spsa-#1948540-v1-2015 texas taxation update powerpoint ... · strasburger & price, llp 2015 tax...

Strasburger & Price, LLP 2015 Tax Symposium 1

TEXAS MARGIN TAX AND SALES TAX UPDATE

Daniel L. Butcher Teo Seger

214.651.4640 210.250.6162

[email protected] [email protected]

Katherine E. David Brooks Caston

210.250.6122 214.651.2078

[email protected] [email protected]

MARGIN TAX

2


House Bill 32 Makes Significant Changes Affecting All Taxpayers

• Effective January 1, 2016

• Cuts the basic rates of the margin tax by 25 percent (reducing the regular rate to 0.75 percent and the retailer rate to 0.375 percent, respectively) and the alternative “EZ” rate available to small businesses by 42 percent to 0.331 percent, while also extending the availability of the “EZ” rate to business with up to $20 million in total revenue (up from $10 million).

3

House Bill 2896 Targets Apportionment of Certain Broadcaster Receipts


• Broadcaster receipts are apportioned based on the legal domicile of the payor (consistent with the state’s policy of sourcing intangible revenue).

• “Broadcaster” means a taxable entity, not including a cable service provider or a direct broadcast satellite service, that is a: television station licensed by the FCC; television broadcast network; cable television network; or television distribution company.

• Codified in Tex. Tax Code Ann. § 171.106(h).

4


House Bill 3230 Expands Costs Eligible for Tax Credit for Rehabilitation of Historic Structures


• HB 500, 83rd Legislature, Regular Session (codified in Tex. Tax Code § 171.901 et seq.), created a credit against the margin tax based on the qualified costs of a certified rehabilitation of certain historic structures.

• The legislation referred to the I.R.C. to define “eligible costs and expenses.”

• Subsequently, a 2014 AG Opinion ruled that an individual or nonprofit could claim this credit and, though not subject to margin tax, “could still benefit by selling or assigning the credit to a taxable entity that could.”

(cont’d)

5

House Bill 3230 Expands Costs Eligible for Tax Credit for Rehabilitation of Historic Structures

• A nonprofit, however, could not satisfy the plain language requirements of I.R.C. § 47(c)(2), on which the definition of “eligible costs and expenses” is based.

• HB 3230 amends the Tax Code by redefining “eligible costs and expenses” by stating that the provisions of the I.R.C. that would otherwise exclude entities or individuals not subject to margin tax from qualifying for the credit “do not apply to costs and expenses incurred by an entity exempt from the [margin] tax … and those costs and expenses are eligible costs and expenses if the other provisions of the … Internal Revenue Code are satisfied.”

• Codified in Tex. Tax Code Ann. § 171.901(4).

6


Senate Bill 1049 Margin Tax Exemption for Veteran-Owned Businesses


• Offers a temporary, five year margin tax exemption for a taxable entity that qualifies as a new, veteran-owned business formed after September 1, 2015.

• A taxable entity is a “veteran-owned business” only if the taxable entity is a new business in which each owner is a natural person who served in and was honorably discharged from a branch of the U.S. armed forces and who provides verification to the Comptroller of the person’s service and honorable discharge.

(cont’d)

7

Senate Bill 1049 Margin Tax Exemption for Veteran-Owned Businesses

• Authorizes the Comptroller to require the veteran-owned business to file an information report stating the entity’s beginning date and any other information required by the Comptroller.

• Waives all the filing fees imposed under the Business Organizations Code.

• Exemptions are repealed effective January 1, 2020.

• Codified in Tex. Tax Code Ann. §§ 171.0005, 171.001(d), 171.204(d), and Tex. Bus. Orgs. Code Ann. § 12.005.

8


Autohaus LP, LLP v. Combs(Tex. Dist. Ct. April 29, 2015).

• Autohaus both sells and services automobiles. On its margin tax return, it claimed a cost of goods sold deduction for the labor costs associated with the service and installation aspect of its business, claiming it “produced” the goods as defined by statute.

• The Texas Tax Code defines “production” to include “installation.” The Comptroller’s Rules define “production” much more narrowly to include “installation occurring during the manufacturing or construction process.”

