Taxes In Texas: Coin Operated Machines

Today the topic is taxation and coin-operated claw machines that are amusement games from which the player tries to pick up a toy with the claw and drop it in the chute. I’m not sure these are all coin-operated today as some likely only take folding money and some might take your credit or debit card.

ruling from the Texas Comptroller of April 24, 2024 caught my attention. There are all types of taxes and one in Texas is the coin-operated machine tax! It defines the machine and like many taxes, has at least one exemption that then creates added complexity to define that exception. Here the exception is for “amusement machines designed exclusively for a child.” This means a “machine that can only be used for skill or pleasure by a child under 12 years of age.”

Well, what does exclusively mean and how does one really know if a machine is for ages 11 and below rather than ages 12 and more? Well, in a 2002 ruling, the comptroller defined “exclusively” as a machine “designed such that no person other than a child can use the machine.” Also, “it doesn’t matter if an immature adult or older child actually uses the machine” because it is the design that is relevant and the kind of prize a player can win is not relevant.  That seems odd, what if the prize is a pack of cigarettes?

I’m sure the Texas comptroller must have better things to do than determine if a coin-operated machine is for kids age 11 and under rather than for immature adults or for anyone.

Ok, this is a bad way to draft a tax rule. At least two problems here. Coin-operated is too limiting if that means actual coins are dropped into a machine as these machines will certainly get converted to Apple Pay or debit/credit card tap as fewer people carry real money around. And there is no need for any exception here (I think that is true for most taxes – exceptions should be avoided).  If there is some need to provide relief to certain machine operators, find another way such as have them apply for a grant based on financial need (I’d say an income tax credit but Texas doesn’t have a personal income tax).

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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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Impact Of Sales And Use Tax On Mergers And Acquisitions

Mergers and acquisitions (M&A) involve complex transactions that require careful planning and execution. One aspect that is often overlooked is the impact of sales and use tax on the transaction. Failure to properly account for sales and use tax can have a significant impact on the deal, including increased costs, potential legal issues, and decreased profitability.

One of the main reasons why sales and use tax can be a challenge in M&A due diligence is that it varies by state. Each state has its own rules and regulations regarding sales and use tax, and these rules can change frequently. This means that companies involved in M&A transactions need to be aware of the specific sales and use tax laws in each state where they operate or plan to operate.

When performing a due diligence review, it is important to address the target company’s sales and use tax exposure by reviewing nexus, previously filed tax returns, payment history, and any audits or assessments. This will help identify any potential liabilities, such as underpayment or non-payment of sales and use taxes.

It is also important to assess the target company’s sales and use tax compliance processes, including the accuracy of tax calculations, the appropriate use of exemptions and credits, and the maintenance of proper documentation.

Another important consideration in a due diligence review is the potential impact of sales and use tax on the transaction itself. In some cases, the buyer may be responsible for any unpaid sales and use tax liabilities of the target company. This can significantly increase the cost of the transaction and impact the profitability of the deal.

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Sales And Use Tax Issues
1. Determine The Correct Sales Tax To Charge

One of the primary taxation issues for direct mailers is determining the correct sales tax to charge. Sales tax laws vary from state to state and even within different areas of the same state, making it difficult to keep track of the applicable tax rates. For example, if you send mail to customers in multiple states, you may need to charge different sales tax rates for each state. Additionally, some products or services may be exempt from sales tax in certain states, further complicating the matter.

2. Identify The Correct Tax Classification

Another issue that direct mailers may face is determining the correct tax classification for their products or services. Depending on the type of product or service offered, it may fall under different tax classifications, each with its own set of regulations. For example, some states may classify advertising services as taxable, while others may consider them exempt.

3. Be Aware of Tax Implications When Using Third-Party Vendors

Direct mailers should also be aware of the tax implications of using third-party vendors. If you use a third-party vendor to provide services such as printing, mailing, or list management, you may be responsible for collecting and remitting sales tax on those services. However, the tax laws surrounding these services can be complex, and it’s important to consult with a tax professional to ensure compliance.

4. Keep Accurate Tax Transactions Records

Direct mailers should keep accurate records of all tax-related transactions. This includes keeping track of sales tax collected and any exemptions or deductions claimed. In the event of an audit, having detailed records can help demonstrate compliance and avoid any penalties.

Thompson Tax Can Help!

Although tax compliance can be a significant challenge for direct mailers, understanding the various taxation issues they may face and taking appropriate measures to ensure compliance, direct mailers can avoid complications and focus on growing their business. It’s always recommended to seek the advice of a tax professional to ensure compliance with all applicable tax laws. Contact Thompson Tax today for all your sales and use tax needs and let us be your Trusted Tax Advisor.

Contact Nicole Brown, CEO Thompson Tax.

“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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Update To The California Partial Manufacturing Sales And Use Tax Exemption

Since 2014, qualified companies have been eligible for a partial exemption from sales tax for purchases of machinery and equipment used in qualified manufacturing and research and development activities. California was late to the table, as most states have long had exemptions for such purchases. The exemption has also been unique in that it has been a partial exemption, and allowable only on the first $200 million of qualified purchases.

