Texas Sales & Use Tax

Transcription

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2 Texas Sales & Use Tax 2017 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 7/5/17

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4 Instructor Jimmy Martens, trial and appellate attorney, is the founding partner of Martens, Todd, Leonard & Ahlrich, a boutique tax litigation law firm located in downtown Austin, Texas. Mr. Martens has handled the trial of 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 Amusement & Vending, L.P., 422 S.W.3d 632 (Tex. 2013); In Re: AllCat Claim Service, L.P., 356 S.W.3d 455 (Tex. 2011); and Titan Transportation, L.P. v. Combs, 433 S.W.3d 625 (Tex. App. Austin, 2014, pet. denied). His recent appellate cases include: Combs v. Newpark Resources, Inc., 422 S.W.3d 46 (Tex. App. Austin 2013, no pet.); Hegar v. CGG Veritas Services (U.S.), Inc., 2016 Tex. App. LEXIS 2439 (Tex. App. Austin Mar. 9, 2016, no pet.); Graphic Packaging Corp. v. Hegar, 471 S.W.3d 138 (Tex. App. Austin 2015, pet. filed); and Gulf Copper & Mfg. Corp. v. Hegar, No. D-1-GN (53rd Dist. Ct., Travis County, Tex. Feb. 22, 2016), pet. filed, No CV. He limits his law practice to Texas tax and multi-state tax controversies and litigation. He is board certified by the Texas Board of Legal Specialization in Tax Law. Mr. Martens is a former council member of the Tax Section for the State Bar of Texas and the former chair of the CLE Committee. He is also a CPA and teaches for the Texas Society of CPA s statewide courses on Texas franchise and sales tax. Mr. Martens received his B.B.A. and J.D. from The University of Texas at Austin, both with honors. Mr. Martens may be reached by at jmartens@textaxlaw.com or by telephone at (512) Visit for blog post updates regarding trending issues in Texas tax law.

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6 Instructor Lacy Leonard, trial attorney, is a partner with Martens, Todd, Leonard & Ahlrich a tax litigation law firm located in downtown Austin, Texas. She and other members of her law firm limit their practices to Texas tax, multi-state, and federal tax controversies and litigation. Ms. Leonard represents clients in administrative proceedings before the Texas Comptroller's office, the Texas State Office of Administrative Hearings, and in Texas state courts. Her recent appellate cases include: Combs v. Newpark Resources, Inc., 422 S.W.3d 46 (Tex. App. Austin 2013, no pet.); Titan Transportation, LP v. Combs, 433 S.W.3d 625 (Tex. App. Austin 2014, pet. denied); and Hegar v. CGG Veritas Services (U.S.), Inc., 2016 Tex. App. LEXIS 2439 (Tex. App. Austin Mar. 9, 2016, no pet.). She also represents federal tax clients in administrative appeals, before the United States Tax Court, and in the Courts of Appeals. Ms. Leonard has eight years of substantial trial experience. She has successfully tried numerous cases to judgment before courts throughout Texas. She speaks at Texas sales and use tax seminars throughout the state and assists in preparing the Texas sales and use tax course materials. Ms. Leonard received her J.D. degree from Southern Methodist University School of Law in May of She also earned a bachelor of arts in government from the University of Texas. Ms. Leonard may be reached by at lleonard@textaxlaw.com and by phone at (512) Visit for blog post updates regarding trending issues in Texas tax law.

