|April 2012||TAX POLICY NEWS|
|a monthly newsletter about Texas tax policy|
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Hot Topics for the 2012 Filing
Late Filing Penalty
Taxpayers will be assessed a $50 penalty when a report is filed after the due date. The penalty will be assessed regardless of whether the taxpayer subsequently files the report, or any tax is due for the period covered by the late-filed report. This $50 penalty is due in addition to any other penalties assessed for the reporting period.
$1 Million No-Tax-Due Threshold Extended and Adjusted
The $1 million no-tax-due threshold was to expire on Dec. 31, 2011. The Legislature extended it through Dec. 31, 2013. With the Consumer Price Index adjustment required by Tax Code Section 171.006(b), the no-tax-due threshold is $1,030,000 for reports originally due on or after Jan. 1, 2012, and before Jan. 1, 2014.
A $600,000 threshold takes effect Jan. 1, 2014.
Compensation Deduction Limit Adjusted
The limit on the compensation deduction has been adjusted, as required by Tax Code Section 171.006(b), and is now $330,000 per person for reports originally due on or after Jan. 1, 2012, and before Jan. 1, 2014.
Passive Entity Reporting
Effective for 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 required to file a No Tax Due Information Report (Form 05-163) (PDF) 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.
Additional Reporting Requirement for Combined Groups with Temporary Credit
The reporting entity of a combined group with a temporary credit for business loss carryforward preserved for itself and/or its affiliates must submit common owner information by the due date of the report. This information must be submitted to satisfy franchise tax filing requirements, even if the combined group is not claiming the credit on the current year’s report. For 2012, submit the common owner information electronically at Texas Franchise Tax Common Owner Information.
Temporary Credit Election
A taxable entity elects to use the temporary credit by properly taking the credit on a report filed on or before the original or extended due date. It is not necessary to blacken the circle on an Extension Request Form in order to claim the credit for the report year. A taxable entity filing a Franchise Tax Report (Form 05-158) (PDF) must complete a Credits Summary Schedule (Form 05-160) (PDF) if electing to use the temporary credit for business loss carryforward or if carrying over this year's temporary credit or the temporary credit from prior years.
Extensions and Mandatory Electronic Funds Transfer (EFT)
If an entity cannot file its annual report by the original due date, it may request an extension of time to file the report. If granted, the extension for a non-EFT payor will be through Nov. 15, 2012. EFT payors, see below. The extension payment must be at least 90 percent of the tax that will be due with the 2012 report or 100 percent of the tax reported as due on the 2011 franchise tax report (provided the prior report was filed on or before May 14, 2012). For more information, see the Electronic Funds Transfer (EFT) section of our website.
The extension request must be made on Form 05-164 and must be postmarked on or before May 15, 2012. If a timely filed extension request does not meet the payment requirements, then penalty and interest will apply to any part of the 90 percent not paid by May 15, 2012, and to any part of the 10 percent not paid by Nov. 15, 2012. A taxable entity that became subject to the franchise tax during the 2011 calendar year may not use the 100 percent extension option. For information on combined group extensions, see below.
There are special provisions in the franchise tax law regarding filing extensions for taxpayers required to pay by EFT (mandatory EFT). The law provides for a first extension, from May 15 to Aug. 15, and for a second extension until Nov. 15.
For 2012, mandatory EFT taxpayers who submit an extension request by May 15 have an extended due date of Aug. 15 to file their reports or to request a second extension of time to file. If a mandatory EFT taxpayer does not request the second extension, a report filed after Aug. 15 is not timely. In that case, the taxpayer cannot claim the temporary credit on the 2012 report and is subject to penalty and interest.
EFT payments must be initiated by 6 p.m. CST Monday, May 14, 2012, in order to be timely on Tuesday, May 15, 2012.
Combined Group Extensions
A combined group may only use the 100 percent extension option if the combined group has lost a member or if the members of the combined group are the same as they were on the last day of the period upon which the report due in the previous calendar year was based. A combined group must timely submit Forms 05-164 (PDF) and 05-165 (PDF) along with the required payment to request an extension of time to file its report.INSURANCE TAX
Surplus Lines “Agent of Record” and House Bill 3410
House Bill 3410, passed during the 82nd Texas Legislature, became effective on Jan. 1, 2012. This bill provides for important changes to the collection, reporting and payment of surplus lines insurance premium taxes. It affects the definition of the “agent of record” as used in Comptroller and Texas Department of Insurance (TDI) rules and adds a definition of a “managing underwriter” under Chapter 981 of the Insurance Code:
“Sec. 981.002(1-a) ‘Managing underwriter’ means a surplus lines agent or agency that exercises, pursuant to a written agreement with an eligible surplus lines insurer, underwriting authority for the eligible surplus lines insurer and that derives the agent or agency’s business from a surplus lines agent.”
