|July 2011||TAX POLICY NEWS|
|a monthly newsletter about Texas tax policy|
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In this issue...
Hotel Occupancy Tax
Recently Adopted Rules
Recently Proposed Rules
NOTE: Legislative Update Coming Soon!
We are working on a special Legislative Update to explain all the changes made by the 82nd Regular and Special Legislative Sessions. Significant changes were made, and we will have a summary of them in the August issue of Tax Policy News.FRANCHISE TAX
Court Case Summary: Staff Leasing Services Company Must Compute Margin Using Compensation
Taylor & Hill, Inc. v. Combs, et al., Cause No. D-1-GN-10-004429
Taylor & Hill, Inc. (Taylor & Hill) filed its 2009 Texas franchise tax report electing to use the cost of goods sold method to determine margin. The Comptroller examined the report and asserted that Taylor & Hill, a registered professional engineering firm, was not eligible to compute margin by deducting cost of goods sold. The cost of goods sold deduction was denied by the auditor, the 70 percent of total revenue calculation was applied and additional tax was assessed for the period.
Taylor & Hill then filed suit to recover the additional tax that was paid under protest for the 2009 report year.
Taylor & Hill asserted that it is a professional and engineering staffing firm serving the oil and gas industry and that it temporarily assigns its employees to its clients to supplement its clients' workforce in special situations. Taylor & Hill receives payments from its clients in exchange for the labor provided by its employees. These payments include reimbursement for wages, payroll taxes on those wages, employee benefits and worker's compensation benefits for the employees that it assigns to the client companies.
In its original petition, Taylor & Hill sought: (1) a declaration that Tax Code Section 171.1012(i) allows Taylor & Hill to compute its margin by deducting cost of goods sold; (2) a declaration that Tax Code Section 171.101 allows Taylor & Hill to elect to compute its margin by using the method that results in the lowest margin; and (3) a declaration that Tax Code Section 171.1011(k) allows Taylor & Hill to exclude from its revenue payments received from a client company for wages, payroll taxes on those wages, employee benefits and workers' compensation benefits for the assigned employees of the client company.
In its third amended original petition, however, Taylor & Hill sought a declaration that: (1) as a staff leasing servicing company, Taylor & Hill qualifies for the revenue exclusion for staff leasing servicing companies and must subtract compensation to compute its taxable margin; (2) if Taylor & Hill is not a staff leasing company, it is eligible for the cost of goods sold deduction; or (3) Taylor & Hill should be permitted to compute margin using the method that results in the least amount of tax.
The judge ruled in favor of Taylor & Hill's first cause of action in the third amended petition; that Taylor& Hill is a temporary employment service and is therefore entitled to take the revenue exclusion for staff leasing companies and to use compensation (as required by Tax Code Section 171.101(b)) to compute its taxable margin on its 2009 Franchise Tax Report.
None of the other issues presented in this case were addressed in the ruling. There was no guidance from the court on Taylor & Hill's eligibility for the cost of goods sold deduction or on the election language in Tax Code Section 171.101.HOTEL OCCUPANCY TAX
State Cost-Recovery Fee Subject to Hotel Tax
Hotels compute their overhead costs to determine the prices charged for hotel rooms. Some hotels include separately stated charges on their guest's invoices to recover some of these costs. In STAR document 201106069L, a hotel asked about the tax implications of charging for a "State Cost-Recovery Fee" to recover the expense of paying the hotel's Texas franchise tax.
An article in the August 2010 issue of Tax Policy News described the State Cost-Recovery Fee as a method for a company to recover its franchise tax expense. Franchise tax is imposed on most companies conducting business in Texas, and like other business expenses such as payroll, utilities and insurance, it is part of a company's overhead cost of doing business. The article concluded that the recovery fee is part of the total sales price of a taxable item sold by the company and, therefore, is subject to sales tax.
State hotel occupancy tax is also due on the State Cost-Recovery Fee. Hotel Tax Rule 3.162(a)(2) provides that,"All charges for items or services, other than personal services or charges for use of a telephone, which are furnished in connection with the actual occupancy of the room are subject to hotel occupancy tax...These charges are includable in the tax base whether or not separately stated."
The recovery fee is not a charge for a personal service. Instead, it is a charge directly related to occupancy of the room. As such, state hotel occupancy tax is due on the fee.