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8 Instructor Danielle Ahlrich is a tax litigation attorney with Martens, Todd, Leonard & Ahlrich. She and other members of her firm limit their law practices to Texas and federal tax controversies and litigation. Mrs. Ahlrich represents tax clients during audits and in litigation before the State Office of Administrative Hearings, state district court, and the court of appeals. She is licensed by the State Bar of Texas and is admitted to practice before all of the Texas courts and the U.S. Tax Court. Notable trial and court of appeal cases include: Hegar v. CGG Veritas Services (U.S.), Inc., 2016 Tex. App. LEXIS 2439 (Tex. App. Austin Mar. 9, 2016, no pet.); Titan Transportation, LP v. Combs, 433 S.W.3d 625 (Tex. App. Austin 2014, pet. denied); Combs v. Newpark Resources, Inc., 422 S.W.3d 46 (Tex. App. Austin 2013, no pet.); Gulf Copper & Mfg. Corp. v. Hegar, No. D-1-GN (53rd Dist. Ct., Travis County, Tex. Feb. 22, 2016), pet. filed, No CV; and Garriott v. Combs, No. D-1-GN (201st Dist. Ct., Travis County, Tex. Oct. 1, 2013). She frequently writes and speaks on a variety of tax subjects, including the Texas sales & use and franchise taxes. Mrs. Ahlrich holds dual bachelor degrees with honors from the University of Texas and a J.D. from Baylor Law School. Mrs. Ahlrich may be reached by at dahlrich@textaxlaw.com and by phone at (512) Visit for blog post updates regarding trending issues in Texas tax law.

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10 Texas Sales & Use Tax Table of Contents CHAPTER I. OVERVIEW... 1 SALES TAX AND USE TAX... 1 USE TAX CASES... 2 JOINT LIABILITY... 3 GOODS AND SERVICES SUBJECT TO SALES AND USE TAX... 4 SOLD IN TEXAS SELLERS: SPECIAL CASES ENTITY CONCEPT CREDIT FOR TAXES PAID TO OTHER STATES NEXUS TRAILING NEXUS REPEALED REGISTRATION, PERMIT AND REPORTING REQUIREMENTS DIRECT PAYMENT PERMITS LOCAL TAXES FREIGHT CHARGES TAX INCLUDED CONTRACTS SAND, DIRT AND GRAVEL CHAPTER II. MULTISTATE TAX ISSUES STREAMLINED SALES TAX BENEFITS OF REGISTRATION MARKETPLACE FAIRNESS ACT DROP SHIPMENTS INTERNET SALES CHAPTER III. TAXABLE SERVICES OVERVIEW THE LIST GENERAL RULES - APPLICABLE TO ALL TAXABLE SERVICES REPAIRS TO PERSONAL PROPERTY REPAIRS TO REAL PROPERTY REAL PROPERTY SERVICES DATA PROCESSING SERVICES INFORMATION SERVICES TELECOMMUNICATIONS SERVICES DEBT COLLECTION SERVICES INSURANCE SERVICES CREDIT REPORTING SERVICES LITIGATION SUPPORT COMPUTER SERVICES AND CONSULTING INCLUDING INTERNET SERVICES

11 Page ii Table of Contents CHAPTER IV. EXEMPTIONS GENERAL TYPES OF EXEMPTION PROVISIONS CLAIMING EXEMPTIONS RESALE EXEMPTIONS MANUFACTURING EXEMPTION GAS AND ELECTRICITY MOTION PICTURES/VIDEO/AUDIO EXEMPTION CLOTHING, FOOTWEAR, AND SCHOOL SUPPLIES WEEKEND ENERGY EFFICIENT PRODUCTS TAX WEEKEND EMERGENCY PREPAREDNESS WEEKEND WATER CONSERVATION WEEKEND TIMBER OPERATIONS HISTORIC SITES EXEMPTION QUALIFIED DATA CENTERS QUALIFIED LARGE DATA CENTERS RESEARCH AND DEVELOPMENT TAX EXEMPTION OFFSHORE SPILL RESPONSE CONTAINMENT EXEMPTION RAILROAD EQUIPMENT COIN & PRECIOUS METAL EXEMPTION FOOD PRODUCTS & GROCERY ITEMS VENDING MACHINE SALES OVER-THE-COUNTER DRUGS AGRICULTURE EXEMPTION EXEMPT ORGANIZATIONS EXPORT SALES SPECIFIC RULES FOR SALES INTO MEXICO CHAPTER V. BUSINESS TRANSACTIONS FORMING A BUSINESS TRANSFERS AFTER FORMING A BUSINESS COMMON PROPERTY OWNERSHIP TRANSFERS OCCASIONAL SALES LIQUIDATING A BUSINESS PURCHASING A BUSINESS SELLING ACCOUNTS RECEIVABLE BAD DEBTS LEASING OR RENTING PROPERTY WITHOUT AN OPERATOR LEASING OR RENTING PROPERTY WITH AN OPERATOR TEXAS EMISSIONS REDUCTION SURCHARGE (TERP)