Now, Assembly Bill 1951 would expand the exemption to a full exemption (rather than partial). According to the legislative language, “This bill would on and after January 1, 2023, and before January 1, 2028 make this a full exemption for purchases not exceeding $200,000,000. The bill would repeal these provisions on January 1, 2028 and would revert to the above-described partial exemption on that date.”

So, why make these changes now? As the bill points out:

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SALES AND USE TAXES ECONOMIC NEXUS AND WAYFAIR

PART 2:  IF A TAXPAYER MEETS THE SALES THRESHOLD IN A STATE, WHAT MUST WE DO NOW?

These frequently asked questions build on our prior series of FAQs.

Q:  Once a taxpayer meets the sales threshold of a state, what must be done to be compliant with the state’s tax laws?

A:  You must register for sales and use taxes with the state.  Depending on the state and jurisdiction, you may need to register with the local jurisdiction or parish.  Please note some states may require you to register with the state’s Secretary of State before obtaining a sales tax permit from the state.

Q:  How often will I need to file sales and use tax returns? 

A:  It will depend on each state.  The state will assign you a filing frequency based on certain criteria it has established.  The frequency will be either monthly, quarterly or yearly.

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The Challenges Of SaaS Taxability And Why You Should Care

Even without considering the ramifications of the 2018 Wayfair decision, the taxability of software-as-a-service (SaaS) products is complicated. With Wayfair thrown in, it just gets worse.

But why is it so complicated? More importantly, how are SaaS companies supposed to be able to comply with tax laws when they can barely keep on top of them?

A large portion of it comes down to irregularities in SaaS definitions between states, in addition to little uniformity when it comes to SaaS tax legislation. The very nature of the product (is it “software” or “service”) adds to complexity. Over 20 states now assess sales tax on the SaaS revenue stream, but for different reasons.

Why Are SaaS Taxes So Complicated?
In addition to occasionally differing definitions, the laws built on top of those definitions are also different state to state. For example, in New York, all canned or prewritten computer software is considered tangible personal property, and is thus taxable. In others, like Nevada, SaaS is taxable, but only when used for business purposes. Texas classifies SaaS as information services and assesses tax on 80% of the cost (rather than 100%).
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Sales And Use Tax Audits- Aaron Giles

When you receive a sales and use tax audit notice in the mail, it sparks worry, concern and anxiety.  Frequently, the first question that comes to mind is “What triggered this sales and use tax audit?” Understanding the sales and use tax audit triggers or cause of the audit can help companies both prepare for the audit by predicting what the auditor will be looking for, as well as take steps to avoid sales and use tax audits in the future.

Similar to the IRS with income tax audits, states have systems, policies and procedures in place that help them to identify businesses to select for a sales and use tax audit.  While each state’s methodology is different, there are some common reasons taxpayers are flagged for a sales and use tax audit.

12 COMMON SALES AND USE TAX AUDIT TRIGGERS

Our analysis of common sales and use tax audit triggers is based upon 15 years’ worth of sales and use tax audit defense and representation services that we have provided to hundreds of taxpayers across the U.S.  We have arranged these reasons in order of the likelihood of triggering a sales and use tax audit.

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Aaron Giles

Wisconsin State Sales And Use Tax

The state of Wisconsin levies a 5% state sales tax on the retail sale, lease or rental of most goods and some services. Local jurisdictions can impose additional sales taxes of 0.6%. The range of total sales tax rates within the state of Wisconsin is between 5% and 5.6%.

Use tax is also collected on the consumption, use or storage of goods in Wisconsin if sales tax was not paid on the purchase of the goods. The use tax rate is the same as the sales tax rate. Returns are to be filed on or before the 20th day of the month following the month in which the purchases were made. For example, purchases made in the month of January should be reported to the state of Wisconsin on or before the 20th day of February. For more information on Wisconsin sales tax exemptions please visit the sites shown below.
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Aaron Giles

Washington DC Sales And Use Tax

The District of Columbia, Washington D.C., levies a 5.75% state sales tax on the retail sale, lease or rental of most goods and some services. There are no additional local sales taxes in Washington D.C.

Use tax is also collected on the consumption, use or storage of goods in Washington D.C. if sales tax was not paid on the purchase of the goods. The use tax rate is the same as the sales tax rate. Returns are to be filed on or before the 20th day of the month following the month in which the purchases were made. For example, purchases made in the month of January should be reported to the District of Columbia on or before February 20th.

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Aaron Giles - Ohio, Oklahoma And Oregon

Ohio State Sales And Use Tax

As of September 1, 2013, the state of Ohio levies a 5.75% state sales tax on the retail sale, lease or rental of most goods and some services. Local jurisdictions impose additional sales taxes ranging between 0.75% and 2.25%. The range of total sales tax rates within the state of Ohio is between 6.5% and 8%.

Use tax is also collected on the consumption, use or storage of goods in Ohio if sales tax was not paid on the purchase of the goods. The use tax rate is the same as the sales tax rate. Returns are to be filed on or before the 23rd day of the month following the month in which the purchases were made. For example, purchases made in the month of January should be reported to the state of Ohio on or before the 23rd day of February.

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