When two or more agents who hold surplus lines licenses are involved in the placement of a surplus lines policy, the new provisions require the surplus lines agent that places the policy with the managing underwriter to collect, report and pay the premium taxes due on the placement. There must be a written agreement between the two parties acknowledging that the surplus lines agent agrees to act as the agent for the placement of the policy and be responsible for all filing, reporting, collection, and payment requirements.
Prior to HB 3410, Rule 3.822 defined the agent of record as the Texas licensed surplus lines agent who placed a policy with an eligible surplus lines insurer, or the Texas licensed surplus lines agent who transacted business directly with an out-of-state agent not licensed by Texas as a surplus lines agent to obtain coverage with an eligible surplus lines insurer. The agent of record was responsible for all taxes due the state on policies issued by the agent in the surplus lines market. Rule 3.822 is being revised to reflect the changes from HB 3410.
The managing underwriter must maintain the following records, available for inspection by the TDI and the Comptroller:
- the name and address of the insured;
- the policy number and policy period;
- the name of the eligible surplus lines insurer;
- the gross premium charged for the insurance;
- the name of the producing surplus lines agent who placed the policy with the managing underwriter;
- the license number of the producing surplus lines agent who placed the policy with the managing underwriter; and
- a written agreement between the managing underwriter and the producing surplus lines agent that the producing surplus lines agent will act as the “agent of record” for the placement of the policy and be responsible for all filing, reporting, collection, and payment requirements under both Chapter 981 (Surplus Lines Insurance) and Chapter 225 (Surplus Lines Insurance Premium Tax) of the Insurance Code.
If a managing underwriter is acting as the sole licensed surplus lines agent for a policy, then the managing underwriter must maintain the records listed in numbers 1 through 6 above and also make the records available for inspection by representatives of the Comptroller and the TDI. The managing underwriter would be responsible for filing the policy, paying the taxes, and all other requirements imposed under the surplus lines statutes.
These provisions only apply to policies where Texas is the home state of the insured.MIXED BEVERAGE GROSS RECEIPTS TAX
Tax Disclosure Statement Allowed
A statutory 14 percent gross receipts tax is imposed on the mixed beverage permit holder on the sale, preparation or service of alcoholic beverages sold by a mixed beverage permit holder. In addition, the permittee owes 14 percent gross receipts tax on ice and nonalcoholic beverages (i.e., “mixers”) that are sold or served to be mixed with an alcoholic beverage.
Effective June 17, 2011, Tax Code Section 183.0212 (added by House Bill 2033, 82nd Regular Session) allows an optional, informational statement to be added to a customer’s invoice, bill or other type of receipt provided the statement is separate from the calculation of charges the customer owes. The informational statement may disclose the amount of mixed beverage gross receipts tax a permittee owes on the alcoholic beverages sold.
The disclosure of gross receipts tax owed by the permittee may not be separately charged to or paid by the customer, may not be labeled as a tax reimbursement and may not be shown as part of the calculation of charges on the customer’s receipt.
As a tax imposed on the permittee, not the customer, mixed beverage tax may not be added to the selling price or backed out from the amount received. Texas law requires any amount a seller labels as a “tax” to be paid to the state in full in addition to the mixed beverage tax.
Based on the statutory requirements, the Comptroller offers the following as an acceptable tax disclosure statement: “Not included in this bill: [Business Name] pays a 14% tax ($$) on this sale of alcohol.”SALES TAX
Agriculture Sales Tax Exemptions: Some Reminders
Ag/Timber Number Not Required for All Items Used in Agriculture
Some items (PDF) used in agriculture are exempt only if they are used exclusively on a farm or ranch to produce agricultural products for sale. The purchaser must hold an Ag/Timber Number in order to buy those items tax free.
Many items used for agriculture purposes are, however, exempt from sales tax by law, so anyone can buy these items tax free and an Ag/Timber Number (or any other type of proof) is not required to be provided to the seller on those items.
The following items are always exempt from Texas sales and use tax:
- seeds and annual plants, the products of which are commonly recognized as food for humans or animals, or are usually only raised to be sold in the regular course of business, such as corn, oats, soybeans and cotton seed;
- animals, such as cattle, sheep, poultry and swine, the products of which are ordinarily food;
- horses, mules, donkeys and ponies*;
- all medications, tonics, restoratives or other therapeutic preparations (vaccines and drenches, for example) prescribed or dispensed by a veterinarian**,
- water; and
- feed for farm and ranch animals or wild game, including oats, hay, chicken scratch, wild bird seed and deer corn. Feed for pets does not fall in this category, even if those animals are located on a farm or ranch.
* All other animals are taxable, including dogs, cats and rabbits.
