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

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CIGARETTE TAX; CIGARS AND TOBACCO PRODUCTS TAX

Time to Renew Cigarette/Tobacco Non-Retailer Permits

It's time to renew cigarette and tobacco products non-retailer permits for the period March 1, 2011, through Feb. 29, 2012. Non-retailers include cigarette, cigar and/or tobacco products manufacturers, importers, distributors, bonded agents and wholesalers.

Current non-retailer permits will expire Feb. 28, 2011. Renewal packets with pre-printed applications were recently mailed to all non-retailers. Non-retailers should review the pre-printed information and make any corrections. Return all pages of the renewal packet and any other documentation with the applicable permit fee to the Comptroller's office by the date printed on the application form.

Returning the renewal packet with the application fee by the return date will allow enough time for us to process the renewal before the current permit expires.

COIN-OPERATED AMUSEMENT MACHINE TAX

Renewal Application — Due Dates, Fees and Penalties

Renewal applications for coin-operated amusement machine General Business License, Import License, Repair License and Registration Certificate were due Nov. 30, as announced in the September 2010 Tax Policy News.

Applicants who filed and paid all fees and taxes by the due date, but have not received a license or registration certificate, may continue to operate their machines after Dec. 31, unless notified by our office of a problem with the renewal.

A renewal application filed after the due date may result in the license or registration certificate being issued after Dec. 31 when the 2010 license or registration certificate expires. Taxpayers who filed their renewal applications late cannot operate amusement machines until the 2011 license or registration certificate is issued. A person who operates amusement machines without a license or registration certificate or with an expired license or registration certificate is guilty of a Class A misdemeanor, as provided in Occupations Code Section 2153.356 and Rule 3.602(b)(1).

Fees on late filers, as provided in Occupations Code Section 2153.162, are $50 on renewal applications filed after the due date but before the license or registration certificate expires on Dec. 31; one-and-a-half times the annual license or registration fee when filed Jan. 1 through March 31; and twice the annual license or registration fee when filed April 1 or after.

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. See Occupations Code Sections 2153.401 and 2153.406.

Coin-operated amusement machine operators who did not receive their renewal packets should contact our office.

For information on license and registration fees and tax permits, including a fee schedule, see the Coin-Operated Machines Tax section of our website and our publication #96-256 on coin-operated amusement machine regulation and taxation.

FRANCHISE TAX

Change in Reporting Policy for Certain Passive Entities

Under current policy, an entity that filed as passive on a prior report is not required to file a subsequent franchise tax report as long as the entity continues to qualify as passive.

This policy is changing beginning with reports originally due on or after Jan. 1, 2011. A passive entity that is registered, or required to be registered, with the Comptroller's office or the Secretary of State's office is now required to file a No Tax Due Information Report (Form 05-163) (PDF, 93KB) to affirm that the entity qualifies as passive for the period upon which the tax is based. An entity that qualifies as passive is not required to file an Ownership Information Report (Form 05-167) (PDF, 212KB).

The policy will not change for a partnership or trust that qualifies as passive and is not registered, and not required to be registered, with the Comptroller's office or the Secretary of State's office. These entities are not required to register with, or file a franchise tax report with, the Comptroller's office as long as they continue to qualify as passive.

Rule 3.582 will be amended to reflect the policy change.

INSURANCE TAX

Motor Vehicle Financial Responsibility

As a condition of operating a motor vehicle in this state, Texas law requires a person to maintain financial responsibility for the vehicle and prohibits the operation of a motor vehicle unless financial responsibility is established. This requirement for financial responsibility can be established through several methods.

The most common method of establishing financial responsibility for a motor vehicle is through a liability insurance policy issued by an insurance company authorized to write motor vehicle liability insurance in this state. The law also sets minimum coverage amounts that must be maintained.

The Transportation Code lists several options as alternative methods of establishing financial responsibility in lieu of liability insurance coverage on motor vehicles. These options are:

  • a surety bond filed with the Texas Department of Public Safety (DPS) under Section 601.121, Transportation Code. The DPS files a notice of the bond in the county clerk's office in the county where the real property described in the bond is located;
  • a deposit of cash or securities in the amount of $55,000 with the Comptroller as described in Section 601.122, Transportation Code. The contact at the Comptroller's office is Wolf Bouldin who may be reached at (512) 463-6069.
  • a deposit of cash or a cashier's check in the amount of $55,000 with a county judge of the county where the motor vehicle is registered under Section 601.123, Transportation Code; or
  • self-insurance under Section 601.124, Transportation Code. This applies to someone who has more than 25 motor vehicles registered in their name. The self-insurance certificates are handled by DPS.

