January 7, Texas State Tax Update. Texas Franchise Tax. Legislative Jimmy Martens Jimmy Martens Jimmy Martens

Transcription

1 2016 Texas State Tax Update Texas Franchise Tax Legislative 1

2 Franchise Tax Rates Permanently Decreased: - Regular rate.75% - Retailer rate.375% - EZ rate.331% Veteran-Owned Businesses Requirements Formed After Year Exemption Information Report Only 2

3 $1 Million Exemption Converted $1 Million Revenue Exemption Expired Converted to Deduction Alternate to 30% Deduction $1 Million Deduction Method Revenue less $1 million Taxable Margin times Texas factor Apportioned Taxable Margin times Tax Rate (x.0075 or.00375) less Temporary & Bus. Credits Net Margin Tax Due $ $ $1 Million Deduction & Tiered Partnerships Corp. 1 (upper) Corp. 2 (upper) 50% 50% LP (lower) LP Has $4 MM Revenue LP Elects to Pass Up $2 MM each Does Each Corp Get $1 MM ded? 3

4 E-Z Computation Simplicity $20 Million or Less in Revenue Revenue Times.331% No Credits or Deductions E-Z Computation (2016) Revenue times Texas Factor Apportioned Revenue times E-Z Tax Rate (x.00331) Texas Margin Tax Before Discount less Small Business Discount Net Margin Tax Due $ $ R & D Tax Incentives 4

5 Research Tax Incentive Choice Sales Tax Exemption OR Franchise Tax Credit Depreciable TPP Expenses Qualified Research In Texas New or Improved Products Patents New Technologies Environmental Testing New or Improved Software Other Research Tax Incentive Choice Sales Tax Exemption Depreciable TPP 5

6 Sales Tax Exemption Sale, Storage or Use Depreciable TPP Reporting Franchise Tax Credit Franchise Tax Credit Qualified Research Expenses Qualified Research Expenses Research Wages Research Supplies Time-Sharing Computer Costs Contract Research Costs 6

7 Credit Calculation Incremental Credit Current Year Qualified Expenses less 50% of 3 Year Average times 5% equals the R & D Credit Additional Rules Unused Credit Carry Over Enhanced for College Research Combined Group Rules Expires December 31, 2026 Court Cases 7

8 Franchise Tax Cases - Final CGGVeritas Services Hallmark Marketing Co. Gulf Chem. & Metallurgical Corp. Hovel v. Batzri CGGVeritas Services CGGVeritas Services Sells Seismic Data Two Business Lines Multi-Client Data Library Client Specific Work Eligible for COGS Deduction Real Estate Activity 8

9 Hallmark Marketing Co. Hallmark Marketing Co. Sales Texas Everywhere Products Investments 0 (100) Total Comptroller: 100/100 equals 100% Texas Court: 100/200 equals 50% Texas Net Gain Issue Passive Entity (Income) Compensation Deduction (NDI) 9

10 Net Loss Issue Illustration Active Passive Total Rents Interest Net Real Estate Gains Net Securities Loss (100) (100) Comptroller Percent 88% Net Loss Issue Illustration Active Passive Total Rents Interest Net Real Estate Gains Net Securities Loss Business ,0000 Percent 90% Gulf Chem. & Metallurgical Corp. Old Franchise Tax Reduce Gross Receipts by Allowances Importance: Substance over form Federal tax cases as guidance 10

11 Hovel v. Batzri Don t pay franchise tax Forfeit Corporate Privileges Personal Liability Breach of Construction Contract Debt Incurred at Time of Contracting LLC Sole Manager Not Personally Liable Franchise Tax Cases - Pending American Multi-Cinema, Inc. Graphic Packaging Corp. Autohaus LP, LLP Gulf Copper & Manufacturing Corp. American Multi-Cinema, Inc. Substituted Opinion issued 1/6/17 11

12 American Multi-Cinema, Inc. Service v. Goods Direct Costs of Production Auditorium Costs Graphic Packaging Corp. Texas Tax Code Section 141 Issue Does Margin = Net Income 12

13 Is Margin Arrived At By:... deducting expenses from gross income, one or more forms of which expenses are not specifically and directly related to particular transactions. Five Filing Election Choices Cost of Goods Sold Compensation 30% of Revenue Deduction $1 Million Deduction E-Z Computation Graphic Packaging Corp. Present Status: Graphic Lost at Appeals Court Pending Consideration Texas Supreme Court Petition for Review Briefing Ordered 13

14 Autohaus LP, LLP COGS: Statute Defines Production... construction, installation, manufacture, development, mining, extraction, improvement, creation, raising, or growth. COGS: Rule Defines Production Construction, manufacture, installation occurring during the manufacturing or construction process, development, mining, extraction, improvement, creation, raising, or growth. 14

