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November/December 2011 TAX POLICY NEWS
a monthly newsletter about Texas tax policy

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IMPORTANT REMINDER!

Ag/Timber Exemption Registration Number

Beginning Jan. 1, 2012, a person claiming an exemption from sales tax on the purchase of certain items used in the production of agricultural and timber products is required to have a Texas Agriculture and Timber Exemption Registration Number (Ag/Timber Number). For more information, see Get Ready, Texas!

COIN-OPERATED AMUSEMENT MACHINE TAX

Renewal Application – Due Dates, Fees and Penalties

Applications to renew coin-operated amusement machine General Business Licenses, Import Licenses, Repair Licenses and Registration Certificates were due Nov. 30, as announced in the September 2011 Tax Policy News.

Applicants who filed and paid all fees and taxes by the Nov. 30 due date, but who have not received a license or registration certificate, may continue to operate their machines after Dec. 31unless 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 2011 license or registration certificate expires. Taxpayers who filed their renewal applications late cannot operate amusement machines until the 2012 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).

Penalty 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 Coin-operated Amusement Machine Regulation and Taxation (Publication 96-256).

FRANCHISE TAX

Cost of Goods Sold Updates

Tax Code Section 171.1012(c) allows, as a cost of goods sold, all direct costs of acquiring or producing the goods. Following is Comptroller policy for several cost of goods sold issues that have been repeatedly raised.

Manufacturing

Direct labor costs for cost of goods sold include only the labor of those persons who physically produce a good or acquire a good. Supervisory labor does not qualify as a direct cost. It is an indirect cost subject to the same limitations as other costs classified as indirect or administrative overhead costs for franchise tax purposes. See Tax Code Section 171.1012(f).

Restaurants and Bars

The Mixed Beverage Tax is a gross receipts tax imposed on the mixed beverage permittee. The tax is not paid in relation to acquiring or producing a restaurant or bar's goods; therefore, the Mixed Beverage Tax is not allowed as a cost of goods sold.

For more information about the cost of goods sold deduction for the restaurant industry, see the franchise tax article in the October 2010 Tax Policy News.

INSURANCE TAX

Captive Insurance

Generally, captive insurers are formed to cover the risks of their parent or affiliated companies. In essence, this is “in-house” insurance that is not available to the general public.

This arrangement has become increasingly attractive to companies that have difficulty obtaining and affording traditional insurance. Rising premium costs make it difficult for companies to afford adequate insurance to cover their exposures.

Other issues companies face include risks that are difficult to cover; poor loss control practices that make them ineligible for coverage; insufficient credit for deductibles; and insurer credit rating structures that consider market trends rather than actual loss experience.

Captive insurers are attractive from a financial standpoint since premiums charged by a captive are generally lower than those for coverage from traditional insurers. The theory behind using a captive insurer is not to make a profit, but to provide low-cost coverage. By using captive insurers, companies can adjust the proportion of assumption of risk or the amount of reinsurance needed depending on market conditions.

There are several types of captive insurers:

  • A single parent or in-house captive is formed to insure the risks of a parent and/or affiliated companies.
  • An association captive is formed and owned by an industry or group solely for the benefit of its members.
  • A group captive is owned by a group of companies with a shared insurance need.
  • An agency captive is a reinsurance company owned by a separate insurance company to reinsure their client's risks.
  • A rent-a-captive provides the benefits of a captive for a fee to companies that may not have the resources to form their own captive company. Unrelated entities “rent” a captive to insure their risks.

The Texas Insurance Code and Captive Insurance

The Texas Insurance Code provisions under Chapter 101 recognize only “single parent captives” or captives that are formed to cover the risks of its parent or affiliated companies – “in-house” insurance that is not available to the general public. Section 101.053(b)(6) provides an exemption or “safe harbor” from the consequences of conducting unauthorized insurance for activities in this state by or on the sole behalf of a nonadmitted captive insurance company that insures solely:

(A) directors' and officers' liability insurance for the directors and officers of the company's parent and affiliated companies;
(B) the risks of the company's parent and affiliated companies; or
(C) both the individuals and entities described by paragraphs (A) and (B).