** The purchaser must either provide the retailer a written prescription or allow the retailer to receive the prescription directly from the veterinarian. The seller must keep a copy of the prescription on file to document the exemption.
See our Tax Exemptions for Agriculture Bulletin (PDF) for more information.
Work Animals and Their Food – Exemption Certificate Required; Ag/Timber Number Not Required
An exemption may be claimed on the purchase of a “work animal.” Animals used exclusively in one of the following work activities qualify for this exemption:
- herding dogs and animals raised for their products, such as wool or fur, if harvesting of those products is their primary purpose;
- aiding a person with a disability (professionally trained service animals); and
- performing protective services, if the animal has been professionally trained for that specific purpose.
Work animals do not include animals raised, trained or held as pets or breeding stock; for sport (i.e., hunting dogs) or for show. For example, tax is due on deer and other animals purchased by a hunting operation for game, exotic animals purchased by a zoo or circus, and hunting dogs.
“Show animals,” as used in this context, do not include animals raised and shown by students in 4H, FFA and similar vocational educational groups. Taxable animals (such as rabbits), that are raised for show and sale by students, qualify for exemption.
Purchasers should issue a regular exemption certificate (PDF) when buying work animals. The exemption certificate must indicate what type of work the animal will perform. An Ag/Timber Number is not required in order to claim the exemption.
Feed purchased for an animal that might normally be kept as a pet, such as a dog, is generally taxable. An exemption can be claimed, however, on feed for work animals, as well as for animals held for sale in the normal course of business.
The purchaser must provide a properly completed regular exemption certificate to the seller when claiming the exemption; an Ag/Timber Number is not required. The exemption certificate should indicate the type of work performed by the animal(s) to be fed (such as “dog food for a service dog”) or that the feed will be fed to animals being held for sale in the regular course of business or for animals used as breeding stock for animals that will be held for sale.
Purchasers claiming an exemption on work animals or on feed for work animals are not required to have an Ag/Timber number. The exemptions for work animals and their feed are not included in the specific statutory sections subject to the new Ag/Timber registration requirement under Tax Code Section 151.1551.
Purchasers who have an Ag/Timber Number may not use their number or an ag or timber exemption certificate to claim an exemption on work animals or their feed, or animals held for sale and their feed. Ag/Timber Numbers (on the appropriate exemption certificate) can only be used to claim an exemption on those items identified in Tax Code Section 151.1551.
Retailers who sell pet food to customers claiming the work animal or animals held for sale exemptions can accept a blanket regular exemption certificate (PDF) for those sales.
Pet food also qualifies for exemption when sold or dispensed under a veterinarian’s prescription. An exemption certificate and/or Ag/Timber Number is not required. The purchaser must either provide the retailer a written prescription or allow the retailer to receive the prescription directly from the veterinarian. The seller must keep a copy of the prescription on file to document the exemption.
Ag/Timber Number Not Required on Sales to Exempt Entities or Sales for Resale
Purchasers buying items to resell to others, federal and Texas governmental entities and exempt nonprofit organizations do not need an Ag/Timber Number in order to buy items, including agricultural items, tax free.
A retailer may continue to accept a properly completed resale certificate from a customer buying items for resale. Retailers may also continue to accept a properly completed general exemption certificate (PDF) or a government-issued purchase order, without an Ag/Timber number from qualified exempt organizations such as Texas public schools and universities; churches; federal and Texas state and local government agen¬cies; and nonprofit organizations buying items for their own use.SALES TAX
Disaster Relief for North Texas Tornado Victims
In response to the severe storms and multiple tornados damaging many parts of North Texas, the Governor has issued a proclamation declaring a disaster in Dallas, Tarrant and Kaufman counties.
Because of this disaster declaration, purchasers can claim an exemption from sales tax on separately stated charges for labor to repair or restore real or personal property damaged as the result of the storms. The materials and equipment that are used in the performance of the repairs continue to be taxable.
The exemption allowed under Tax Code Section 151.350 applies only to charges for labor to repair or restore damage resulting from the condition that caused the area to be declared a disaster area. Therefore, the exemption authorized by this disaster proclamation is limited to damage caused by the harsh weather and does not extend to repairs to personal property, a building, or other improvement to realty damaged by other sources. There is no time limit or expiration date on how long a purchaser has to claim an exemption on labor charges related to a declared disaster.
For more information, see Disasters and Texas Sales Tax (Publication 94-182), as well as the Disaster Relief: Frequently Asked Questions, on the Comptroller’s Disaster Resources section of our website. Additional resources regarding Texas’ response to the storms can be found on the Office of the Governor’s website.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; John Huffman, Lavonne Key, Herman Mason, Carol McAnnally, Jo Anne Meyerson, Karen Ortosky, Lindey Osborne, Jerry Oxford, Viki Smith, Karen Snyder and Jennifer Specchio