• The Court, in finding Autohaus entitled to its cost of goods sold deduction, found the Comptroller's Rule improperly defined “production” more narrowly than did the statute and therefore found the Comptroller’s definition invalid and unconstitutional.

• The dispute is currently pending before the Third Court of Appeals.

9

CGGVeritas Services (U.S.), Inc. v. Combs(Tex. Dist. Ct. Sept. 17, 2014)

• CCGVeritas is a geo-sciences company that produces and collects seismic data. It maintains a library of this data and licenses it to the oil and gas industry for the purpose of informing drilling operations.

• CCGVeritas claimed that it furnishes materials and labor when producing its seismic data and is entitled to deduct its cost of goods sold.

• The Court agreed, holding that the seismic data produced by CCGVeritas constitutes “tangible personal property” that qualifies as a “good” licensed to customers in its ordinary course of business, and that CCGVeritas was entitled to fully deduct its cost of goods sold.

• The dispute is currently pending before the Third Court of Appeals.

10


Senate Bill 1364 Changes Requirements for “No Tax Due” Margin Tax Filers

• Effective September 1, 2015

• Adds the information report that an entity must file when no margin tax is due to the list of reports that must be filed electronically.

• Codified in Tex. Tax Code Ann §§ 111.0626(a), 171.362(g).

11

House Bill 2891 Streamlines the Filing and Reporting Processes for Partnerships and Professional Associations


• Eliminates certain reporting requirements and filing fees for professional associations and partnerships to the Secretary of State, instead including the information in the entity’s public information report filed with the Comptroller.

• According to the Texas Taxpayers and Research Association, this change will eliminate roughly $2.4 million annually in fees.

• Codified in Tex. Tax Code Ann. § 171.203 et. seq., Tex. Bus. Orgs. Code Ann. §§ 4.156, 153.301.

12


American Multi-Cinema, Inc. v. Hegar (Tex. App.—Austin, April 30, 2015).

• Tangible personal property as defined in Tex. Tax Code Ann. § 171.1012(a)(3)(A)(i) includes a film distributor's exhibitions of films, which means these exhibitions fall within the definition of goods contained in § 171.1012(a)(1), and therefore AMC was entitled to subtract its exhibition expenses as a cost of goods sold.

• “Tangible personal property” (“TPP”) includes personal property that can be “seen” or “that is perceptible to the senses in any other manner,” and a movie screening can be seen and is otherwise perceptible to the senses.

• No “take-home” requirement for TPP. In other words, purchaser need not take possession or title to the item.

(cont’d)

13

American Multi-Cinema, Inc. v. Hegar (Tex. App.—Austin, April 30, 2015).

• Motion for Rehearing and for Reconsideration En Banc filed July 5, 2015.

• Comptroller has warned this could lead to an annual margin tax loss of $1.5 billion and refunds potentially totaling $6 billion.

• Implications:

– Potential expansion of the availability of a cost of goods sold deduction to taxpayers who have previously been considered service providers and/or sellers of intangible personal property.

– Taxpayers previously considered service providers seeking to claim themselves producers of TPP may subject themselves to sales tax liability.

14


Rent-A-Center, Inc. v. Hegar, (Tex. App.—Austin, June 11, 2015)

• Rent-A-Center filed its margin tax returns using the .5 percent rate applicable to retailers. On audit, the Comptroller took the position that Rent-A-Center could not qualify as a retailer, must pay the full one percent tax rate, and that it was not entitled to deduct its cost of goods sold. Rent-A-Center paid the additional tax under protest and filed suit.

• The trial court found for the Comptroller on all issues.

• The Third Court of Appeals reversed and remanded.

(cont’d)

15

Rent-A-Center, Inc. v. Hegar, (Tex. App.—Austin, June 11, 2015)

• It was undisputed that Rent-A-Center engages almost exclusively in “rent-to-own” transactions, and that those transactions have elements of both a lease transaction and a sales transaction.

• In finding for Rent-A-Center, the Court held that when a business is engaged in activities that have elements of more than one transaction, the appropriate classification is what they are “more like.”