The State Cost-Recovery Fee is not a tax or fee imposed directly on the customer, so companies may not use terms such as "tax" or "reimbursement" for the line item charge on the invoice. In addition, if a charge is labeled a "tax," Tax Code Section 111.016(a) requires that amount must be paid to the state in full, in addition to the hotel tax.INSURANCE TAX
Assessment for the Office of Public Insurance Counsel (OPIC)
The Office of Public Insurance Counsel (OPIC) was created to represent the interests of insurance consumers in Texas. OPIC may assess the impact of insurance rates, rules and forms and may initiate or intervene in a judicial proceeding involving any action taken by an administrative agency. To defray OPIC's administrative and operational costs, all licensed insurers and health maintenance organizations are subject to the assessment.
Section 501.203 of the Insurance Code provides that each property and casualty insurer authorized to engage in business in Texas must pay an assessment of 5.7 cents for each property and casualty insurance policy in force in Texas at the end of the year.
Section 501.204 of the Insurance Code provides that life, health and accident insurers and each health maintenance organization authorized to engage in business in Texas must pay an assessment of 5.7 cents for each new individual policy and also for each certificate of insurance evidencing coverage under a group policy, of life, health or accident insurance that is written for delivery and placed in force in Texas with initial premium paid in full during the calendar year.
Section 501.205 of the Insurance Code provides that each title insurer authorized to engage in business in Texas must pay an assessment of 5.7 cents for each owner and mortgage policy that is written for delivery in Texas during each calendar year on property located in Texas for which the full basic premium is charged.
The OPIC assessment is reported on the Insurance Maintenance, Assessment and Retaliatory Report (Form 25-102) (PDF, 124KB). If an insurer or health maintenance organization does not have any policies to report, it must indicate "0" on the appropriate line item on the report.
Annuities are not subject to the OPIC assessment.NEW LEGISLATION
New $50 Late Filing Penalty for Reports Due on or after Oct. 1, 2011
Beginning with reports due on or after Oct. 1, 2011, certain taxpayers will be assessed a $50 penalty when a report is filed late. The penalty will be assessed regardless of whether the taxpayer subsequently files the report or whether any taxes or fees were due from the taxpayer for the period covered by the late filed report.
Taxes or fees affected by this provision are:
- 9-1-1 prepaid wireless emergency service fee;
- hotel occupancy tax;
- mixed beverage gross receipts tax;
- motor fuels tax;
- motor vehicle gross rental receipts;
- motor vehicle seller finance;
- sales and use (including direct pay); and
- the off-road, heavy-duty diesel equipment surcharge.
Prior to this provision, $50 penalties were only imposed on the third, and all subsequent, late filings of sales and use tax; maquiladoras; fireworks and off-road, heavy-duty diesel equipment surcharge reports. Article 14 repeals Tax Code Section 151.7031, the statute that prohibited application of the $50 late filing penalty to the first two occurrences of late filing of reports for those taxes.SALES TAX
House Bill 1841 Creates a New Rule for Purchasers of Internet Hosting
House Bill 1841 (82nd Legislature, Regular Session) creates a new rule for purchasers of Internet hosting services with respect to when those purchasers are engaged in business in Texas. The bill became effective June 17, 2011, and creates a new Section 151.108 of the Tax Code concerning Internet hosting:
"(a) In this section, "Internet hosting" means providing to an unrelated user access over the Internet to computer services using property that is owned or leased and managed by the provider and on which the user may store or process the user's own data or use software that is owned, licensed, or leased by the user or provider. The term does not include telecommunications services.
(b) A person whose only activity in this state is conducted as a user of Internet hosting is not engaged in business in this state.
(c) A person providing Internet hosting is not required to:
(1) examine a user's data to determine the applicability of this chapter to a user;
(2) report to the comptroller about a user's activities; or
(3) advise a user as to the applicability of this chapter."
The new law has no effect on whether the Internet hosting provider is engaged in business in Texas: it is still Texas law that any person who owns or leases servers in Texas has nexus and must collect and remit tax on sales of taxable items here.
And, the bill did not change the taxability of Internet hosting services, which are still taxable under the definition of data processing in Tax Code Section 151.0035 and Comptroller Rule 3.330. Therefore, sellers of these services with nexus in Texas must collect sales or use tax on the charge for these services, subject to the 20 percent exemption provided in Tax Code Section 151.351, when sold to Texas purchasers.
Similarly, purchasers who buy Internet hosting or other data processing services for use in Texas from a seller who is not engaged in business in Texas continue to be responsible for accruing and remitting use tax directly to the Comptroller.
