|June 2012||TAX POLICY NEWS|
|a monthly newsletter about Texas tax policy|
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Tax-Exempt Insurance Premium for Certain Groups of Public Employees
The Insurance Code exempts from any state tax, regulatory fee or surcharge (including a premium or maintenance tax or fee) the life and accident and health premiums received from certain groups of public employees. Broadly speaking, the groups are:
- state employees and retirees;
- state college and university employees and retirees;
- active public school employees;
- retired public school employees;
- employees of municipal, county or hospital districts in Texas where the group covered by the policy consists of a single nonprofit trust established to provide coverage; and
- employees of the federal government.
The Employees Retirement System of Texas administers insurance benefits for state employees and retirees. The premiums received are exempt from tax by the Insurance Code, Chapter 1551 (PDF, 204KB), under the Texas Employees Group Benefits Act. Included in this Act are appointed and elected officers and employees of the state of Texas, employees of state institutions of higher education and retirees under the state’s Employee Retirement System. An “institution of higher education” is any public junior college or senior college or university, except those in the University of Texas System or the Texas A&M University System, which are covered by a separate act as explained below.
Employees and retirees of the University of Texas System or the Texas A&M University System obtain their insurance through those systems. The premiums received for coverage are exempt from tax by the Insurance Code, Chapter 1601 (PDF, 95KB), under the Uniform Insurance Benefits Act for Employees of the University of Texas System and the Texas A&M University System.
The premiums received for those who participate in the Teacher Retirement System of Texas (TRS) are exempt from tax under the Insurance Code, Chapter 1579 (PDF, 73KB), Texas School Employees Uniform Group Health Coverage. This program is referred to as “TRS-ActiveCare.” This group includes employees of school districts, regional education service centers and charter schools that open their records to inspection and audit relating to participation in the program. School districts with 500 or fewer employees are required to participate under this chapter unless the district was self-funded on Jan. 1, 2001; school districts having greater than 500 employees may elect to participate.
Insurance Code Chapter 1575 (PDF, 114KB) covers retirees of the TRS who are not eligible for coverage under either Chapter 1551 or Chapter 1601. Premiums or contributions on a policy, insurance contract, or agreement under this chapter are exempt from tax. This program is referred to as “TRS-Care”".
Under the Insurance Code, Chapter 1576 (PDF, 46KB), both active employees contributing to the TRS as well as TRS retirees (including spouses, surviving spouses, parents, grandparents, fathers-in-law and mothers-in-law) may purchase long-term care insurance at their own expense, the premiums for which are also exempt from tax. The premiums received from a single non-profit trust established for the benefit of certain municipal, county or hospital district employees are exempt under Insurance Code, Chapter 222 (PDF, 47KB), Section 222.002(c)(5). See the October 2011 Tax Policy News for more information.
Premiums received from the Employees Health Benefits Fund, which is administered by the Office of Personnel Management, for enrollees of the Federal Employees Health Benefit Plan are pre-empted from tax as well, under Section 8909, Title 5, United States Code.SALES TAX
Battling Drought – Sales Tax Exemptions for Items Used to Enhance the Availability of Water
The severe drought covering most of the state has prompted many Texans to examine ways to save water. Similarly, the rising cost of living has many of us looking for ways to save money. The sales tax exemptions authorized under Tax Code Section 151.355 can help with both objectives.
An exemption applies to equipment, supplies and/or services used solely for certain types of water conservation. For the purpose of exemption, “solely” means the equipment, supplies or services are used exclusively for the reason stated. Items that do not meet the “sole purpose test” are not exempt. For example, a toilet (even a low-water-use toilet) does not qualify for the exemption since it is not solely used to reduce or eliminate water use. But, a water dam in a toilet tank is only used to save water, so it qualifies for the exemption.
Other items that do not meet the “sole purpose test” and are subject to tax include:
- artificial turf;
- low-flush toilets;
- pumps for fountains or water displays;
- tools used for landscaping or lawn care;
- water-efficient appliances; and
- water hoses.
What Conservation Activities Are Exempt?
The exemption applies to equipment, supplies and services used solely in the types of conservation activities listed below.
Equipment, supplies and services used solely for capturing and storing rainwater for subsequent use are exempt from sales tax, including:
- rainwater filtration equipment;
- purification equipment;
- rain barrels;
- gutters used solely to route the water into rain barrels or rainwater collection systems;
- tanks and cisterns;
- roof washers used in a harvesting systems;
- screens and filters for the gutters, barrels, tanks, cisterns and roof washers; and
- a collection surface area that is not used as a roof of a structure or storage area.
Piping, plumbing or sprinkler systems used to distribute water inside a house or other structure or throughout a yard or other grounds are not considered part of rainwater harvesting equipment and are not exempt.
Water Recycling and Reuse
Equipment, services and supplies used solely to capture and recycle water qualify for exemption, including:
- cisterns; and
- water recycling systems for washing machines.
Reduction or Elimination of Water Use
Equipment, services and supplies used solely to reduce or eliminate water use qualify for exemption, including:
- water dams for toilets;
- timers and rain sensors attached to sprinkler systems;
- water displacement devices for toilet tanks; and
- faucet sensors that shut off water flow.