12 Table of Contents Page iii CHAPTER VI. SPECIALIZED INDUSTRIES HOTEL INDUSTRY ENTERTAINMENT INDUSTRY TRANSPORTATION / MOTOR VEHICLE INDUSTRY OIL AND GAS INDUSTRY AIRCRAFT INDUSTRY BUYING AIRCRAFT TRANSFERRING AIRCRAFT IN BUSINESS ORGANIZATIONS LEASING AIRCRAFT CHAPTER VII. POST-ASSESSMENT COLLECTION STATE TAX LIENS SUCCESSOR LIABILITY EMPLOYEE LIABILITY CRIMINAL PENALTIES CIVIL PENALTIES CHAPTER I. BEFORE THE AUDIT BEGINS REVIEWING TAXPAYER RECORDS RESALE AND EXEMPTION CERTIFICATES STATUTE OF LIMITATIONS VOLUNTARY DISCLOSURE PROGRAM GUIDELINES INTEREST RATES INTEREST DUE ON DEFICIENCIES INTEREST EARNED ON REFUNDS PENALTIES SEEKING COMPTROLLER ADVICE CHAPTER II. DURING THE AUDIT AUDIT SELECTION IDENTIFYING AUDIT ISSUES CONTROLLING INFORMATION DOCUMENTATION DEADLINES AUDITOR NOTES AND WORKPAPERS THE INDEPENDENT AUDIT REVIEW CHAPTER III. CHALLENGING AUDIT RESULTS TEXAS NOTICE OF AUDIT RESULTS PETITION FOR REDETERMINATION REFUND CLAIMS THE SOAH HEARING PROTEST SUITS DISTRICT COURT LITIGATION CHALLENGING A STATE S POWER TO TAX

13 Page iv Table of Contents VENDOR ASSIGNMENTS CHAPTER IV. AFTER AN ASSESSMENT BECOMES FINAL SUCCESSOR LIABILITY OFFICER & DIRECTOR LIABILITY EMPLOYEE LIABILITY CRIMINAL PENALTIES CIVIL PENALTIES SUGGESTED GUIDELINES FOR OBTAINING EXEMPTION CERTIFICATES

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16 Texas Sales & Use Tax Page 1 Chapter I. Overview Sales Tax and Use Tax The Texas Limited Sales, Excise and Use Tax Act imposes a tax on the sale, lease or rental of tangible personal (touchable, movable) property and on certain specified services. 1 Sales and Use taxes are complementary. Together, they are intended to uniformly tax transactions only once whether in or out of Texas. Sales and use taxes account for 26% of all state revenues, roughly five times the contribution of any other tax. Sales Tax. Texas imposes sales tax on retail sales of taxable items in Texas. The state rate is 6.25% as of July 1, Various local sales taxes may be imposed in addition to this tax. The maximum combined tax rate for local taxes may not exceed 2% at any location. Therefore, the maximum possible sales tax rate is 8.25%. Example Austin Manufacturing purchases an office desk from a supplier located in Waco. This is a taxable sale. Austin Manufacturing is considered the consumer of the desk. Use Tax. This tax applies when items are purchased out-of-state and brought into Texas. Texas law requires a Texas retailer to collect the sales tax at the time of sale. Since a non-texas retailer makes the sale, Texas sales tax would not be collected at the time of sale. Also, the seller would usually not collect the other state s sales tax because the item is destined for Texas. Without the use tax, persons could purchase items from an out-of-state retailer, use the items in Texas and escape paying any sales tax. The use tax prevents this abuse. The use tax applies to any taxpayer who purchases tangible personal property from any retailer for storage, use or other consumption in Texas Chapter 151 of the Texas Tax Code. Texas Tax Code