Insurance premium and maintenance tax and the Automobile Burglary and Theft Prevention Authority assessment apply to any motor vehicle policy purchased to establish financial responsibility.

You may request additional information from the Texas Department of Public Safety by contacting Cheryl Garran at (512) 424-5002 and requesting a packet called "Alternative Methods of Financial Responsibility."

SALES TAX

Court Case Summary: Combs v. Home & Garden Party, Ltd.

On Nov.3, 2010, the Third Court of Appeals reversed the district court's grant of summary judgment for the taxpayer in Combs v. Home & Garden Party, Ltd., Cause No. 03-09-00673-CV, 2010 Tex. App. LEXIS 8875 (Tex. App. - Austin Nov. 3, 2010). The court held that the manufacturing exemption did not apply to taxpayer's purchases of materials used to package items that taxpayer did not fabricate or process.

Home & Garden Party (HGP) is a manufacturer and wholesaler of home decorating products. It manufactures items such as framed prints and wood products, but also purchases pre-finished items in bulk, such as silk flowers and resin figurines, which it repackages prior to sale. HGP sought a refund (pursuant to the manufacturing exemption in Tax Code Section 151.318) of sales tax it had paid on wrapping and packaging supplies for periods from January 1998 through May 2004. The Comptroller conducted an audit of HGP and allowed the exemption for packaging materials used to package items it actually manufactured, but denied the exemption on the remaining materials that were used to repackage pre-finished items purchased from other manufacturers. The district court had granted summary judgment to HGP and the Comptroller appealed.

HGP argued that its purchases were exempt because it was a manufacturer, not only with regard to the products it actually produced, but also regarding the products it repackaged, asserting that it had an integrated packaging operation for all the products it sold.

Section 151.318(a)(1) provides that, "tangible personal property that will become an ingredient or component part of tangible personal property manufactured, processed, or fabricated for ultimate sale," is exempt from the taxes imposed by this chapter, "if sold, leased, or rented to, or stored, used, or consumed by a manufacturer." Manufacturing is defined as including, "each operation beginning with the first stage in the production of tangible personal property and ending with the completion of tangible personal property having the physical properties (including packaging, if any) that it has when transferred by the manufacturer to another." See Texas Tax Code Section 151.318(d).

The Comptroller argued that HGP was not the manufacturer of the pre-finished items because the manufacturing process was complete when those items were sold by their manufacturers to HGP. The Comptroller argued that HGP merely repackaged the items and was not entitled to the exemption in Rule 3.314(c). Further, the agency argued HGP was not "primarily" engaged in manufacturing; therefore, it did not qualify for the exemption under Rule 3.314(e).

The court of appeals found the agency's interpretation of the exemption to be reasonable and also upheld Rule 3.314 against HGP's assertion that it was invalid.

SALES TAX

Hearings Summary — Flight Instruction is Not Taxable; but Flight Instructors Buying Aircraft Need a Permit

Hearing No. 101,806

President John Adams once said that, "facts are stubborn things..." He could just as easily have been speaking of statutes. Statutes take precedence over verbal opinions, policy letters, publications — and even rules. Hearing No. 101,806 hinged on this issue.

Texas Tax Code Section 151.328(a)(2) exempts the sale of aircraft to a person who has a sales tax permit and uses the aircraft to provide flight instruction under certain circumstances relating to Federal Aviation Administration regulations. Note that the exemption requires the person purchasing the aircraft to hold a sales tax permit.

The most important issue in interpreting a statute is giving effect to legislative intent1 and every word used in a statute is presumed to have been used for a purpose.2 The Comptroller's office strives to adhere to these principles in all information it disseminates regarding a statute, whether verbally or in writing. While rules and publications are written to capture legislative intent for administrative purposes, the fact that they do not always comprehensively address each detail in a taxability issue does not lessen the overriding importance of the plain language of a statute.

The taxpayer in Hearing No. 101,806 purchased aircraft in another state and brought them into Texas. The taxpayer claimed to have purchased the aircraft to use in flight instruction, pursuant to the exemption in Tax Code Section 151.328(a)(2); however, the taxpayer did not hold a sales tax permit.

