|February 2012||TAX POLICY NEWS|
|a monthly newsletter about Texas tax policy|
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Hearing Summary: Three-Factor MTC Apportionment Formula Not Allowed
The taxpayer filed amended Texas Franchise Tax reports for the 2008 and 2009 report years claiming a refund on franchise tax paid in error. The taxpayer filed the amended reports using the three-factor apportionment formula provided under the Multistate Tax Compact (MTC), rather than the single-factor apportionment formula provided under the Texas Franchise Tax Code, which the taxpayer used in filing its original franchise tax reports. The Comptroller denied the refund claims on the grounds that Chapter 141 of the Texas Tax Code, which adopted the MTC, does not apply to the Texas franchise tax.
The taxpayer requested a refund hearing, contending that the current version of the franchise tax, which is based on a taxable entity's margin, is an income tax and therefore subject to the MTC. The taxpayer also argued that it could elect to use the MTC three-factor formula because Texas Tax Code Section 171.112(g), which provided that Chapter 141 did not apply to Chapter 171 ( Franchise Tax), was repealed by House Bill 3 and not reenacted by the Legislature. As the specific bar against applying the MTC to the Franchise Tax Code was repealed, the taxpayer contended that the MTC's three-factor formula may be used in apportioning its margin to Texas.
Comptroller staff asserted that the Texas Franchise Tax Code requires use of the single gross receipts factor mandated by Tax Code Section 171.106, which does not provide for an alternative apportionment method. Further, Comptroller staff asserted that the specific rule in Tax Code Section 171.106(a) addressing apportionment controls over the general provisions of Tax Code Section 141.001.
The Administrative Law Judge concluded that, notwithstanding the absence of the repealed statutory prohibition, the specific and unqualified requirement in Tax Code Section 171.106(a) to use a single-factor formula, buttressed by Rule 3.591(c), Frequently Asked Questions and policy statement in State Tax Automated Research System (STAR) Accession No. 201007003L, is more than sufficient to preclude a taxable entity from electing to use the MTC three-factor formula. The taxpayer is required to use the single-factor formula, and the Administrative Law Judge therefore determined that the amended franchise tax reports and the attendant refund claims were properly denied.INSURANCE TAX
Guaranty Association Assessment Credits
In order to protect policyholders from insurers who become insolvent and cannot pay claims, Texas requires licensed insurers to be members of guaranty associations. When an insurer becomes insolvent, its respective guaranty association issues an assessment on the other members to pay the outstanding claims of the insolvent insurer.
In Texas, there are three guaranty associations: the Texas Property and Casualty Insurance Guaranty Association; the Texas Life, Accident, Health, and Hospital Service Insurance Guaranty Association; and the Texas Title Insurance Guaranty Association.
While all three guaranty associations make assessments on their members, only the Life, Accident, Health and Hospital Service Association distinguishes between administrative assessments (Class A) and assessments to cover outstanding claims of the insolvent insurer (Class B). This association can also assess a property and casualty insurer that is writing accident and health insurance.
Texas allows insurance companies to recoup paid guaranty association assessments as a credit against premium tax.
Life, accident and health insurers must claim the entire amount of Class A assessments as a tax credit for the year in which they are paid; however, credits for Class B assessments are allowed at a maximum of 20 percent per year beginning with the year after the assessment is paid.
Property and casualty insurers are allowed to claim the credit at a maximum of 10 percent per year, beginning with the year the assessment is paid. Title insurers may recoup the assessment through the rates charged in an amount up to 1 percent of their premium, and any excess not recovered in the rates charged may be taken as a premium tax credit at a rate of 20 percent per year over a minimum of five years.
The Texas Insurance Code, Chapters 462, 463 and 2602, allows insurers to carry forward any unused portion of the yearly maximum allowed for use in subsequent years and to record it on the books and records as an admitted asset.
