Archive for Jason Hendrix

Legal Post: Texas Sales And Use Tax For Equipment Rentals

Legal Post: Texas Sales and Use Tax For Equipment Rentals

Many businesses in Texas involve the performance of services that require the use of machinery and equipment.  While these businesses may purchase the necessary equipment outright, others opt to rent equipment from third-party rental companies, or to completely outsource the equipment-related services to another service-provider.  These transactions seem simple on the surface, but may be more complex when determining how to treat them for Texas sales and use tax purposes.

General Sales Tax Treatment of Equipment Rental

In determining how equipment rental should be treated, the first place to look is whether the equipment is being rented by itself (on a “standalone” basis), or whether it’s being rented with an operator.

  • Standalone Basis – Comptroller Rule 3.294(c)(1) states that “receipts from the lease of tangible personal property without an operator are taxable.” [1]
  • With an Operator – Comptroller Rule 3.294(c)(2) states that “[t]he furnishing of tangible personal property with an operator for which a single charge is made to the customer shall be presumed to be the performance of a service…” [2]

An “operator,” in turn, is defined as a “person who actively guides, drives, pilots, or steers tangible personal property” and does not include one who merely provides maintenance, repair, or supervision. [3]

Under Rule 3.294(c)(2), the rental of equipment with an operator, billed as a single charge, is treated as the performance of a service.  The taxability of this service, in turn, will depend on the nature of the service itself.  Additionally, if equipment is rented with an operator, but there are separate charges for the equipment and operator, each charge will be treated differently for tax purposes – one as a rental of equipment on a “standalone” basis under Rule 3.294(c)(1), and one as a charge for the provision of services by the operator.

Additional Rules and Complications

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IRAs Part II – Contributions And Distributions

IRAs Part II – Contributions And Distributions

This post is a follow-up to my previous post in which I discussed some of the basics concerning Individual Retirement Accounts (“IRAs”).  It can be found here if you haven’t read that post yet.  In this “Part 2” post, I’ll discuss some of the limitations and tax implications of contributions to and distributions from IRAs.

As noted in my prior post, the tax advantages of an IRA depend on whether the IRA is classified as a “Traditional” or “Roth” IRA.  I’ll discuss each of those separately here.

General Limitations

As a general matter, taxpayers can only contribute a certain amount to IRAs each year. [1] This amount is adjusted on an annual basis to account for a “cost of living adjustment,” which is, in turn, computed based on annual core inflation. [2] For 2023, this amount was $6,500 [3], but was increased to $7,000 for 2024 [4].

An additional $1,000 is added to this annual limitation if you’re over the age of 50. [5]

Traditional IRAs

  1. Contributions to a Traditional IRA

Contributions to a traditional IRA are typically deductible. [6]. However, there are certain limitations that apply to individuals participating in certain listed pension plans. [7]

  1. Distributions from a Traditional IRA

Distributions from a traditional IRA are typically included in taxable income. [8] There are several exceptions to this, perhaps most notably the exception for “rollover contributions.”  In short, amounts that are distributed but are rolled into another qualifying IRA or eligible retirement plan are not includible in taxable income. [9]

Roth IRAs

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IRAs Part I – The Basics

IRAs

Individuals have access to a wide variety of vehicles for investing hard-earned (or not-so-hard earned) money.  Some of these, including “individual retirement accounts” (or “IRAs”), provide potential benefits from a federal tax standpoint.

Over the next several weeks, I’ll be issuing a series of posts discussing IRAs in depth – general information, tax treatment, and some limitations and pitfalls.  For now, let’s dive into a few basics.

What is an IRA?

Generally speaking, an IRA is a tax-advantaged retirement account owned by an individual, either for his or her own benefit or for the benefit of a third-party (a “beneficiary”).  The Internal Revenue Code defines the term “individual retirement account” as follows:

A trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:

  • Except in the case of a rollover contribution…no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219(b)(1)(A).
  • The trustee is a bank…or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.
  • No part of the trust funds will be invested in life insurance contracts.
  • The interest of an individual in the balance in his account is nonforfeitable.
  • The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.

