Texas Franchise Tax and Texas Sales & Use Tax Recent Developments

Transcription

1 THE UNIVERSITY OF TEXAS SCHOOL OF LAW Presented: 62 nd Annual Taxation Conference December 3-4, 2014 Austin, Texas Texas Franchise Tax and Texas Sales & Use Tax Recent Developments Jimmy Martens Author contact information: Jimmy Martens Martens, Todd, Leonard & Taylor Austin, Texas Continuing Legal Education

2 Texas Franchise Tax and Texas Sales & Use Tax Recent Developments 2014 This teaching manual/outline provides information on general tax issues and is not intended to provide advice on any specific legal matter or factual situation. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel. James F. Martens ( ). All rights reserved. Last Revised 11/3/14

3 Instructor Jimmy Martens, trial and appellate attorney is a partner with Martens, Todd, Leonard & Taylor, a boutique Texas tax litigation law firm located downtown, Austin, Texas. Mr. Martens has handled the trial of federal and Texas tax cases and related appeals all the way through both the Texas Supreme Court and the U.S. Supreme Court. His recent Texas Supreme Court cases include Combs v. Roark Amusements & Vending., 422 S.W.3d 632 (Tex. 2013); and In Re: AllCat Claim Service, L.P., 356 S.W. 3d 455 (Tex. 2011). His recent Court of Appeals cases include Combs v. Newpark Resources, Inc., 422 S.W.3d 46 (Tex. App. Austin, Dec. 31, 2013, no pet.); and Titan Transportation, LP v. Combs, 433 S.W.3d 625 (Tex. App. Austin, 2014, pet. filed). He and other members of his law firm limit their law practices to Texas tax, multi-state, and federal tax controversies and litigation. He is board certified by the Texas Board of Legal Specialization in Tax Law and a CPA. He is a former council member of the Tax Section for the State Bar of Texas and the former chair of the CLE Committee. Mr. Martens teaches courses in Advanced Texas Franchise and Sales Tax, Texas Sales Tax for the Oilfield Services Industry, and Texas Sales & Use Tax for LAT Seminars. He also teaches the TSCPA s statewide course on Texas taxes. He received his B.B.A. and J.D. from University of Texas at Austin, both with honors. Mr. Martens may be reached by at jmartens@textaxlaw.com or by telephone at (512) Special Note: Martens, Todd, Leonard & Taylor maintains a website which provides Texas tax information, links to all of the websites referenced in this manual and links to all available state revenue officers websites. The site is located at: The service is free.

4 TABLE OF CONTENTS TEXAS FRANCHISE TAX I. CALCULATIONS, EXEMPTIONS, RATES & APPORTIONMENT 1 ELECTION-SWITCHING: POLICY REVERSAL 1 $1 MILLION DEDUCTION 2 TEMPORARY RATE DECREASES LEGISLATIVE CHANGES 6 INSURANCE COMPANY EXEMPTION 8 SEISMIC DATA RECEIPTS APPORTIONMENT 9 THREE FACTOR APPORTIONMENT: MTC ELECTION 9 II. REVENUE EXCLUSIONS 11 FLOW-THROUGH FUNDS MANDATED BY LAW OR FIDUCIARY DUTY 11 REAL ESTATE INDUSTRY EXCLUSION 14 RECENTLY-ADDED EXCLUSIONS 17 III. COST OF GOODS SOLD DEDUCTION 23 INBOUND TRANSPORTATION COSTS 23 PIPELINE COMPANIES 23 REAL ESTATE INDUSTRY SERVICE PROVIDERS 24 PARSING OF DIRECT COSTS 26 INDIRECT COSTS 26 IV. COMPENSATION 31 NET DISTRIBUTIVE LOSSES 31 WORKING CONDITION BENEFITS 33 V. TAX CREDITS & INCENTIVES 35 RESEARCH & DEVELOPMENT CREDIT 35 CLEAN COAL PROJECTS 49 CLEAN ENERGY PROJECTS 50 HISTORIC STRUCTURE REHABILITATION CREDIT 50 MAIN OFFICE RELOCATION COSTS 51

