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July 2012 TAX POLICY NEWS
a monthly newsletter about Texas tax policy

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In this issue...


Insurance Tax

Mixed Beverage Gross Receipts Tax

Sales Tax

Resources

INSURANCE TAX

Fees Relating to Insurance

Many different kinds of insurance companies operate in Texas to provide residents and businesses with the coverage they need. These companies can be classified into two categories: admitted insurers and non-admitted insurers.

The admitted insurance market is composed of all licensed insurance companies that have received a certificate of authority from the Texas Department of Insurance (TDI) to conduct the business of insurance in Texas. The premium associated with the issuance of a policy of insurance by an admitted insurance company is subject to a premium tax that insurers are required to pay.

The non-admitted insurance market refers to insurers who are not licensed by the TDI, including insurers who have met eligibility requirements to write coverage in the surplus lines market. This market also includes insurance placed as “independently procured” or as “unauthorized” insurance. In the non-admitted market, the premium tax is a transaction tax that is either collected from the policyholder and remitted by the surplus lines agent, or is paid directly by the policyholder, the agent or the insurer.

Insurance Code Chapters 221, 222, 225 and 226 define premium for tax reporting purposes to include premiums, membership fees, assessments, dues, and any other consideration for insurance. In addition, Rule 3.822(a)(4) defines premium to include “agent fees that are charged in addition to, or in lieu of, a commission.” Therefore, "fees in lieu of commission" are considered premium in the admitted and non-admitted insurance markets and as such are subject to premium tax.

An insurance agent or broker who did not include these fees in the taxable premium base, collect, report and pay the surplus lines or other non-admitted insurance premium tax for "fees in lieu of commission" or an insurer who failed to include these fees in the tax base should amend prior premium tax returns in order to correct this reporting error.

Fees charged that are not related to procuring a policy of insurance are not considered premium, and an agent or broker is not required to report and pay premium tax on these fees. The fees could, however, be subject to sales tax if charged for the performance of taxable insurance services. Insurance agents and brokers often provide services that may or may not be in connection with selling or placing an insurance policy, such as loss prevention services that minimize the occurrence of accidents, losses or damage. Other examples of taxable insurance services include loss and damage appraisal, inspection, investigation, actuarial analysis and research and claims adjustment and processing.

See Rule 3.355 for additional information on sales tax on insurance services and STAR document 200603647L for information regarding sales tax on fees in lieu of commission.

MIXED BEVERAGE GROSS RECEIPTS TAX

Complimentary Champagne

In a recent communication, a restaurant asked how complimentary champagne would be treated for audit purposes. The champagne would be given away one day a week as a marketing tool. The restaurant does not sell champagne, but does sell other types of wine.

The restaurant’s plan was to have the restaurant’s vendor issue a separate purchase invoice for the champagne, and the restaurant would pay sales tax on the purchase of champagne. Champagne would be given away both to customers who purchase a meal and to customers who do not purchase a meal. The restaurant would not advertise in any way that champagne is included with the purchase of a meal.

Rule 3.1001, regarding mixed beverage gross receipts tax, defines a complimentary alcoholic beverage as one served without any consideration paid to the permittee. “Consideration” includes a purchase of a meal, any other item sold with service of the beverage, an entertainment fee or an entry fee. Champagne given indiscriminately to customers who purchase and do not purchase a meal is a complimentary alcoholic beverage. Since the restaurant receives no consideration for the complimentary champagne, it should be excluded from the mixed beverage gross receipts tax base.

Written or verbal advertisements and promotions that suggest in any way champagne is included with the purchase of a meal, such as champagne brunch, champagne buffet or dinners receive complimentary champagne, is viewed as selling champagne and not as complimentary.

The restaurant must keep all purchase invoices showing sales tax paid on the complimentary champagne, as required by Tax Code Section 111.0041 and Rule 3.1001. A service check must record each individual service of complimentary champagne with the total number of complimentary services of champagne included in the restaurant’s daily summary.

SALES TAX

Aerial Wildlife Management

Selling a gunner’s seat on an aircraft used in agriculture operations to a person who will participate in predator control (such as feral hog eradication) is subject to Texas sales and use tax as an amusement service. The seller must obtain a Texas sales and use tax permit, collect tax on the sale of the seat, and remit the tax to the Comptroller.