The purpose behind the bill, as explained in the legislative history, is to protect Texas sellers of Internet hosting from losing business. The new law does this by clarifying the obligations of out-of-state purchasers of these services with respect to collecting and remitting taxes on items they sell in Texas. Specifically, there is no nexus created when a purchaser's only contact with the state is using Internet hosting services purchased from an unrelated third party provider who provides those services by use of servers and software located in Texas. If a purchaser of Internet hosting does nothing else that meets the definition of doing business in Texas, it is not required to collect tax on sales to purchasers in Texas because, according to the terms of the new law, it is not engaged in business in Texas.
Another way to explain the bill's impact is to say if an out-of-state company leases or owns servers in Texas which it uses to do business, it has nexus. But, if the out-of-state company purchases Internet hosting services from an unrelated seller located in Texas who provides the service by use of servers the seller owns or leases in Texas, and that is the only contact the out-of-state company has with Texas, no nexus is created.
The bill also expressly provides that sellers of these services have no obligation to inform purchasers about their tax payment or collection obligations under Texas law, which is a continuation of our current policy.
We will update Rule 3.286 to implement HB 1841.SALES TAX
There's No (Tax-) Free Lunch for Employees of Exempt Organizations
Only an exempt organization or its authorized agent may purchase items tax free by issuing an exemption certificate (PDF, 57KB) instead of paying tax. An exempt organization's employees may not purchase meals tax free with an exemption certificate, even when on official business for the organization. Texas state and local governments and universities are exempt organizations as referenced in Rule 3.322(g)(5)and(6).
Under Rule 3.322(g)(5), "An employee of an exempt organization cannot claim an exemption from tax when the employee purchases taxable items of a personal nature even though the employee receives an allowance or reimbursement from the organization."
Under Rule 3.322(g)(6), "A person who travels on official business for an exempt organization must pay sales tax on taxable purchases whether reimbursed on a per diem basis or reimbursed for actual expenses incurred."
For more information, see Exempt Organizations: Sales and Purchases (96-122) (PDF, 407KB) .OTHER NEWS
Happy Golden Anniversary, Sales Tax!
The year 1961 was historic for many reasons, including the inauguration of John F Kennedy as president; construction of the Berlin Wall; establishment of the Peace Corps; and the introduction of the first disposable diaper. It was also the year that Texas first imposed sales and use tax.
When the 57th Legislature convened on Jan. 10, 1961, it faced a $63 million budget deficit (the equivalent of over $475 million in 2011). And, although the Legislature worked hard to solve the budget issue, it was unable to reach an agreement during the regular session. It was not until the final day of the First Called Session - Aug. 8, 1961 - that House Bill 20 was finally passed, creating the state's first sales tax. The Texas Limited Sales, Excise and Use Tax Act became effective Sept. 1, 1961, and imposed a 2 percent state sales tax on most retail sales of tangible personal property.
The 1961 Act provided an exemption from the new sales tax for a number of items. Although some of those exemptions have been repealed over time (such as the exemption for outerwear apparel priced at less than $10 per article), most are still found in Texas Tax Code Chapter 151 today. These exemptions include those for water; prosthetic devices; prescription drugs and medicines; farm machinery; feed, seeds, plants and fertilizer for plants (the products of which are food for human consumption); and railroad rolling stock.
The tax raised around $300 million in 1962, slightly less than the amount of revenue raised by the motor fuels tax at that time. Today, sales tax is the largest source of tax revenue for the state, bringing in almost $20 billion in 2010.
A Snapshot Look at the Major Changes to Texas Sales Tax Since 1961
1967 -The legislature enacted the Local Sales and Use Tax Act which authorized cities to impose a 1 percent local tax on all retail sales beginning Jan. 1, 1968.
1968 - The state sales tax rate on retail sales was raised to 3 percent.
1969 - The state sales tax rate was increased to 3.25 percent, and imposed sales tax on retail sales of beer and wine.
1971 - The state sales tax rate was increased to 4 percent.
1975 - The 64th Legislature, working with a budget surplus of approximately $1 billion, enacted many new sales tax exemptions, including the exemption for machinery and equipment used by original producers to process, pack or market agricultural products; component parts for newspapers; food sales by Parent-Teacher Associations, as well as by 18-year-old or younger members of youth athletic organizations; solar energy devices; and aircraft used for flight instruction.
1977 - Exemptions were added for leases of motion picture films by theaters and television stations; sales of newspapers; sales of subscriptions to magazines entered as second class mail and sold for a semi-annual or longer period; syringes and hypodermic needles. Organizations qualifying for an exemption from federal income tax under Internal Revenue Code 501(c)(3) were also exempted from state sales and use taxes.