17 Page 2 Texas Sales & Use Tax Example Austin Manufacturing purchases an office desk in Tulsa, Oklahoma for use at its Use Tax offices in Austin, Texas. Desk Purchased TULSA Austin Manufacturing owes Texas use tax on the office desk. If sales tax was legally AUSTIN Desk Used owed and paid in Oklahoma, Austin Manufacturing would be entitled to a sales tax credit for the tax paid in the other state. If the Oklahoma retailer lacks nexus with Texas, Austin Manufacturing must accrue and remit the use tax. Use Tax Cases Items Manufactured in Texas and Transported Out of Texas. Taxable use includes attaching display items to merchandise in Texas that a taxpayer ships out-of-state for sale. See Combs v. Chapal Zenray, Inc. 3 In the case, a costume jewelry wholesaler imported jewelry from outside the United States and purchased display cards and other jewelry display items out-of-state. It affixed the display items to the jewelry in Texas, then shipped the jewelry to out-of-state distribution centers for sale. Texas law excludes from use tax items purchased out-of-state that are manufactured or assembled in Texas when the taxpayer transports them outside Texas for sale. These excluded uses include processing, fabricating, or manufacturing the property or attaching the property to or incorporating the property into other property to be transported outside the state for use solely outside the state. 4 The taxpayer argued it qualified for this exclusion. However, the court found the taxpayer did not qualify because the jewelry did not remain attached to the display cards in the hands of the ultimate consumer S.W.3d 751 (Tex. App. Austin 2011, pet. filed). Texas Tax Code (f)

18 Texas Sales & Use Tax Page 3 Items Manufactured Out of Texas & Brought Into Texas. Use tax is now due on items manufactured out of Texas and brought into Texas for assembly in Texas. Facts. ABC manufactures prefabricated building components outside of Texas. ABC sells the prefabricated building components directly to Texas customers. When a Texas customer places an order for a building, ABC ships the building components to the Texas job site where they are stored 1-3 days. Then, ABC employees assemble the components and affix the building to the ground. The customer s order is in the form of a lumpsum contract to buy a building. The purchase of a building is not taxable because buildings are real property. Law. Before 2003, Texas imposed use tax only on taxable items purchased from an out-of-state retailer and brought into Texas for use in this state. 5 The Legislature expanded the scope of the use tax to apply to all tangible personal property other than printed material that has been processed, fabricated or manufactured into other property or attached to or incorporated into other property transported into this state. 6 Joint Liability The tax is a debt of the purchaser of the goods or services. The seller or service provider is responsible for collecting and remitting the tax. The Comptroller may pursue either the buyer or the seller for the unpaid tax. 7 5 Sharp v. Morton Buildings, Inc., 953 S.W.2d 300 (Tex. App. Austin 1997, pet. denied). 6 H.B (78th Legis. Session) amended Texas Tax Code (a), effective October 1, , and repealed the Third Court of Appeals decision in Sharp v. Morton Buildings, Inc., 953 S.W.2d 300 (Tex. App. Austin 1997, pet. denied). Bullock v. Delta Indus. Constr. Co., Inc., 668 S.W.2d 502 (Tex. Civ. App. Austin 1984, no writ).