Although items used by the provider of an amusement service are typically taxable, the purchase of an aircraft used to provide predator control is exempt from tax under Tax Code Sec. 151.328 (a)(5) if it is bought for exclusive use in agricultural operations as the term is defined in Tax Code Section. 23.51.

Qualifying agricultural activities include:

  • predator control;
  • wildlife or livestock capture;
  • wildlife or livestock surveys;
  • census counts of wildlife or livestock;
  • animal or plant health inspection services; and
  • crop dusting, pollination or seeding.

An aircraft is considered to be "exclusively" used in agricultural operations if 95 percent of its use is for one of the purposes listed above. The 95 percent provision allows travel of less than 30 miles each way to a location to perform these exempt services.

The aircraft owner must maintain flight records for all uses of the aircraft and must make them available to the Comptroller upon request.

Any use of the aircraft for nonagricultural purposes will result in loss of the exemption.

The exemption under Tax Code Section 151.328 also applies to repair and replacement parts for the aircraft and repair labor. The exemption does not apply to firearms, ammunition or other machinery or equipment used on or with the aircraft or used by the aircraft owner or operator. But, an aircraft operator performing crop dusting or other operations classified as “agricultural” under 14 C.F.R. Section 137.3, may,obtain an Ag/Timber number from the Comptroller and then claim an exemption on chemicals and other equipment used exclusively to perform crop dusting and the other agricultural services specifically identified in the federal definition under Tax Code Section 151.316(a)(11). This exemption does not apply to firearms, bullets or other equipment used to perform predator control, wildlife census counts or other services not included under 14 C.F.R. Section 137.3.

For more information, see Tax Exemptions for Agriculture (Pub. 94-101).

SALES TAX

Multistate Benefit Exemption

Taxable services performed for use in Texas are subject to tax. Because some services are performed for use both within and outside Texas, the Legislature created Section 151.330(f) to provide an exemption for that portion of the taxable services performed for use outside Texas. The exemption was specifically limited to those services that became taxable on or after Sept. 1, 1987. This exemption is commonly referred to as the “multistate benefit exemption.”

The services that became taxable after Sept. 1, 1987, include:

  • credit reporting services;
  • debt collection services;
  • insurance services;
  • information services;
  • real property services;
  • real property repair and remodeling services;
  • telephone answering services; and
  • Internet access services

Additionally, when the statutory definition of tangible personal property changed on Oct. 1, 1987, to include custom computer programs, the services to repair, remodel, maintain or restore custom computer programs also became taxable. These same taxable services performed on canned computer programs do not qualify for the multistate benefit exemption because they became taxable before Sept. 1, 1987 (i.e., Oct. 2, 1984).

When determining whether a taxable service qualifies for the multistate benefit exemption, two thresholds must be met.

First, the taxable service must be included in the list of services that became taxable on or after Sept. 1, 1987. If the service became taxable before that date (such as maintenance of canned software or the repair of construction equipment that may be used both inside and outside Texas), a customer is not entitled to assert a claim to the exemption.

Next, the customer must establish that the taxable service in question supports or benefits a separate, identifiable segment of the customer’s business and that the separate, identifiable segment is located both within and outside of Texas.

An “identifiable segment” is defined by the Comptroller as a part of a business that has its own identity apart from, and performs a function that is separate from, the general administration or operation of the company. The existence of a separate, identifiable segment must be demonstrated by evidence of the organizational and operational structure of the business. The location where the service is actually used, and any allocation of charges, must be supported by taxpayer books and records. The mere fact that a taxpayer operates in multiple states does not mean that services purchased by a taxpayer in Texas were partly used outside of Texas.

Once an identifiable segment is demonstrated, the taxpayer may use any reasonable method for allocation that is supported by business records. But, to the extent the use of the service cannot be assigned to a separate, identifiable segment, it is presumed to be used to support the taxpayer’s business generally at the principal place of business, which is deemed to be the place from which trade or business is directed or managed.

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
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, Kirk Davenport, Lisa Davis, Don Dillard, Tommy Hoyt, Carol McAnnally, Jo Anne Meyerson, Karen Ortosky, Lindey Osborne, Jerry Oxford, Debbie Riley, Viki Smith, Karen Snyder and Jennifer Specchio

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