Unused guaranty assessment credits may be transferred to another licensed insurer only in limited circumstances. These include a merger, acquisition or total assumption of reinsurance; or, if the Commissioner of Insurance approves the transfer by a Commissioner's Order.
An insurer that is no longer writing insurance in Texas or that withdraws from Texas may not transfer credits unless one of the circumstances stated above applies.MIXED BEVERAGE TAX
Grace Period for Alcohol Sales Reporting is Over With the March 2012 Report
The Comptroller's six-month grace period for filing alcoholic beverage sales reports by certain alcoholic beverage suppliers ends after the February 2012 report, due March 25, 2012. Penalties may be assessed on reports filed late, beginning with the March 2012 report, due April 25, 2012.
In 2011, the 82nd Legislature passed House Bill 11, effective Sept. 1, 2011. The new law (Tax Code Chapter 151, Subchapter I-1) requires brewers, beer manufacturers, distributors, wholesalers, package stores holding local distributor's permits and wineries to file a monthly report of their alcoholic beverage sales made to retailers. The Comptroller will use this data to support and enhance its mixed beverage and sales tax audit programs.
Alcoholic beverage reports are filed electronically using the Comptroller's Retail Inventory Tracking System and must include the number of units of alcohol sold, individual container size and pack for each unit, brand name, type of beverage, Universal Product Code and net selling price. The “net selling price” is the total combined amount charged for all items on each line of the report and not the price charged per unit. A separate alcoholic beverage sales report must be filed for each permit or license held. Penalties and other enforcement actions may be taken if a report does not include all the information required.
Two types of civil penalties may be assessed on late reports: a $50 penalty under Texas Tax Code Section 151.703(d) for each report filed late and a daily civil penalty of between $25 and $2000 under Tax Code Section 151.468(b).
An amended report overrides the entire original report. When filing an amended a report, the entire amended report and not a portion of the report must be filed.SALES TAX
Agriculture Exemption: A Tale of Two Taxes
Most tangible personal property is taxed under Tax Code Chapter 151, Limited Sales, Excise, and Use Tax.
Motor vehicles, however, are taxed under Tax Code Chapter 152, Taxes on Sales, Rental, and Use of Motor Vehicles. “Motor vehicles” are self-propelled units that transport property or persons on public highways. The term also includes trailers, semitrailers, travel trailers and motorcycles designed for highway use. The term does not include parts and accessories not attached to the motor vehicle at the time of sale. Motor vehicle parts and accessories are subject to limited sales and use tax.
Qualifying for the Agriculture Exemption
To qualify for the sales tax agriculture exemption, machinery or equipment must be used exclusively (100 percent of the time) on a farm or ranch in the production of food, grass, feed and other agricultural products for sale, or in building or maintaining roads and water facilities located on a farm or ranch. For example, a tractor used exclusively on a farm in the production of crops for sale qualifies for exemption from Texas sales and use tax.
To qualify for the motor vehicle tax agriculture exemption, the motor vehicle must be used primarily (at least 80 percent of the operating time) on a farm or ranch directly in the production of food for human consumption; grass; feed for any form of animal life; or other livestock or agricultural products to be sold in the regular course of business.
A self-propelled motor vehicle must be specially adapted for use in the production of crops or rearing of livestock (including poultry); used in feedlots; or specially adapted for applying plant food materials, agricultural chemicals or feed for livestock in order to qualify for the exemption. A farm trailer primarily used by a farmer or rancher in processing, packing or marketing of the farmer's own livestock or agricultural products also qualifies for motor vehicle tax exemption.
The motor vehicle tax exemption is claimed at the time of registration or titling on the Application for Texas Certificate of Title (Form 130-U) (PDF). The Ag/Timber Number (PDF, 268k) must be entered on Form 130-U at the time of registration or titling.
The primary use and characteristics of the vehicle, not the type of registration (such as farm tags), determine the taxability. For example, a standard pickup truck does not qualify for exemption, even if it has farm tags, because it has not been adapted for a specific agricultural purpose. Similarly, a horse trailer with sleeping quarters is not exempt, nor is any trailer used for transporting horses to and from competitions or shows because these trailers are not used primarily in a qualifying activity.