• The Court seems to endorse a “best fit” analysis.

• Remanded to the District Court for further proceedings on the only remaining issue—the amount of Rent-A-Center’s cost of goods sold deduction.

16


Internal Memo 201504069L (April 23, 2015)

• Revises the Comptroller's existing policy.

• A taxable entity that is eligible for a cost of goods sold deduction and contracts out the manufacturing of the goods is now permitted to claim, as a cost of goods sold, all research, experimental, engineering, and design activity costs, including all research or experimental expenditures described in I.R.C. § 174.

• Under prior Comptroller policy, an entity had to produce the goods at issue to qualify for the deduction.

17

Temporary Credit for Business Loss Carryforward

• Combined Reporting – Amended Policy for Temporary Credit for Business Loss Carryforward – STAR 201404878L (Nov. 20, 2014).

– Amended STAR 201404878L (April 9, 2014).

• Under prior policy, the identity of the common owner of a combined group was used to determine whether an entity that was a member of a combined group had “changed combined groups” and lost the right to claim the credit.

• Under the new policy, an entity “changes combined groups” and loses the right to claim the credit when an entity: 1) leaves a combined group; 2) joins an existing combined group; or 3) is acquired and it results in the creation of a new combined group.

18


Temporary Credit for Business Loss Carryforward

• Hearing No. 110,191 (June 24, 2015): Late Reporting

• Taxpayer possessed substantial unused business loss carryforwards which could be claimed beginning with the 2008 tax year. Taxpayer properly preserved these credits on February 6, 2008.

• The Taxpayer late filed its 2010 margin tax report. The Comptroller disallowed the credit, claiming that it had not been timely filed.

• Citing to the plain language of the statute, the ALJ ruled that the credit was preserved in 2008 and it was not necessary for taxpayer to make a separate election in each successive year.

• The Taxpayer did not revoke the credit and took the credit when it filed its 2010 margin tax report. For purposes of the statute, this process was sufficient to claim the credit.

19

Fuel Surcharge• Hearing No. 107,457 (December 4, 2014)

• Taxpayer, a freight carrier, contracts with its customers for the reimbursement of fuel charges that exceed a certain floor, which they included on invoices as a separate fuel surcharge line item.

• Taxpayer initially included the fuel surcharge payments in its gross receipts for federal tax purposes and total revenue for Texas margin tax purposes. Taxpayer subsequently amended its federal return—on the basis that the fuel surcharges were actually reimbursements and therefore excluded from gross income calculations—which had the effect of reducing taxpayer’s total revenue and taxable margin. Taxpayer amended its margin tax return and sought a refund on this basis. The Comptroller denied the refund claim.

• The ALJ, in holding that the Taxpayer was entitled to a refund, found that fuel surcharges were properly excluded from federal gross receipts, which by statute reduced the Taxpayer’s total revenue for margin tax purposes.

20


Graphic Packaging Corp. v. Hegar (Tex. App.—Austin, July 28, 2015)

• A taxpayer may not use the Multistate Tax Compact’s (“MTC”) three-factor apportionment formula based on a combination of in-state and out-of-state property, payroll, and sales, and instead, must use the margin tax’s single-factor apportionment formula based on gross receipts in apportioning its margin between Texas and everywhere else.

• The Texas margin tax is not “a tax imposed or measured by net income” and, therefore, it does not fall within the definition of an “income tax” found in the MTC provisions of Tex. Tax Code Ch. 141.

• Additionally, the apportionment provisions also distinguish between margin and income taxes and the Legislature failed to include the MTC formula in Tex. Tax Code Ann. § 171.106 (listing alternative formulas for apportioning margin to Texas).

21

Titan Trans., LP v. Combs, 433 S.W. 3d 625 (Tex. App.—Austin 2014)

• Petition for Review was denied by the Texas Supreme Court on May 1, 2015.

• Exclusion of Flow-Through Funds

– Tex. Tax §171.1011(g)(3) permits a taxpayer to exclude from total revenue flow-through funds paid for “services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property or the location of the boundaries of real property.”