The taxpayer acknowledged that it did not have a sales tax permit, but attempted to rely on several sources to show that the Comptroller was intentionally not enforcing that part of the statute. Furthermore, the taxpayer sought detrimental reliance. In both efforts, the taxpayer noted, among other things, that there was no direct mention of the permit requirement in the related rule (3.297), publications (ca. 2002 and 2006) or a Tax Policy News article. The taxpayer also sought to establish his position by testimony of one former Comptroller employee and a reference to an undocumented telephone conversation with another.

The taxpayer claimed that a Comptroller employee informed him, via telephone, that he did not need a sales tax permit for flight instruction. While the Administrative Law Judge (ALJ) agreed, in reaching the decision, that it is true that flight instruction is not a taxable service requiring a sales tax permit, the ALJ also noted that this is not germane to the exemption. A permit is required to trigger the exemption, regardless of the fact that it is not required for flight instruction.

The ALJ used the example of the 2002 aircraft publication, noting that, while the publication did not say that the taxpayer had a responsibility to hold a permit to trigger the exemption, the publication also did not state, erroneously, that the taxpayer would qualify without one. The ALJ added that, ultimately, "the law recognizes that there is no duty to inform others of the law because all persons are presumed to know the law."3

Moreover, the ALJ mentioned that the taxpayer failed to demonstrate any case in which the Comptroller allowed a purchaser without a permit to qualify for the exemption. Finally, the ALJ cited two notable instances in which the Comptroller had denied the exemption due to the lack of the permit [Hearing No. 101,712 (2009) and Hearing No. 43,207 (2004)].

Based on these findings, the ALJ concluded that the statutory requirement to hold a permit to qualify for the exemption in Tax Code Section 151.328(a)(2) cannot be overlooked, regardless of whether that fact was always overtly promulgated in the entire Comptroller's communication. In addition, while the right to seek detrimental reliance is almost always associated with tax collection as opposed to a tax liability on a taxpayer's purchase, the taxpayer in this case could not establish all elements of the test for detrimental reliance. The taxpayer could not establish direct communication from the Comptroller's office stating that the permit was not required, nor could he establish that the direct communication he ostensibly received had been rendered with sufficient information to have led the employee to give correct advice. To the contrary, there was clear evidence from hearings and testimony that the Comptroller had consistently required taxpayers to hold permits to qualify for the exemption.

1 See Fleming Foods of Texas, Inc. v. Rylander, 6 S.W.3d 278 (Tex. 1999)

2 See Liberty Mut. Ins. Co. v, Garrison Contractors, Inc., 966 S.W.2d 482, 485 (Tex. 1998). See also Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535 (Tex. 1987).

3 Greater Houston Transportation v. Phillips, 801 S.W.2d 523, at 525 (Tex. 1990)

SALES TAX

Hearings Summary: Mobile Telecommunications Sourcing Act is Not Applicable to Calls Made in Mexico

Hearing Nos. 100,586 and 100,587

In these hearings, the Comptroller ruled the roaming charges for wireless calls that originated and terminated in Mexico should be deleted from the audit.

The taxpayers were wireless telecommunications service providers that each maintained a Texas network and sold mobile wireless users the right to access their networks. The taxpayers entered into agreements with other wireless telecommunications providers to purchase telecommunication services with the intent to resell those services to give their customers seamless service even when the customers traveled (roamed) outside taxpayers' network coverage area. Some of the taxpayers' customers traveled to Mexico, and used a wireless device to place or receive calls that originated and terminated in Mexico. The related charges were separately stated, call-specific roaming charges for a telecommunications service that was provided in Mexico.

The Comptroller audited the taxpayers and assessed sales tax on the itemized roaming charges paid by the taxpayers' customers who traveled in Mexico and used a wireless device to place or receive calls that originated in Mexico. The charges were taxed as sales of telecommunications services in Texas. See Texas Tax Code Sections 151.051, 151.0101(a)(6) and 151.0103(a).

The Mobile Telecommunications Sourcing Act (MTSA) provides that a mobile telecommunications service provided in the United States will be deemed to have been provided at a subscriber's place of primary use, as defined by the Act. See 4 U.S.C. Sections 116 and 124(12).

The Comptroller determined the primary use rule under MTSA did not apply. The wireless telecommunications subscribers were not using a wireless telecommunications service that could be deemed provided in Texas when the subscribers traveled to a foreign country, and used a wireless device to place or receive calls that originated and terminated in the foreign country.

SALES TAX

Exports and Refunds — A Friendly Reminder

Texas sales tax is due when a purchaser buys and takes possession of taxable items in this state. Once the items have been exported, the purchaser may request a refund of the tax paid from the store where the purchase was made, or, in some situations, directly from the Comptroller's office. The purchaser must provide acceptable proof that the item(s) purchased were exported and cannot obtain a refund until after the applicable waiting period has passed. See Rule 3.323, "Imports and Exports".