Items such as low-flow showerheads, xeriscaping services, native and drought-resistant plants, rock gardens and artificial turf do not qualify since they are not used solely to reduce water use.
Desalination of Surface Water or Groundwater
“Desalination” is the process of removing salts from undrinkable or brackish surface water or groundwater to obtain useable fresh water or high-quality drinking water.
Equipment, services and supplies used solely for desalination qualify for exemption, including:
- reverse osmosis systems;
- cleaning and pickling valves;
- pre-filter pumps;
- product flow meters;
- salinity meters; and
- high-pressure control valves
Brush Control Designed to Increase the Availability of Water
“Brush control” is the selective control, removal or reduction from watershed rangelands of mesquite, prickly pear, salt cedar or other deep-rooted woody plants to enhance the availability of water.
Equipment, services and supplies used solely for brush control are exempt from sales tax, including:
- root plows;
- crawler tractors;
- hydro axes;
- roller choppers;
- aerial sprayers;
- sling blades;
- herbicides; and
- repair services performed on brush control equipment.
“Precipitation enhancement” is an activity, such as cloud seeding, done to artificially induce rain clouds to produce rain.
Purchases of equipment, services and supplies used solely for precipitation enhancement are exempt from sales tax, including:
- end-burning cloud-base flares;
- acetone solution wing-tip generators;
- pressure transducers; spectrometer probes;
- calibration equipment.
Water or Wastewater Systems
Equipment, services and supplies used to construct or operate a water or wastewater system certified by the Texas Commission on Environmental Quality (TCEQ) as a regional system and water or wastewater systems constructed or operated as a public-private partnership qualify for exemption.
The exemption also covers a water supply or wastewater system built or operated by a private entity if the system is certified by a political subdivision or by a non-profit water supply corporation created and operated under Chapter 67 of the Texas Water Code. See Rule 3.318 regarding water-related exemptions and Water and Wastewater Systems (Pub. 94-123) (PDF, 1004KB).
Fracturing at an Oil or Gas Well
Production and completion of oil or gas wells can sometimes require fracturing, which requires injecting a large volume of water into the well to fracture rock formations and release the oil or gas. Recycling and reusing the recovered contaminated wastewater reduces the amount of fresh water used in oil and gas drilling.
Equipment and supplies specifically used to process, reuse or recycle the wastewater resulting from the fracturing at an oil or gas well qualify for sales tax exemption.
The purchaser of qualifying items used for the sole purpose of water conservation or reuse must present to the seller a Texas Sales and Use Tax Exemption Certificate (Form 01-339) (PDF, 57KB) stating valid qualifications for the exemption. The certificate must also show the purchaser’s name and address; description of the item; the reason the purchase is tax exempt; the purchaser’s signature; the date; and the seller’s name and address.SALES TAX
Sales Tax Holiday is August 17, 18 and 19!
This year’s annual sales tax holiday begins at 12:01 a.m. on Friday, August 17th and ends at midnight on Sunday, August 19th. During this three-day period, Texas shoppers get a break from state and local sales taxes on purchases of school supplies, clothing and most backpacks priced under $100.SALES TAX
Sunsetting the Sales Tax on Sunscreen
As of June 18, 2012, sunscreen is once again exempt from Texas sales and use tax thanks to a new Food and Drug Administration (FDA) rule (PDF, 225KB).
Over-the-counter (OTC) drugs and medicines, including sunscreen, were exempted from sales tax on April 1, 2000.
Legislation that became effective Sept. 1, 2007, however amended the definition of OTC drugs in Texas Tax Code Section 151.313 (a)(3) to provide that an over-the-counter item is exempt from sales tax only if the OTC drug or medicine is required by the FDA to be labeled with a drug facts panel. As a result of that statutory change, sunscreen became taxable because it was not required to be labeled with a drug facts panel.
At the time the amendment to Tax Code Section 151.313 occurred, the FDA had proposed, but then delayed, a drug panel labeling requirement for sunscreen. Due to the FDA proposal, many sunscreen manufacturers began voluntarily labeling their products with a drug facts panel. But, because OTC sunscreen drug products were not required by the FDA to be labeled with a drug facts panel, sunscreen products were subject to sales tax based on Tax Code Section 151.313 (a)(3) even if the product displayed a drug facts label.
The FDA has now published a final rule to establish labeling and testing requirements for OTC sunscreen drug products, and the rule requires sunscreen drug products to bear the drug facts panel. The FDA rule became effective June 18, 2012.
Because sunscreen is now required by the FDA to be labeled with a drug facts panel, it also now qualifies for the exemption set out in Tax Code Section 151.313 (a)(3). Therefore, as of June 18, 2012, sunscreen is once again exempt from Texas sales and use tax.RESOURCES
Popular Online 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
Melissa Brogan, Robin Corrigan, Lisa Davis, Tommy Hoyt, Carol McAnnally, Jo Anne Meyerson, Karen Ortosky, Lindey Osborne, Viki Smith and Karen Snyder