• Titan, an aggregate hauler, claimed that it was entitled to exclude subcontracting payments from total revenue as flow-through fundsas permitted by the statute. The Comptroller disagreed, but Titan prevailed on its position before the Third Court of Appeals.

(cont’d)

22


Titan Trans., LP v. Combs, 433 S.W. 3d 625 (Tex. App.—Austin 2014)

• Based on the Comptroller’s historical policy, to be excludable from total revenue, payments had to relate to activities that result in physical change to real property.

• After Titan, the Comptroller revised its policy. “Physical change” was no longer required. “Reasonable nexus” is sufficient. See Letter 201406920L (June 10, 2014).

• Under the revised policy, subcontracting payments that qualify as flow-through funds may be excluded if they “have a reasonable nexus to the actual or proposed design, construction, remodeling, or repair of improvements on real property or the location of boundaries of real property.”

23

Hallmark Marketing Company, LLC v. Combs, 2014 WL 6090574 (Tex. App.—Corpus Christi, 2014)

• Section 171.105(b) states that, “[i]f a taxable entity sells an investment or capital asset, the taxable entity’s gross receipts ... includes only the net gain from the sale.”

• Hallmark generated both gross receipts and a net loss on sales of investments and capital assets in 2008. Based on its reading of the statute, Hallmark did not reduce its gross receipts by the amount of the net loss. On audit, the Comptroller held that gross receipts needed to be reduced by the net loss—as required by the Comptroller's Rules—increasing Hallmark’s apportionment factor, and causing additional tax to be due. Hallmark argued that the Rule improperly conflicted with the unambiguous language of the statue.

• The Court, holding for the Comptroller, found that the term “net gain” is ambiguous and that the Comptroller’s construction was reasonable and therefore entitled to deference.

24


Gulf Chemical v. Comptroller (Tex. App.—Austin, Tex. 2015)

• Gulf Chemical provides environmental disposal and recycling services for oil refineries. As part of the recycling service, precious metals are recovered and sold at a profit. Gulf Chemical charged an environmental fee to each refinery customer, but also provided each customer with a credit for a portion of profits derived for selling recovered metals.

• The Comptroller’s former Rule 3.557(e) stated that, “sales returns and allowances that a seller allows reduce gross receipts of the seller in the computation of gross receipts.” At issue was whether the credits paid to customers constituted “allowances” and therefore could be credited against sales proceeds.

(cont’d)

25

Gulf Chemical v. Comptroller (Tex. App.—Austin, Tex. 2015)

• The court held that the credits should be treated as an allowance because it reduced the sales price and could actually result in no payment to Gulf Chemical. If there was no payment, there could be no revenue.

• A substance over form analysis led to the Court concluding that “the legal determination of whether the metal credits constitute allowances under Texas law cannot turn on the labeling of such credits in Gulf’s internal books or tax forms but must turn, rather, on the substance of the transactions.”

26


SALES TAX

27

House Bill 2712 Provides Exemption for Items Essential to Operating a Large Data Center

• Effective June 10, 2015 (expansion of the new data center exemption passed last session in HB 1223).

• Provides a 20-year state and local sales tax exemption for the purchase of items necessary and essential to the operation of “qualified data centers.”

• Items include: electricity; electrical, cooling, mechanical, and plumbing systems; mainframe computers or servers; software; and data storage devices.

• To qualify, certain specified qualifications must be met, including a certification of eligibility from the Comptroller.

(cont’d)

28


House Bill 2712 Expands Exemption for Items Essential to Operating a Large Data Center

• Principal requirements include:

– a five-year capital investment of $500 million;

– a new or refurbished facility of at least 250,000 square feet that may include multiple buildings;

– creation of at least 40 new full-time jobs paying at least 120 percent of the average county wage; and

– contract for at least 20 megawatts of transmission capacity for operations of the large data center project.

• Exemption can be revoked if owner, operator, or occupant fails to meet the qualification requirements. Revocation causes taxes to be due on purchases made tax-free prior to revocation.

• Codified in Tex. Tax Code Ann §§ 151.3595 and 151.317.