Subsection 101.053(c) states that subsection (b)(6) does not exempt an insured or insurer from the payment of an applicable tax on premium or from another applicable provision of this code.

Captives and the Nonadmitted and Reinsurance Reform Act (NRRA)

Under Section 524(a) of the NRRA, a state still has the authority to determine eligibility of U.S. insurers for surplus lines as long as its requirements are no more restrictive than those under the National Association of Insurance Commissioners' (NAIC) Non-Admitted Insurance Model Act, unless a state has joined an agreement that includes alternative eligibility requirements.

For example, a Vermont captive that is not on the NAIC International Insurers Department (IID) list would need to apply to the state of Texas to be an eligible surplus lines insurer unless it is a single parent captive that covers the risks of its parent and affiliated companies only. A Vermont captive that is a single parent captive would be considered an unauthorized insurer but it is not subject to the regulatory provisions of Chapter 101.

SALES TAX

Exemption for Labor When Repair, Maintenance or Remodeling is Mandated by Law

The original article has been superseded. See STAR accession number 201209577L for more information.

SALES TAX

Holiday Shopping Reminder: Internet Orders are Subject to Texas Sales and Use Tax

Internet sales are subject to Texas sales and use tax in the same manner as sales made by any other business. Texas tax applies to taxable items on orders placed on the Internet when shipped or delivered to a purchaser in Texas. Taxable items include tangible personal property and taxable services.

An online seller engaged in business in Texas must obtain a Texas Sales and Use Tax Permit and must collect and remit tax on the sale of taxable items shipped or delivered into Texas.

Delivery Charges

Fees for shipping and handling charged by the seller of a taxable item are considered part of the sales price of the item. Charges for transportation or delivery to a Texas location are considered to be services or expenses connected to the sale of a taxable item. If the item is taxable, charges for shipping and handling, transportation or delivery are also taxable, even if separately stated on the invoice.

If the item purchased is not taxable, neither are shipping and handling, transportation or delivery charges. See Rule 3.303, related to transportation and delivery charges.

Texas Buyer, Texas Seller

When a purchaser in Texas buys a taxable item from a Texas online seller for use in Texas, generally, local sales taxes due are based on the location of the seller’s place of business. A seller may also be required to collect local use taxes for local taxing jurisdictions in effect at the point of delivery if the seller is engaged in business in those jurisdictions.

A seller is engaged in business in any local jurisdiction in Texas where the seller has, or has had within the previous 12 months, some type of physical presence such as business locations or salespersons. These jurisdictions include those where the seller (or the seller's representative) has solicited sales, performed services (even if done by a subcontractor) or made deliveries.

A seller is not required to collect local use taxes for jurisdictions in which he is not engaged in business; however, the local use taxes may still be due, and the seller may choose to voluntarily collect and remit the taxes as a service to the customer. If the seller does not collect the local use taxes, the purchaser is responsible for remitting those taxes directly to the Comptroller's office.

Shipped from Seller's Place of Business in Texas

When an item is shipped or delivered from the seller's place of business in Texas, the seller charges sales taxes based on the location of that place of business, regardless of where the order was placed.

Shipped from a Texas Warehouse

If the order is shipped or delivered from a warehouse or other location in Texas that is not a place of business of the seller, the local sales taxes due are based on the location of the seller’s place of business where the order is received.

Shipped from an Out-of-State Warehouse

If an order is placed with a seller in Texas, but the item is drop-shipped to the purchaser by an out-of-state, third-party supplier, local sales tax is due based on the location of the seller's place of business where the order was received.

When a seller receives an order at a place of business in Texas, and the taxable items sold are shipped or delivered to Texas customers from the seller's out-of-state location (a place of business or a warehouse, etc.), then local use taxes are due based on the point of delivery. The seller is required to collect those local use taxes if engaged in business in those jurisdictions. See Guidelines for Collecting Local Sales and Use Tax (Pub. 94-105) for more information.