15 Gulf Copper & Manuf. Corp. Advances New COGS Calculation Comptroller: follow examples in statute Gulf Copper: federal deduction based Gulf Copper Facts RECYCLER RAW STEEL SCRAP BIN PAINT FAB SHOP DRY DOCK Summary: Calculation Federal Deductions Subtract Disallowed Costs Limit to 4% Service Costs Texas COGS 15

16 Texas Tax Code (h) Determine Federal COGS Use FIT Methods Corresponding Financial Data Yields Federal COGS Texas Tax Code (e) Disallowed Costs: Leasing non-production facilities Selling, distribution, advertising Interest Officer compensation Others Texas Tax Code (f) Service Department Costs: Security Legal Data Processing Accounting Personnel Financial Planning Management Limited to 4% of Total G & A Costs 16

17 Seltex case: Freight Broker Seltex Case Provides Freight Broker Services Matches Shippers with Customers Collection Agent for Shippers Fiduciary Revenue Exclusion Trial Setting April 2017 Administrative Hearings & Policy Memos 17

18 COGS: Research & Development Costs No Producer Requirement Contract Manufacturers Policy Effective Retroactively Revenue Exclusion for Real Estate Contractors New Comptroller Policy Titan Transportation Comp: Limited to Fee Sharing Contracts Gulf Copper Challenges Comp s New Policy Interstate Carrier Hearing Decision Fuel Surcharge: Expense Offset 18

19 Transport Co. - Apportioning Empty Miles Transportation co. apportionment Treatment of unloaded miles Comp memo conflict with rule? Utility Companies COGS Issue Step-down Transformers When to File Combined Affiliated Group Unitary Business 19

20 Unitary Examples Same General Line of Business Vertically Integrated Functionally Integrated Unitary Hearing Decision Holding: Non-Unitary Fair Shake in Administrative Hearings? FT deductions (like COGS) Comp: Clear & convincing evidence Courts: Preponderance of the evidence 2016 Danielle Ahlrich 20

21 Texas Sales & Use Tax Legislative Repairs After Disasters Declared Disaster Areas Labor Charge Exempt Out-of-State Contractors 21

22 Public Insurance Adjusters Services Exempt Energy Efficient Products Memorial Day Weekend Purchase Tax-Free Dollar Limits Emergency Preparedness Last April Weekend Purchase Tax-Free Dollar Limits 22

23 Water Conservation Items Memorial Day Weekend Purchase Tax-Free Qualified LARGE Data Center Exemption Qualified LARGE Data Center Exemption 250,000 Sq. Ft. Single Occupant 40 Jobs $500 Million Investment 20 Megawatt Capacity 20 Years Tax-Free Purchases 23

24 Offshore Spill Response Containment Agricultural Exemption Telecom Services Exempt Internet Hosting Software Purchases Exempt Software Not Transferred to Customer 24

25 Aircraft Sales Tax Statutes Aircraft Sale for Resale Overhaul Related-Party Leases Transfer Operational Control Owner s Use Lease Payments Taxed Jimmy Martens No Aircraft Use Tax Due 50% Departure Rule Repair, Remodel, or Restore Fractional Ownership Not Taxable Jimmy Martens 25

26 Electronic Filing Updates E-sign & file SUT permit applications E-file No Tax Due FT reports Court Cases Sales and Use Tax Cases - Final Southwest Royalties, Inc. CheckFree Services Fitness International Ryan, LLC Calavista 26

27 Southwest Royalties, Inc. Manufacturing Exemption Sought Casing, Tubing, Pumps Used In Extraction Process Cause Physical Change? Products Separated: Oil Flows Inside Tubing Gas Flows Outside Tubing Texas Supreme Court Denies Exemption Direct Cause: Temperature & Pressure Indirect Cause: Downhole Equipment 27

28 CheckFree Services Corp. Data Processing Services Taxable Data Processing Services Compiling & producing records Entering & retrieving information Professional Exception 20% Exemption Fitness International 28

29 Exercise Equipment Not Bought for Resale Transfer Elements Not Met: Care Custody Control Ryan, LLC Refund Claim Rule Comp: Proof with Claim Invalid 180-day Demand Notice Sanadco 29

30 Calavista Software developer Retained rights to tools Akin to mechanic s wrench Non-taxable contract programming Summary Judgment Disposition Sales and Use Tax Cases - Pending Allstate Insurance Allstate Insurance Inside v. Outside Adjusters 30

31 PointSmith Case Fulfillment Services Administrative Hearings & Policy Memos Trailing Nexus Nixed 31

32 Nexus and Software Licensing Is Software TPP? Is Software License a rental of TPP? Fracking Administrative Decision Fracturing Chemicals 32

33 Proppants Comptroller Rejects Resale Exemption Injected Downhole Portion Flows Back Insufficient Evidence Gas Compressors 33

34 Qualifying Gas Compressors Surface Equipment Operation Target Sales Line Pressure Converting Gas to LNG Non-Qualifying Gas Compressors Well Head (for Lift) After Sales Line 34