Recent Developments Texas State and Local Tax. March 30,

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1 Recent Developments Texas State and Local Tax March 30,

2 Topic Overview Legislative Issues Administrative Rule Changes Case Update

3 Legislative Issues

4 Legislative Issues Budget Shortfall At beginning of this session, the projected budget shortfall for was estimated to be as high as $27 Billion House Bill 1: Proposed 17% drop in spending from general fund Senate Bill 1: Proposed 10.1% drop in spending

5 Legislative Issues Revenue to Fill the Gap? Governor Perry was initially opposed to drawing from the $9.4 billion Rainy Day Fund, but just this month he reluctantly agreed to use some of the fund to fill the budget gap for FY HB 275 (Pitts) proposes a $4.3 billion withdraw from the fund. Legislators have been reluctant to introduce new taxes, but there has been some movement to impose new fees and eliminate exemptions. Franchise ("Margins") Tax was $2.5 billion below total revenue projections by the end of fiscal 2010

6 Legislative Issues Legislation Affecting Taxes - Generally HB 658 (Villarreal) proposes a repeal of the Economic Development Program that refunds state sales tax and franchise taxes to certain qualifying businesses with tax abatements that pay property taxes to school districts. HB 3640 (Pitts) proposes a requirement for early payment of certain taxes (not sales tax). Would make taxes due in September payable in August to realize income in current FY biennium.

7 Legislative Issues Legislation Affecting Taxes - Generally HB 3641 (Pitts) similar speed up bill for motor fuels tax HB 3643 (Pitts) similar speed up bill for alcohol beverage tax HJR 6 (Burnam) proposes a constitutional amendment that would allow voters to initiate measures for adopting and imposing state income tax. HB 255 (Hilderbran) proposes stricter criminal penalties relating to the enforcement of tax laws and strengthens the Comptroller s authority to investigate taxpayers, obtain information, and use that information in criminal and administrative proceedings.

8 Legislative Issues Legislation Affecting Taxes - Generally HB 1850 (Elkins) Requires legislative approval for all rules, including Comptroller rules, prior to adoption (excludes emergency rules). HB 3774 (Pitts) proposes change to late filing penalty. Currently, taxpayers are assessed a $50 late filing fee after 3 rd offense. Bill allows Comptroller to impose a $50 fee whenever a return if filed late, even if not tax was due (applies to sales, franchise, motor fuel, mixed beverage, etc.)

9 Legislative Issues Legislation Affecting Sales Tax HB 353 (Burnam) proposes limitations on the timely filing discount and the prepayment discount. Limit the timely filing discount to $ per fiscal year for each taxpayer. Limit the prepayment discount to $ per fiscal year for each taxpayer. HB 1317 (Naishtat) a click-through nexus bill, which attributes nexus to on-line retailers who partner with in-state businesses on certain sales. Similar bills have been filed in other states.

10 Legislative Issues Legislation Affecting Sales Tax HB 2403 (Otto) proposes an affiliate nexus requirement. The activities of a Texas affiliate would be attributable to an out-of-state seller. HB 2719 (Harper-Brown) proposes the complete opposite approach. The bill provides that an affiliate s activities are not attributable to an out-of-state seller. The bill also purports to be a clarification of existing law (i.e., retroactive application). HB 268 (Hilderbran) proposes a requirement that purchasers claiming an agriculture exemption must present an exempt number issued by the Comptroller.

11 Legislative Issues Legislation Affecting Sales Tax HB 3767 (Pitts) & SB 1721 (Duncan) propose changes to the resale exemption Appears to be a direct response to the BCBS Decision discussed later in this presentation Also implicates the Plush Toys case also discussed later in this presentation

12 Legislative Issues Legislation Affecting Franchise Tax HB 3640 (Pitts) proposes changes to franchise tax reporting requirements. Would require certain large taxpayers to make quarterly payments that equal 90% of the prior year s tax amount. HB 3642 (Pitts) proposes a requirement that at the end of every biennium franchise taxes due for the following year must be paid early (before August 31 st ) even though the tax return is not due until May 15 th of the following year.