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Texas Taxes For Sales Of Alcoholic Beverages

Texas Taxes For Sales Of Alcoholic Beverages

In Texas, sales of alcoholic beverages can give rise to two types of taxes: Mixed Beverage Gross Receipts Tax, and Mixed Beverage Sales Tax.  There are several complexities in how these are computed and how they interact with other state taxes, including the normal Sales and Use Tax.  Additionally, the Comptroller’s audit methodology for these taxes often creates problems for taxpayers.  Below is a brief summary of these taxes and some of the more prevalent issues they present.

Mixed Beverage Gross Receipts Tax

 Texas Tax Code § 183.021 provides that a 6.7% tax is imposed on “the gross receipts of a permittee received from the sale, preparation, or service of mixed beverages or from the sale, preparation, or service of ice or nonalcoholic beverages that are sold, prepared, or served for the purpose of being mixed with an alcoholic beverage and consumed on the premises of the permittee.” [1]

In turn, the term “mixed beverage” is defined to mean:

“One or more servings of a beverage composed in whole or part of an alcoholic beverage in a sealed or unsealed container of any legal size for consumption on the premises where served or sold by the holder of a mixed beverage permit, the holder of certain nonprofit entity temporary event permits, the holder of a private club registration permit, or the holder of certain retailer late hours certificates.” [2]

This generally includes three primary categories of drinks: liquor (including mixed drinks), beer, and wine.

As noted, the 6.7% tax applies to the “gross receipts” of a permittee.  This term is not defined by statute or by regulation, but the Comptroller’s regulations do provide some insight by stating “[t]he tax may not be separately charged to or paid for by the customer and cannot be considered included in the gross receipts amount.” [3] This language suggests the amount must be computed as 6.7% of the total amount charged to the customer, and must be paid separately by the permittee to the Comptroller.

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Texas Sales And Use Tax Rules For Construction-Related Services

Texas Sales And Use Tax Rules For Construction-Related Services

The Texas sales and use tax rules surrounding contractors and other construction-related work are incredibly complex. Additionally, the rules are structured to have broad application and thus impact many industries, including general construction, oil and gas related services, demolition, and more. The application of these rules is a fact-intensive undertaking and should be performed on a case-by-case basis, but I have outlined a basic overview of these rules below.

What is a “Contractor”?

The Texas Comptroller defines a “contractor” as a person who performs one or more of the following real property improvements and who, in making the improvement, incorporates tangible personal property into the real property being improved: [1]

“New Construction”

Building new improvements to residential or nonresidential real property; or
Completing any part of an uncompleted new structure that is an improvement to residential or nonresidential real property
“Scheduled and Periodic Maintenance”
Making improvements to real property as part of periodic and scheduled maintenance of nonresidential real property [2]
“Residential Repair & Remodel”
Repair, restoration, maintenance, or remodeling of residential real property
Work performed by a “contractor” also specifically includes the initial finish-out work to the interior or exterior of an improvement to real property [3], and the addition of new usable square footage to an existing building. [4]

Is Work Performed By a “Contractor” Subject to Sales Tax?
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“Data Processing Services” And Sales And Use Tax: The Problem With Applying A Stagnant Definition To A Dynamic Industry

“Data Processing Services” And Sales And Use Tax: The Problem With Applying A Stagnant Definition To A Dynamic Industry

Last week, I posted a brief summary of sales tax issues related to software and computer programs. However, as the characterization and taxability of “data processing” is such a complex and hotly contested area, I felt a separate post was merited. The definition of “data processing” was implemented in 1987, and has not been substantially updated. As all readers are aware, in that same time span the use of computers has evolved from being little more than an afterthought to being an essential part of life, and are the primary engine for both communications and business. As discussed below, the disconnect between (i) the ever-changing landscape of computers and (ii) the stagnant definition of “data processing” services can create a host of problems for Texas taxpayers.