29

House Bill 2507 Provides Exemption for TPP Sold to Broadcast Entities


• Exemption for the sale of TPP to an entity to which 47 C.F.R. §73.404(a) applies (i.e. certain digital audio broadcast entities) if the property is necessary to provide certain broadcast services described by 47 C.F.R. §§ 73.403 or 73.404.

• Codified in Tex. Tax Code Ann. § 151.3185(g).

30


House Bill 1841 Amends Which Insurance Services are Taxable

• Effective October 1, 2015

• Removes services performed by public insurance adjusters from the definition of taxable insurance services.

• Codified in Tex. Tax Code Ann. § 151.0039.

31

Senate Bill 140 Extends Agricultural Exemption to certain Telecom Services


• Exempts telecommunication services exclusively provided or used for the navigation of machinery and equipment exclusively used or employed on a farm or ranch in the building or maintaining of roads or water facilities or in the production of: 1) food for human consumption; 2) grass; 3) feed for animal life; or 4) other agricultural products to be sold in the regular course of business.

• Codified in Tex. Tax Code Ann. § 151.316(a)(14).

32


House Bill 2313 Provides Exemption for Vending Machine Sales by Nonprofit Orgs.


• Exempts the sale of TPP through a vending machine from sales and use tax if the sale is:

– made by a nonprofit exempted from federal income tax;

– the machine is owned by the nonprofit organization; and

– the machine is stocked and maintained by individuals with special needs as part of an independent life skills and education program operated by the nonprofit organization.

• Requires a nonprofit organization to maintain records demonstrating the sale is eligible for the exemption.


33

Senate Bill 1396 Clarifies Sales and Use Taxation of Aircraft


• "Sale for Resale“ now includes the sale of an aircraft to a purchaser who acquires the aircraft for the purpose of leasing, renting, or reselling the aircraft in the United States or Mexico.

– Leasing or renting includes the transfer of “operational control” (i.e. the exercise of authority over initiating, conducting, or terminating a flight) of the aircraft pursuant to one or more written agreements in exchange for consideration.

– The purchase of an aircraft would qualify as a sale for resale regardless of whether the purchaser used the aircraft if more than 50 percent of the aircraft’s departures were made under the operational control of one or more lessees pursuant to a written lease as described above.

(cont’d)

(cont’d)34


Senate Bill 1396 Clarifies Sales and Use Taxation of Aircraft

• Exempts from sales and use tax:

– Aircraft brought into the state for the sole purpose of being completed, repaired, remodeled, or restored;

– Aircraft brought into the state if the person did not acquire the aircraft directly from a seller by means of purchase; and

– Aircraft brought into this state that made more than half of its departures from locations outside the state for a year beginning on the later of the date the aircraft was acquired or its first flight containing passengers or property.

• Makes transfers between affiliated entities tax-free.

• Imposes no tax liability for aircraft operated under fractional ownership programs.

• Codified in Tex. Tax Code Ann. § 163.001 et seq.

35

House Bill 1905 Amends Taxable Snack Items


• Expands the exemption under “snack items” to include: pork rinds, corn nuts, sunflower and pumpkin seeds, ice cream, sherbet, frozen yogurt, ice and juice pops, sorbet, and other frozen fruit items with less than 50 percent fruit juice by volume.

– Excludes pine nuts

• Consideration of whether or not a package specifies the number of servings it contains is removed from the determination of whether it is a taxable individual-sized portion.

(cont’d)

36


House Bill 1905 Amends Taxable Snack Items

• Provides that when a grocery store or convenience store contains a type of location listed under the prepared food exception (i.e. sale of food products are taxable when prepared or sold ready for immediate consumption at locations such as restaurants, cafeterias, delis, or similar places of business), then only the portion of the store containing the location selling the prepared food will be considered a “like place of business.”


37

House Bill 1905: Liquefied Gas


• Liquefied gas is now considered a special fuel for purposes of Tex. Tax Code Ann. § 151.308 (exempts special fuels from sales tax).

• Codified in Tex. Tax Code Ann. § 162.001(39).

38


Senate Bill 755 Addresses Software Used for Internet Hosting Services

• Effective June 10, 2015.