13 Legislative Issues Legislation Affecting Franchise Tax HB 262 (Hildebran) & SB 2776 (Bohac) propose retention of the $1 million total revenue exemption for the franchise tax. HJR 49 (Anderson) & HJR 25 (Paxton) proposes that any change to the franchise tax rate must be approved by a 2/3 majority of both houses. HB 1439 (Berman) proposes that taxpayers, unless part of a combined group, who lost money (i.e. were not profitable) would not owe any franchise tax. Under the current structure, some taxpayers with no federal taxable income still owe the tax because of the size of their margin

14 Administrative Rule Changes

15 Administrative Rule Changes Comptroller Rule (Security Services) - adopted Rule changed to exclude installation of electronic access control devices from the definition of taxable security services following revisions to the Occupation Code. Installers of electronic access control devices should follow guidelines for contractors taxability depends on the job: residential or nonresidential; new construction or repair; lump-sum or separated.

16 Administrative Rule Changes Comptroller Rule (Use Tax) - adopted Rule changed to clarify the definitions of storage, use, and use tax. Subsection (b) of the rule was amended to distinguish between use tax liabilities associated with nonresidential repair or remodeling and separated contracts for new construction or residential repair or remodeling and use tax liabilities associated with lump sum contracts for new construction or residential repair or remodeling Subsection (d) amended to clarify the responsibilities of Texas purchasers who use goods from out-of-state sellers.

17 Administrative Rule Changes Comptroller Rule (Statute of Limitations) - proposed Repealed old rule entirely and proposed new rule Subsection (b) clarifies that waiver agreement only covers the period specified in the agreement also provides that each waiver may not exceed 24 months Subsection (c) adds tolling provisions addressed by HB 2425 which was passed by the 78 th Legislature in 2003

18 Administrative Rule Changes Comptroller Rule (Refunds) - proposed Repealed old rule entirely and proposed new rule Subsection (a)(3) provides that purchasers who claim refunds directly from the comptroller or take credits on returns must be permitted at the time of the transactions giving rise to the refund. Subsection (a)(4) imposes additional requirements for refund claims Include purchase price, tax amount, specific reason for refund, seller s identify (if tax paid to vendor), and local tax New requirements are to be applied prospective only Comptroller may intend to aggressively enforce these requirements.

19 Administrative Rule Changes Comptroller Rule 1.9 (Position Letter) proposed then withdrawn Would have allowed the Comptroller s Tax Division to waive issuance of a Position Letter if: The Statement of Grounds was inadequate The dispute involves the denial of a settlement agreement SOAH could resolve case without a Position Letter Watch for some similar rule that would allow the Tax Division to move cases faster through the process.

20 Administrative Rule Changes Comptroller Rule 3.11 (Offset) draft stage The draft rule proposes to limit taxpayer rights granted in Tax Code and to net overpayments against underpayments for purpose of calculating interest The draft rule would require certain additional filing requirements on a taxpayer seeking an offset The draft rule would prohibit the use of settlement amounts to calculate an offset The draft rule would give Comptroller staff absolute discretion to deny an offset for any reason

21 Case Update

22 Case Update Frito-Lay, Inc. v. Combs Travis County District Court ISSUE: Does the manufacturing exemption include equipment used to make test-market snack foods at a separate R&D facility Tax Code (c)(3) excludes R&D from the exemption Comptroller - instructions taken from R&D; shape and formula frequently changed; products used to test consumer reactions Frito-Lay - the exemption does not exclude equipment actually used to make food; true R&D activities are separate and distinct; and some of the product was actually sold The Court ruled for Frito-Lay

23 Case Update Zale Delaware Inc. v. Combs Travis County District Court ISSUE: Did Zale properly claim tax credits for bad debt write offs arising from private label credit card sales? Zale we are permitted to apply partial customer payments to nontaxable charges (i.e., interest and fees) before applying the payments to taxable charges for purchased items. Comptroller - retailers are entitled to bad debt credits only if all payments are prorated between taxable and nontaxable charges under Tax Code (e)(2). Comptroller Rule provides, payments to the account MAY be applied ratably... Pending in District Court

24 Case Update El Paso Electric Co. v. Combs Austin Court of Appeals ISSUE: Does the manufacturing exemption apply to cable, poles, and other equipment used to transmit and distribute electricity to end users? El Paso Electric Co. argued the T&D equipment was included in the manufacturing exemption as items necessary to process current, a component of electric energy. The district court judged ruled for El Paso Electric Co. The AG appealed the case, then later withdrew the appeal.

25 Case Update Combs v. Chevron USA, Inc. Austin App. Ct., pet. to be filed Scaffolding provided by vendor was either a nontaxable service or the rental of TPP vendor erected and disassembled the scaffolding for Chevron. Issue: Who had operational control over the use of the scaffolding? District Court held for Chevron Appellate Court reversed and rendered judgment for the Comptroller finding that Chevron employees and other contractors used the scaffolding to perform repairs and maintenance at the plant.