Definitions of “Data Processing Services”

Texas Tax Code § 151.0035 defines “data processing service” to include the following:

-word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation;
-the performance of a totalisator service with the use of computational equipment required by Subtitle A-1, Title 13, Occupations Code (Texas Racing Act); and
-the use of a computer or computer time for data processing whether the processing is performed by the provider of the computer or computer time or by the purchaser or other beneficiary of the service. [1]

This definition was originally implemented in 1987, but has not been substantially updated since then. [2] Comptroller Rule 3.330 defines “data processing services” to mean “the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information.” [3] Further, the Comptroller’s definition states that “data processing services” specifically include “word processing, payroll and business accounting, and computerized data and information storage or manipulation.” [4]

Impact on Various Industries
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Texas Sales And Use Tax Treatment of Software And Computer Programs

Texas Sales And Use Tax Treatment of Software And Computer Programs

The function and utility of computers has changed and evolved at an exponential rate over the last several years, and will likely continue to do so, particularly as advancements like artificial intelligence become integrated in more industries. Unsurprisingly, current Texas sales and use tax authority surrounding the use of computers is complex and can create problems for taxpayers who provide computer programs and software, and perform related services. The following types of transactions involving software and computer programs are discussed briefly below:

Sale of a computer program to a customer;
Providing “contract programming” services; and
Providing repair, maintenance, and restoration services for a computer program
Sales of Computer Programs or Software

Comptroller Rule 3.308(c)(1) provides that “[t]he sale, lease, or license of a computer program is a sale of tangible personal property. Tax is due when the computer program, or a license to use the computer program, is transferred for consideration in Texas, or stored, used, or consumed in Texas, in electronic form or on physical media.” [1] This stems from the Comptroller’s treatment of software as “tangible personal property”, the sale of which is generally taxable in Texas. [2]
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Texas To Pass Legislation Providing Property Tax And Franchise Tax Relief

Texas To Pass Legislation Providing Property Tax And Franchise Tax Relief

On Monday, Texas Lieutenant Governor Dan Patrick and Texas House Speaker Dale Phelan released a joint statement announcing their agreement to propose legislation that will deliver “the biggest property tax cut in Texas history.” The proposed legislation comes in the form of HB 2/SB 2, HB 3/SB 3, and HJR 2, discussed further below.

Property Tax Reform – House Bill 2 (Rep. Morgan Meyer)/Senate Bill 2 (Sen. Paul Bettencourt)

HB 2 [1] and SB 2 [2] propose various changes to the Texas Education Code and Texas Tax Code, which would result in the following:

-The “maximum compressed rate” for school district property taxes would be reduced by $0.107;
-The homestead exemption for school district homes would be raised from $40,000 to $100,000; and
-The amount by which the appraisal value of non-homestead property (valued no more than $5,000,000) can be increased year-to-year would be limited to (i) a 20% increase, plus (ii) the market value of any new improvements to the property during the year.

School districts would be eligible for additional funding to account for the reduction in property taxes that would result from the above changes. The Texas Legislature also seeks to amend Section 1, Article VIII of the Texas Constitution to implement these changes. [3] The proposed amendment is discussed in House Joint Resolution 2.

The above changes would result in an estimated $12.7 billion tax cut through August 31, 2025, and an estimated $33.9 billion tax cut through 2028. [4] Each of the above bills was filed on July 10, 2023, and is expected to be passed by the Texas Senate later this week. The bills would then go to Governor Greg Abbott, who is expected to sign them into law.

Franchise Tax Reform – House Bill 3 (Rep. Charlie Geren)/Senate Bill 3 (Sen. Paul Bettencourt)
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Texas Sales And Use Tax Implications Of Oil And Gas Well Servicing

Texas Sales And Use Tax Implications Of Oil And Gas Well Servicing

In certain circumstances, services performed on oil and gas wells or related equipment may be subject to Texas sales or use tax. The taxability of these services is fraught with complexity, but is discussed briefly below.

General Taxability

At a high level, services performed on oil and gas wells are generally subject to tax as either (i) commercial repair and remodeling services (i.e., services performed on real property) or (ii) repair, remodeling, or maintenance of tangible personal property (i.e., services performed on portions of the well or related equipment). [1]

Nontaxable Services

Comptroller Rule § 3.324 carves out certain services as specifically nontaxable. This Rule lays out two general categories of nontaxable services.

First, no Texas sales or use tax is due on “[t]he labor to perform those services subject to the 2.42% oil well service tax imposed under Tax Code, Chapter 191”. [2] In this context, Chapter 191 applies “oil well services” which are defined to include:
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