Repairing and Remodeling
For the purpose of this article, we will discuss the effect of each tax on repairs to a farm trailer. The principles discussed and guidelines provided, however, also apply to other farm motor vehicles.
Because the sales tax exemption requires exclusive use (100 percent) on the farm or ranch, and the motor vehicle tax exemption requires only primary use (80 percent) on the farm or ranch, a farm trailer licensed for highway use may qualify for the motor vehicle tax agriculture exemption, but parts purchased to repair the trailer will not qualify for the sales tax agriculture exemption. For example, materials purchased to replace a trailer coupling, repair a broken axle or replace a tire on a farm trailer licensed for highway use are taxable, even if the trailer is used primarily on a farm or ranch to produce agricultural products for sale.
On the other hand, the sales tax exemption can be claimed on parts purchased for use in repairing or remodeling a farm trailer that is not licensed for highway use if the trailer otherwise qualifies for the agriculture tax exemptions.
Charges for labor to repair motor vehicles are not subject to sales tax.
If the repairman charges a single price (lump-sum charge) for labor and materials, the repairman is the consumer of the parts and should not collect sales tax from the customer. The repairman owes sales tax to suppliers for any materials used to perform the motor vehicle repair. A repairman cannot claim the agricultural exemption on parts, even if the parts are used to repair a farm trailer or a farm vehicle that is not licensed for highway use.
If the repairman separately states the charges for labor from the charges for parts, then the repairman is considered the seller of the parts. In this scenario, the repairman may issue a resale certificate to the parts supplier. The repairman should then collect tax from his customer on the separately stated charge for parts that will be going on a farm trailer or other motor vehicle registered for highway use. The charge for labor is not taxable.
If the repair is performed on a farm trailer or other motor vehicle that qualifies for exemption, the repairman can accept from the farmer or rancher either a signed Texas Agricultural Sales and Use Tax Exemption Certification (Form 01-924) (PDF, 67k) displaying the Ag/Timber Number, or a signed copy of the agricultural registration confirmation letter from the Comptroller in lieu of collecting tax on the separately stated charge for parts. If the vehicle does not qualify for exemption, then tax is due on the charge for parts.
See Rule 3.290 and Motor Vehicle Repairs (Pub. 94-113) for more information about the taxability of motor vehicle repair and maintenance. For information about tangible personal property repair and maintenance, see Rule 3.292.SALES TAX
Hearings Summary and Summary of General Rule 3.2 – Offsets and the Application of Credits and Payments to Liabilities: What is the Correct Procedure?
The Comptroller ruled in Hearing No. 104,636 (2011) that tax overpayments are determined by report period and not on a transaction-by-transaction basis. The taxpayer contended that credit interest on overpayments should be “computed based on the gross credit or refund that resulted from the managed audit of each relevant reporting period, and without regard to any liability incurred for the same period.”
In overruling the taxpayer's position, the Comptroller also held that there were no features of managed audits in general that require or justify different interest computations. The Comptroller determined that the holdings in Comptroller Decision Nos. 49,371 (2009) and 100,933 (2009) should be followed since the taxpayer in Hearing No. 104,636 raised no new arguments that had not previously been considered.
In those hearings, the Comptroller determined that under Tax Code Sections 111.064 and 111.104(a), interest on refunds is computed on the net amount due after tax that is erroneously paid is first credited against any other amounts due and payable. Also, Comptroller Decision No. 49,371 held that there were no features of managed audits in general, or in that managed audit in particular, that required or justified different interest computations than used in other audits.
Additionally, the Comptroller has adopted amendments to General Rule 3.2 to memorialize in the formal rule the longstanding agency policy discussed in Comptroller's Decision Nos. 104,636 (2011), 100,933 (2009), and 49,371 (2009) dealing with the treatment of offsets and procedures for offset requests.