1981 - Exemptions enacted for therapeutic equipment prescribed for an individual by a doctor; purchases by certain civic, fraternal, and veteran organizations qualifying under IRS Code sections 501(c)(4), (c)(8), (c)(10) or (c)(19); purchases by nonprofit chambers of commerce; and sales of handicrafts by senior citizen organizations.
1984 - The state tax rate was raised to 4.125 percent, and the Legislature imposed sales and use tax on services for the first time. Amusement services; cable television services; specific personal services; motor vehicle parking and storage services; and repair, maintenance and restoration of tangible personal property all became taxable in 1984.
1986 - The sales tax rate was increased to 5.25 percent.
1987 - The Texas Legislature raised the sales and use tax rate to 6 percent and increased the list of services subject to sales tax to include data processing; credit reporting; debt collection; information services; insurance services; nonresidential repair and remodeling; landscaping; waste collection and removal; pest control; cleaning and janitorial services; surveying services and security services. In addition, the Legislature authorized cities to impose an additional amount of sales and use tax for specific purposes such as property tax relief and street repair. The 2 percent cap on local tax was imposed.
Finally, in 1990, the state tax rate was raised from 6 percent to the current rate of 6.25 percent.
Fun Tax Facts
The first recorded sales tax was imposed by Egypt on cooking oil. To ensure that citizens were not avoiding the cooking oil tax, scribes would audit households to make sure that appropriate amounts of cooking oil were consumed and that citizens were not using leavings generated by other cooking processes as a substitute for the taxed oil.
During the time of Julius Caesar, the Roman Empire imposed a 1 percent sales tax. During the time of Caesar Augustus, the sales tax was 4 percent for slaves and 1 percent for everything else.
France adopted the first formal sales tax in Europe in 1292, imposing a tax of one-half percent on the sale of all goods except food.
The first U.S. state to impose a sales tax was West Virginia in 1921.
Texas was the 36th U.S. state to adopt a sales and use tax. Today, 45 states and the District of Columbia impose some type of sales tax.RECENTLY ADOPTED RULES
The following rule adoption was filed with the Secretary of State on June 30, 2011, with a publication date of July 15, 2011, effective 20 days after filing.
3.2 - Offsets and Application of Credits and Payments to Liabilities; Unjust Enrichment
Crude Oil Production
The following rule adoption was filed with the Secretary of State on July 13, 2011, with a publication date of July 29, 2011, effective 20 days after filing.
3.32 - Exemption of Oil Incidentally Produced in Association with the Production of Geothermal Energy
Motor Fuel Tax
The following rule adoption was filed with the Secretary of State on July 12, 2011, with a publication date of July 29, 2011, effective 20 days after filing.
3.443 - Diesel Fuel Tax Exemption for Water, Fuel Ethanol, Biodiesel, Renewable Diesel, and Biodiesel and Renewable Diesel Mixtures
The following rule adoption was filed with the Secretary of State on July 13, 2011, with a publication date of July 29, 2011, effective 20 days after filing.
3.24 - Exemption of Gas Incidentally Produced in Association with the Production of Geothermal Energy
Sales and Use Tax
The following rule adoptions were filed with the Secretary of State on June, 29, 2011, with a publication date of July 15, 2011, effective 20 days after filing.
3.322 - Exempt Organizations
3.325 - Refunds and Payments Under Protest
3.339 - Statute of Limitations
The following rule was submitted for filing with the Secretary of State with a publication date of July 15, 2011. The comment period ended 30 days after publication.
3.23 - Credits for Qualifying Low Producing WellsABOUT THE NEWSLETTER
The Comptroller's office publishes this newsletter to keep you informed about state taxes. Tax questions can be complicated, so please use these summaries as guidelines only.
For a Copy of a Proposed Rule
For a copy of a proposed rule or information about a proposed rule, write to Bryant Lomax, Tax Policy Division, 1700 North Congress Avenue, Austin, Texas, 78701-1436, or submit a request via Texas Tax Help.
For Publications, Rules or Other Tax Information
Contributors to This Month's Issue
Teresa Bostick, Robin Corrigan, Don Dillard, Carol McAnnally, Lindey Osborne, Jerry Oxford, Nancy Prosser, Nina Roberts, Jo Samuel, Viki Smith, Karen Snyder, Jennifer Specchio, Karen Specht and Steve White