When Can the Tax be Refunded?

Sellers located in counties that border the United Mexican States (Mexico) may not issue a refund until 24 hours after the time of export listed on the documentation. These counties are El Paso, Hudspeth, Jeff Davis, Presidio, Brewster, Terrell, Val Verde, Kinney, Maverick, Dimmit, Webb, Zapata, Starr, Hidalgo and Cameron. For example, if a customer buys a stereo from a store in El Paso and takes it across the border into Mexico (exports it) at 2:00 p.m. on Tuesday, the purchaser cannot return to the seller and receive a refund until after 2:00 p.m. on Wednesday.

Sellers located in all other counties in Texas may not issue a refund until the seventh day after the date of export shown on the documentation.

Note that any use of the property in Texas by the owner prior to export causes the loss of export exemption. For example, if a customer buys a hat in Texas and wears it, the purchaser may not request a refund of the tax paid on the hat even if the purchaser subsequently exports it when leaving the United States. Wearing the hat is a taxable use of the item in this state.

OTHER NEWS

Earned Income Tax Credit

As part of the Comptroller's campaign to publicize the federal Earned Income Tax Credit (EITC) program, we are asking employers to share the following information with their employees.

The EITC is a special federal credit for certain persons who work. The credit reduces the amount of income tax a qualifying taxpayer owes (if any) and is intended to offset some of the increases in living expenses and Social Security taxes.

Beginning with the 2011 tax year, the Advanced Earned Income Tax Credit is no longer available. Taxpayers who are eligible to claim EITC must wait and claim the credit when the return is prepared.

Taxpayers who received the advanced payments during the 2010 tax year are required to file a tax return, regardless of their income.

For more information, call the Internal Revenue Service at (800) 829-1040, or go to the Earned Income Tax Credit section of our website.

The EITC publications below are available in English and Spanish. You may print these publications from our website or order by e-mail at tax.help@cpa.state.tx.us. Enter "EITC" in the subject line and request the publication by number of the item that interests you.

  • Do You Qualify for the EITC? (Limit 10) — Frequently asked questions. (Pub.96-540) (PDF, 600KB)
  • Volunteer Income Tax Assistance (Limit 2) — Information about getting assistance for filing federal income tax returns. (Pub. 96-1063) (PDF, 1178KB)
  • Inserts/handouts (Limit 10) — Envelope-size bulletin that can be inserted in official mail or handed out. (Pub. 98-408) (PDF, 353KB)
  • Earned Income Tax Credit Poster (Limit 2) — To be placed where the general public and eligible personnel can read them. (Pub. 96-520) (PDF, 725KB)
OTHER NEWS

New ENERGY STAR® Appliance Mail-in Rebate Program

Texas residents can save money on their purchases of certain ENERGY STAR® appliances by participating in the new Texas Appliance Mail-In Rebate Program scheduled to begin Dec. 20, 2010, thanks to the nearly $10 million of funds remaining from the April 2010 appliance rebate program.

The program's goals are to stimulate the Texas economy and provide savings to Texans by promoting awareness of ENERGY STAR® appliances and decreasing energy consumption by encouraging the replacement of old appliances.

A list of eligible appliances is available on the program's website.

Mail-in rebates will be available to Texas residents (with a valid Texas residential address) on a first-come, first-served basis until all funds are distributed.

Rebate application forms will be available online shortly before Dec. 20. You can also sign up to be notified by e-mail when the forms are available.

Once you've chosen your appliance, follow these steps to receive a rebate:

  1. Purchase a qualifying ENERGY STAR® appliance from a Texas retailer or contractor on or after Dec. 20, 2010, and keep your receipt;
  2. Install the new, qualifying appliance at your valid Texas residential address;
  3. Properly dispose of, or recycle, the old appliance being replaced;
  4. Completely fill out and mail a rebate application form, along with your receipt and any other required documentation, to the address that will be available before the start of the purchase period on December 20.

For more information on the program, plus information how to obtain a federal tax credit on the cost of energy-efficient products, visit our Texas Powerful Smart website.

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, Don Dillard, Lia Edwards, Gary Johnson, Carol McAnnally, Jerry Oxford, Tim Pingree, Jacob Salisbery, Viki Smith, Karen Snyder, Jennifer Specchio, Steve White and Elizabeth Wilson-Davis

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