New subsection (a) provides definitions for terms used in Rule 3.2. New subsection (b) concerns offsets and the application of credits and payments to liabilities. Subsection (b)(1) explains the information that must be provided in a request for any offset, along with how and when the request must be provided to the comptroller. Subsection (b)(2) explains when offsets are not allowed, including examples of how the Comptroller will apply this section to certain fact patterns. Subsection (b)(3) explains how approved credits and payments will be applied, including the following application guidelines set out in Subsection (b)(3)(A)-(C):
(3) Application of credits and payments.
(A) When credits are established in a period, they will automatically be netted against liabilities in the same period. If there are no liabilities to net against the credits, or the credits are greater than the liabilities in the same period, the credits will first be applied as payments to liabilities in prior periods.
(B) The application of credits will begin in the oldest liability period and apply within that period first to tax, next to penalty, and finally to interest. If credits remain, they will be applied to the next oldest period in the same manner, until all prior liabilities are paid or the credits are extinguished.
(C) If a credit remains after all preceding liabilities have been satisfied, and the taxpayer is current in all tax filings, applicable credit interest will be calculated for periods due on or after Jan. 1, 2000, and a refund will be issued for the credit amount and interest.SALES TAX
Sales Tax Deductions on Federal Income Tax Returns
Texans who itemize deductions on their federal income tax are able to deduct state and local sales or use taxes when they file their 2011 income tax returns. The deductions include sales or use taxes paid on big-ticket items such as cars, recreational vehicles and boats. The state sales and use tax rates of 6.25 percent and up to 2 percent local tax applies to purchases of tangible personal property and taxable services unless the purchaser may claim a valid exemption. The state motor vehicle tax and boat tax rates are 6.25 percent.
Eligible taxpayers can claim the federal deduction for state sales and/or use tax in one of two ways: they can keep receipts and claim the actual amount of taxes paid, or they can use the tax tables provided by the IRS.
Taxpayers who built a new home or improved their home in 2011 may be able to deduct sales taxes paid on the materials incorporated into the real property improvement. Labor is not taxable for new construction or residential repair and remodeling.
In order for a homeowner to be eligible for such a deduction, the homeowner must have purchased the materials directly from, and paid tax to, the building materials supplier, or worked with a contractor under a separated contract. Lump sum (one price) contracts are not eligible for the deduction. This is because, under Texas Tax Code Section 151.056(a), a contractor performing a contract for a lump sum price covering both the performance of the service and the furnishing of the necessary material is considered the consumer of all materials incorporated into the project. As the consumer, the contractor pays the sales tax on materials and does not collect tax from the customer. See Rule 3.291. Since the customer did not pay tax to the contractor, the customer cannot deduct the tax on the federal income tax return.RESOURCES
Our Window on State Government website is a wonderful resource for information about Texas taxes. From applying for a sales tax permit to closing a business, and all things in between, you can find answers here. You can also sign up to be notified when pages of interest to you are updated.
Some of the most popular sections include:
- Texas Taxes – This section has links to all Texas taxes and fees. Clicking on a specific tax on the list will open its own page which will have links to everything needed to report and pay that tax, along with the statutes and rules that govern it.
- Texas Taxes – Frequently Asked Questions – Answers to our most common questions, organized by tax
- Tax Publications – Links to publications about specific taxes
- Special Tax Mailings – A list of pertinent information sent to specific industries to keep them up to date about new legislation or other items of interest
- State Tax Automated Research System (STAR) – A searchable tool for Texas tax law and tax policy, including position letters and hearings
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
Robin Corrigan, Lisa Davis, Don Dillard, Tommy Hoyt; Carol McAnnally, Karen Ortosky, Lindey Osborne, Jerry Oxford, Stefanie Medack, Jo Anne Meyerson, Viki Smith, Karen Snyder and Jennifer Specchio