable. A fee charged for admission to the event, however, is taxable. See Rule 3.298.

Limousines and Shuttles

Separately stated charges for limousine or shuttle service are not taxable if the primary purpose is to provide transportation from one location to another. Limousine rental is taxable if the primary intent is to provide a tour of points of interest along a route. A lump-sum charge to a customer for a package including banquet facility rental with food and limousine service would be taxable.

RECENTLY ADOPTED RULES

The following rule adoptions were filed with the Secretary of State on Oct. 1, 2010, with a publication date of Oct. 15, 2010, effective 20 days after filing.

Texas Prepaid Wireless 9-1-1 Emergency Service Fee

Section 3.1271 Imposition and Collection of the Prepaid Wireless 9-1-1 Service Fee

State Sales and Use Tax

Section 3.344 Telecommunications Services

RECENTLY PROPOSED RULES

The following rule was submitted for filing with the Secretary of State with a publication date of Oct. 8, 2010. The comment period is 30 days after publication.

State Sales and Use Tax

Section 3.333 Security Services

The following rule was submitted for filing with the Secretary of State with a publication date of Oct. 29, 2010. The comment period is 30 days after publication.

Section 3.346 Use 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 website.

Contributors to This Month's Issue

Teresa Bostick, Robin Corrigan, Lisa Davis, Don Dillard, Lia Edwards, Gary Johnson, Carol McAnnally, Stefanie Medack, Jerry Oxford, Tim Pingree, Viki Smith, Karen Snyder, Jennifer Specchio, Karen Specht and Steve White

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