5 Page ii Table of Contents TEXAS SALES & USE TAX I. GENERAL 53 AMENDMENT TO THE LOCAL SALES AND USE TAX DEFINITION OF PLACE OF BUSINESS OF THE RETAILER 53 II. TAXABLE SERVICES 53 NAME CHANGE FOR THE TEMPORARY EMPLOYMENT SERVICES PROVISIONS 53 DEFINITIONAL AMENDMENTS RELATING TO DESTINATION MANAGEMENT COMPANIES 53 OIL, GAS, AND RELATED WELL SERVICE RULE 53 III. EXEMPTIONS 54 RESALE EXEMPTION. 54 COMBS V. ROARK AMUSEMENT & VENDING, L.P. 54 COMBS V. HEALTH CARE SERVICES CORPORATION 55 DTWC CORPORATION V. COMBS 56 TEMPORARY EXEMPTION FOR QUALIFIED DATA CENTERS 58 RESEARCH AND DEVELOPMENT TAX EXEMPTION 59 EXEMPTION FOR OFFSHORE SPILL RESPONSE CONTAINMENT PROPERTY 60 DATE OF TAX-FREE WEEKEND MODIFIED 60 BOOSTER CLUBS NOW ENTITLED TO SALES AND USE TAX EXEMPTION 60 CLARIFICATION OF EXEMPT HEALTH CARE SUPPLIES 60 AMENDMENT TO TEXAS SALES AND USE TAX EXEMPTION FOR NEWSPAPERS 61 AMENDMENT TO THE COIN AND PRECIOUS METAL TEXAS SALES AND USE TAX EXEMPTION 61 IV. REBATES 61 TELECOMMUNICATIONS SALES AND USE TAX REBATE 61 V. MISCELLANEOUS 61 STATE JAIL FELONY CREATED FOR USE OF SALES SUPPRESSION DEVICES AND PHANTOM-WARE 61

6 Texas Franchise Tax Recent Developments Page 1 I. Calculations, Exemptions, Rates & Apportionment Election-Switching: Policy Reversal During 2012, the Comptroller reversed her prior policy on election changes. The Comptroller now allows taxpayers to amend their Texas franchise tax reports to switch to or from the cost of goods sold ( COGS ) or compensation deductions at any time within the statute of limitations. 1 Previously, the Comptroller determined that taxpayers could not file amended reports to change their election after the due date of the report. 2 Many taxpayers believe the Comptroller s prior policy conflicted with the Texas Tax Code and the Comptroller s own tax forms and instructions. Cases Challenge Comptroller Election Policy. Two cases filed in Travis County District Court before the Comptroller s policy change concerned whether taxpayers who initially filed using the E-Z computation form may elect the cost of goods sold deduction. 3 The Comptroller s policy reversal came shortly before the August 20, 2012 jury trial scheduled in one of these cases. District Court Allows Election Change. In the first Texas revised franchise tax case tried in the Travis County District Courts, the taxpayer prevailed in proving it qualified as a temporary employment service, rather than as a professional engineering firm as alleged by the Comptroller. In her order, the trial judge ruled that the taxpayer was entitled to claim the compensation deduction for the wages and benefits of the unassigned workers. The taxpayer had previously claimed the COGS deduction. 4 The district court decided this case prior to the Comptroller s policy change. 1 Texas Comptroller of Public Accounts, Important Information Concerning Cost of Goods Sold (COGS) and Compensation Deduction Elections available at 2 See, E.g., Comptroller Hearing No. 105,037 (Nov. 15, 2011). 3 Bigham Bros., Inc. v. Combs, No. D-1-GN Martens, Todd, Leonard & Taylor represented the plaintiff. Sunbelt Custom Mineral, LLC v. Combs, No. D-1-GN Martens, Todd, Leonard & Taylor represented the plaintiff. 4 Taylor & Hill v. Combs, No. D-1-GN , 53rd District Court, Travis County, Texas, July 7, James Martens and Lacy Leonard with Martens, Todd, Leonard & Taylor tried this case.

7 Page 2 Texas Franchise Tax Recent Developments Example Up until 2013, ABC Oil Company had prepared its Texas franchise tax reports electing to report under the compensation method. It was unaware that the Comptroller treated oil & gas wells as real property and that it would also qualify to elect to report under the COGS method. In March of 2013, ABC Oil Company realized its mistake. As a result of the election switching policy change of 2012, ABC Oil Company was entitled amend its reports to claim COGS deductions (and resulting refunds of overpaid franchise tax) for all reports years then open under the four (4) year statute of limitations. $1 Million Deduction For reports due on or after January 1, 2014, the franchise tax calculation now incorporates the $1 million small entity exemption as a $1 million deduction. An entity s taxable margin is now the lesser of (A) 70% of total revenue or total revenue less $1 million; or (B) total revenue less the greater of (1) $1 million, (2) COGS, or (3) compensation. 5 A taxable entity is not required to pay any franchise tax if the amount of tax computed for the taxable entity is less than $1, As compared with the 30% deduction method, the breakeven point is $3,333,333 of total revenue. At this total revenue amount, the deduction for 30% of revenue equals $1 million. Comment: How do the new $1 million deduction and the tiered reporting rules interrelate? 5 Texas Tax Code (a) eff. Jan 1, Texas Tax Code (d)(1).