Texas Buyer, Out-of-State Seller

When a purchaser buys a taxable item from an out-of-state seller for use in Texas, and the seller is engaged in business in Texas, the seller must collect Texas use tax. If the seller is engaged in business at the point of delivery, the seller must also collect any local use tax due.

If the seller is not engaged in business in Texas or otherwise does not collect the Texas tax due, the customer owes Texas use tax. The customer should use the tax rate in effect at the location where the goods were received to calculate the amount of tax due. Tax is due on the entire amount charged by the seller, including shipping and handling, even if separately stated.

A purchaser who holds a Texas sales tax permit may report the transaction as a “Taxable Purchase” on their sales and use tax return. If the purchaser does not have a sales tax permit, the purchaser should file a Texas Use Tax Return (Form 01-156).

Tax Paid to Another State

The purchaser can take a credit against the amount of Texas use tax due for legally imposed sales taxes the purchaser paid to another state or any subdivision of another state. A purchaser cannot take a credit for taxes paid to another country.

Texas Seller, Out-of-State Buyer

A Texas seller who sells a taxable item and ships or delivers it to an out-of-state location does not have to collect Texas state or local sales tax on the sale, even if the billing address is in Texas. To document such a sale, the seller's records must include proof of delivery out of state, such as a bill of lading, a shipping invoice or a postal receipt. A Texas seller engaged in business in another state may have to collect tax in that state. The Multistate Tax Commission has a useful website with links to the tax websites of other states.

Occasional Sales

There is an exemption for tangible personal property sold online when the property was originally purchased for personal use by a person who does not hold, and is not required to hold, a sales tax permit or a similar license or permit in another state.

To qualify for the exemption, the person must not be in the business of selling taxable items, and the receipts from these sales must not exceed $3,000 in a calendar year.

There is also an exemption for the sale of up to two taxable items (other than an amusement service) in a 12-month period by a person who does not hold a sales tax permit or a similar license or permit in another state and who is not in the business of selling taxable items.

Sellers who have sales tax permits in Texas or similar licenses or permits in any other state may not sell items tax free claiming the occasional sale exemption. See Rule 3.316 (b), related to occasional sales.

Purchasers are not responsible for accruing use tax on purchases made under the occasional sale exemption, except for one important exception. A purchaser who holds a sales tax permit must accrue use tax on a taxable item purchased from a person who does not hold a sales tax permit and who has sold two or fewer taxable items (other than an amusement service) during the 12-month period immediately prior to the sale. See Texas Tax Code Section 151.304(g).

Although not required by law, we recommend that a purchaser ask the seller to provide a signed statement that the transaction qualifies for the occasional sale exemption in order to document the exemption. The purchaser should retain the statement in his records for four years following the date of the purchase.

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.

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

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

For more information, call the Internal Revenue Service at 1-800- 829-1040, or go to the Earned Income Tax Credit section of our website.

RECENTLY ADOPTED RULES

Natural Gas Tax

The following rule adoption was filed with the Secretary of State on Oct. 17, 2011, with a publication date of Oct. 28, 2011, effective 20 days after filing.

3.23 Credits for Qualifying Low Producing Wells

RECENTLY PROPOSED RULES

Cigarette and Tobacco Products Regulation

The following rule was submitted for filing with the Secretary of State with a publication date of Nov. 25, 2011. The comment period ends 30 days after publication.

3.1204 Administrative Remedies for Violations and Health and Safety Code, Chapter 161, Subchapter H or K

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

Robin Corrigan, Don Dillard, Jody Frierson, Tommy Hoyt, Carol McAnnally, Karen Ortosky, Lindey Osborne, Jerry Oxford, Jo Anne Meyerson, Viki Smith, Karen Snyder, Jennifer Specchio, Melanie Thompson and Steve White

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