19 Page 4 Texas Sales & Use Tax Goods and Services Subject to Sales and Use Tax In General. Texas imposes sales tax on the sales price of each sale of a taxable item in Texas. 8 The tax is not imposed when an exemption from the tax applies. Presumptions. The tax law presumes that all retail sales or uses of tangible personal property are taxable transactions. Contrast this with the performance of taxable services where this presumption does not lie. Sales Price. This is the amount for which the item is sold, leased or rented without a deduction for the cost of transportation and other costs. Separately Stated Items. Separately stating items, such as freight or transportation, fuel surcharges, and similar costs will not convert them to non-taxable charges. They will remain a component of the sales price. Example Gateway sells and delivers computers. On its invoice Gateway separates the delivery charge from the charge for the computer. Both charges are taxable. If Gateway issued separate invoices for the delivery and the computer, both charges would still be taxable. 8 Texas Tax Code

20 Texas Sales & Use Tax Page 5 Exception for Independent Transactions. This rule does not apply when the items are independently desired and provided and are readily separable into two elements. The following case illustrates this point: In Rylander v. San Antonio SMSA Ltd. Partnership 9 SMSA operated cellular telephone companies. SMSA needed to expand its network and install new networking equipment. SMSA contracted with AT&T to provide both engineering services and telecommunication equipment. SMSA needed engineers to develop plans for the expansion and to prevent service interruption while the new equipment was put into place. AT&T separated the charge for the engineering services from the charge for the equipment. AT&T taxed only the equipment. The Comptroller claimed that the entire payment was subject to tax under the sales price rule. The court held the engineering services were not taxable. The court reasoned that the engineering services were independently desired and AT&T would have sold them separately. The court s decision was not affected by AT&T s use of a single contract and single invoice to bill for both items. Exception for certain charges. Certain charges, if separately stated, are not subject to the tax. These include discounts, refunds, returns, finance charges and trade-ins. 10 The ADP Credit Corporation case illustrates the importance of the separately stated requirement for these items. In ADP Credit Corporation v. Sharp, 11 the court interpreted the separately stated requirement is taken literally. In this case, ADP Credit Corporation s lien contract did not separately state the dollar amount of the finance charge (interest) but instead included all of the information needed to calculate the finance charges, including the total price charged and the term of the contract. ADP sought to exclude the finance charge from sales tax on the theory that it was separately identifiable from the total price charged S.W.3d 484 (Tex. App. Austin 2000, no pet.). Texas Tax Code S.W.2d 490 (Tex. App. Austin 1996, pet. denied).

21 Page 6 Texas Sales & Use Tax The Comptroller rejected this position because the amount of the finance charge was not separately identified from the total price. The Appeals Court upheld the Comptroller s position reasoning, that separately identified did not mean separately identifiable. This was so even though the consumer could calculate the finance charge. ADP sought review of this decision with the Texas Supreme Court, but lost. Rebates. A retailer s cash discounts rebated to a customer after the sale by a are excludable from the amount subject to sales tax. Rebates issued on a Retailer's warrant are considered as a cash discount after the sale. The discount, like a discount taken at the time of the sale, is a reduction is the amount subject to tax. 12 Levy v. Office Max. 13 Customers purchased items from retailers that were eligible for rebates. The customers paid sales tax on the full retail price and received refunds on portions of the retail price. The customer did not receive refunds of the sale tax paid on the rebated portion. The customers filed a class action lawsuit against retailers, seeking a refund of the sales tax paid on the rebated portion of the cost of the items purchased, or assignment of the right to receive the refund from the Comptroller. The District Court dismissed their claims for class-wide relief for lack of jurisdiction. The customers appealed. The Appeals court reversed and remanded the case, holding that the District Court had jurisdiction to consider whether a class should be certified, and to consider the customer s claims for assignment against the retailers. Sale. The sales and use tax taxes applies to a purchase or sale. In general, a sale occurs when three elements are present: 1. A transfer of title or possession, 2. Of a taxable item including tangible personal property, 3. Done for consideration (i.e., money or some other value) Texas Tax Code section (c)(1). Comptroller letter # L. Levy et al v. OfficeMax, Inc. et al, Cause No CV