26 Case Update Combs v. Chevron USA, Inc. Austin App. Ct., pet. to be filed (cont.) 2 nd Issue: Are new claims added for the first time in the motion for rehearing appealable to district court? Comptroller Rule 1.7(d): The statement of grounds may be amended up to the time that a reply to the position letter is required, and not later Tex. Tax Code (a): The grounds of error contained in the motion for rehearing are the only issues that may be raised in a suit under this subchapter. The Court ruled the trial court lacked jurisdiction over the issues raised for the first time in a motion for rehearing.

27 Case Update 7-Eleven, Inc. v. Combs Austin App Ct, pet. denied (9/3/10) 7-Eleven s corporate office took delivery of financial software in Texas, then transferred copies to individual stores 1 st Issue: Is use tax due on the software shipped out of state for use by stores out of state (company stores)? Court of Appeals reversed and remanded for further proceedings. 2 nd Issue: Does the resale exemption apply to software copies resold to franchisees? Court of Appeals reversed and rendered for 7-Eleven 3 rd Issue: Are copies sent to in-state company stores an integral part of taxable data services (and therefore a sale for resale)? Court of Appeals reversed and rendered for 7-Eleven.

28 Case Update Roark Amusement & Vending, L.P. v. Combs Travis County District Court Issue: Whether Roark was eligible to claim a resale exemption on purchases of plush toys used in Roark s coin-operated amusement machines. Resale includes transfer of tangible property as part of a taxable service Amusement services are taxable, but amusement machine services are exempted from the tax. Court held for Roark finding that the amusement machine services constituted taxable-exempt services, a subset of taxable services.

29 Case Update Combs v. Health Care Services Corporation Austin App. Ct. Issue: Whether purchases of items by a service provider in the performance of a federal government contract qualified for sale for resale exemption if the title to the items passes to the federal government under the service contract, which incorporates federal law Court held that federal title-passage clauses incorporated in the contract constituted a sale such that the original purchases of the items qualified as purchases for resale Opinion issued March 16, 2011 (expect petition to Texas Supreme Court)

30 Case Update Roark Amusement & Vending, L.P. v. Combs & Combs v. Health Care Services Corporation HB 3767 (Pitts) & SB 1721 (Duncan) propose changes to the resale exemption directly attacks the above cases: Sales for resale only applies to purchases of items that will be resold as part of a taxable item takes away the exempt taxable service category. Imposes additional requirements on the sale for resale exemption as applied to federal contracts must do more than incorporate a titlepassage clause.

31 Case Update Franchise Tax Galland Henning Nopak v. Combs Amarillo Court of Appeals Issue: Whether franchise tax nexus arises from the activities of a regional manager who supports the sales efforts of Texas distribution companies under contract with the taxpayer? Wisconsin manufacturer has a regional manager responsible for Texas and 6 other states. No office in TX. Manager visits & supports sales staff at distribution companies. Taxpayer ships via common carrier and US mail The Court ruled nexus arises from manager s activities to promote and induce sales in Texas.

32 Case Update Franchise Tax Anadarko E&P Company v. Combs Pending in District Court Issue: Whether Anadarko s failure to perform an impairment adjustment for proved reserves was an accounting error, and whether its taxable capital should be reduced to account for the impairment of the proved assets. Tax Code allows corporations conducting oil and gas exploration and production to report their activities for franchise tax purposes according to the successful efforts method of accounting. Anadarko contends the successful efforts method required it to compute impairment for long-lived assets for proved and unproved assets. Anadarko computed such an impairment but only for unproved reserves.

33 Case Update Franchise Tax TGS-Nopec Geophysical. v. Combs Austin App Ct, pet. filed Issue: Apportioning receipts from the sale of intangible assets (i.e., licenses of seismic data) based on in-state use versus location of payor. TGS (a non-texas corporation) licensed seismic data nationally. TGS wanted to apportion sales to purchasers with out-of-state billing/shipping addresses as non-texas sales even if the purchaser was actually located in Texas. Texas receipts include the use of patent, copyright, trademark, franchise or license in this state TGS argued it did not use licenses in Texas. TGS also urged apportionment should be based on the location of the payor Court of Appeals affirmed lower court and ruled that apportionment should follow use, not the payor s location.

34 Questions?