• Allows software purchases by an internet hosting provider to be treated as sales for resale if a license to use the program is, in turn, sold to an unrelated user and a right to use the program under that license is not retained.

• Codified in Tex. Tax Code Ann. § 151.006(d).

39

Senate Bill 853 Addresses the Sales Tax Permit Application

• Effective June 1, 2015

• Provides that an electronically-filed sales tax permit application complies with the signature requirement for filing an application under Tex. Tax Code Ann § 151.202(b).

• Codified in Tex. Tax Code Ann. § 151.202(c).

40


Senate Bill 904 Provides Exemption for Emergency Preparation Items


• Creates a tax free weekend the last weekend of April (12:01 am on the Saturday before the last Monday in April and ending at 12 midnight on the last Monday in April) for emergency preparation items.

• Examples of emergency preparation items include: portable generators, coolers, smoke detectors, fire extinguishers, self-powered radios, gasoline containers, first aid kits, batteries, and battery chargers.


41

Senate Bill 1356 Provides Exemption for certain Water-Efficient Products

• Effective October 1, 2015

• Provides exemption for certain water conservation equipment:

– a soaker or drip-irrigation hose;

– a moisture control for a sprinkler or irrigation system;

– mulch;

– a rain barrel or an alternative rain and moisture collection system; and

– permeable ground cover surface that allows water to reach underground basins, aquifers, or water collection points.

(cont’d)

42


Senate Bill 1356 Provides Exemption for certain Water-Efficient Products

• Provides an exemption for WaterSense certified products certified under the WaterSense program operated by the EPA or a similar successor program.

• The exemption applies if the sale takes place during a period beginning 12:01 am on the Saturday preceding the last Monday in May (Memorial Day) and ending at 11:59 pm on the last Monday in May.


43

Rule 3.286 Amended to Remove “Trailing Nexus” in Texas

• Previously, an out-of-state seller who had been engaged in business in Texas continued to be responsible for collection of use tax on sales made into Texas for 12 months after the seller ceased to be engaged in business in Texas.

• Under revised rule 3.286(b)(2), an out-of-state seller is responsible for the collection and remittance of sales and use tax on all sales of taxable items made in Texas until the seller ceases to have nexus with Texas.

44


Rule 3.334 Concerning Local Sales and Use Taxes Adopted

• Replaces Subchapters N (County Sales and Use Tax), P (Municipal Sales and Use Tax), and R (Transit Sales and Use Tax) which are repealed.

• Some of the topics addressed include:

– Seller’s and purchaser’s responsibilities for collecting or accruing local sales and use taxes;

– Determining the local jurisdiction where sales tax is due;

– Determining the location of the consummation of sale;

– Determining where use tax is due;

– Items purchased by a direct payment permit holder;

– Special rules regarding certain goods and services;

– Exemptions specific to certain jurisdictions; and

– Applicable prior contract exemptions

45

Southwest Royalties, Inc. v. Combs (Tex. App.—Austin, August 13, 2014)

• Southwest Royalties, Inc. was not entitled to a refund of sales taxes paid on the purchase of equipment and services that it used in extracting oil and natural gas from the ground because the manufacturing and service exemptions in Tex. Tax Code Ann. §§ 151.318(a), 151.3111 did not apply.

• Extraction of oil and gas from the ground did not qualify as “manufacturing” under the definition in Tex. Tax Code Ann. § 151.318(d).

• To the extent that Tex. Tax Code Ann. § 151.318 was ambiguous as to whether any of the purchases might qualify as property or services used during actual manufacturing, processing, or fabrication, the court deferred to the Comptroller’s interpretation under which they did not qualify because the interpretation was not plainly erroneous or inconsistent with the language of the statute.

• The dispute is currently pending before the Texas Supreme Court.

46


DISCLAIMER

Information contained in this document is not intended to provide legal, tax, or other advice as to any specific matter or factual situation, and should not be relied upon without consultation with qualified professional advisors.

Any tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under applicable tax laws, or (ii) promoting, marketing, recommending to another party any transaction or tax-related matter.

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