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Tag Archive for Texas

Rentals Versus Services Under Texas Sales And Use Tax

Rentals Versus Services Under Texas Sales And Use Tax

One of the thorniest issues in Texas sales and use tax is the distinction between the rental of tangible personal property (which is subject to tax) and the provision of a service (which is only taxable if the service is taxable). This distinction not only affects the taxability of charges for the rental or service but also that of equipment that is purchased to provide the rental or service.

What’s a Rental?

The rental of tangible personal property in Texas is subject to sales or use tax.[1] A rental occurs when possession but not title to tangible personal property is transferred for consideration.[2] A person acquires possession of tangible personal property when that person acquires operational control over that property.[3] Operational control, in turn, means that the customer can use, control, or operate the tangible personal property.[4]

What are Taxable Services?

Only the following services are subject to Texas sales or use tax:
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Written by | Posted in Sales/Use Tax • TaxConnections

Texas Tax Roundup | April 2023: Pleas To The Jurisdiction, Retail And Wholesale Franchise Tax Rate, And More

Texas Tax Roundup | April 2023: Pleas To The Jurisdiction, Retail And Wholesale Franchise Tax Rate, And More

Howdy folks, and welcome back to another edition of the Texas Tax Roundup, where we gab about all things Texas tax and perhaps even some things Texas tax adjacent. As ole T.S. once put it, “April is the cruelest month” [1]—although maybe not for the same reasons he had. Because instead of “breeding lilacs out of the dead land”[2] or some such, which implies at least a glimmer of hope (although that might be why he thought it was so cruel, him being a bit of a downer, you know), April 2023 showered us with a string of taxpayer defeats, the one bright spot being a smackdown on a plea to the jurisdiction by the Texas Comptroller.

Court Opinions
Franchise Tax
Plea to the Jurisdiction/Total Revenue

Hibernia Energy, LLC v. Hegar, No. 03-21-00527-CV (Tex. App.—Austin Apr. 21, 2023, no pet. h.)—The Texas Third Court of Appeals affirmed the trial court’s judgment denying the Comptroller’s plea to the jurisdiction but also denying a taxpayer’s/consultant’s claim for refund for franchise taxes attributable to the inclusion in total revenue of gains from the sale of oil-and-gas leasehold interests.

The taxpayer, a limited liability company, acquired oil-and-gas leasehold interests in 2010, and then sold these interests in 2012 and 2014 at a gain of $95,866,370 and $296,691,853 for each year respectively. The taxpayer included these gains in its total revenue for purposes of determining its franchise tax liability for the respective franchise tax report years and paid the taxes.

In 2015, the taxpayer hired a consultant that filed a refund claim on the taxpayer’s behalf for the franchise taxes paid that were attributable to these gains.[3] The reason given for why the taxpayer was entitled to a refund was that it had overstated total revenue by including gains whose inclusion was not required under applicable law.

A limited liability company by default is treated as a partnership for federal income tax purposes.[4] A partnership is required to file a Form 1065, U.S. Return of Partnership Income to “report the income, gains, losses, deductions, credits, and other information about the operation of the partnership.”[5]

Under the Texas franchise tax, the total revenue of a taxable entity treated as a partnership for federal income tax purposes is calculated by first adding up the amounts reportable as income on various lines on the entity’s Form 1065:
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Written by | Posted in Franchise Tax Rate • Texas

Who Is Subject To Mixed Beverage Taxes?

Texas Mixed Beverage Taxes

The state of Texas imposes two taxes on alcoholic beverages that impact holders of certain permits under the Texas Alcoholic Beverage Code. These taxes are the mixed beverage gross receipts tax and the mixed beverage sales tax. Both are set forth in Texas Tax Code, Chapter 183 (“Chapter 183”) and Texas Comptroller Rule 3.1001 (“Rule 3.1001”).[1]

Who’s Subject to Mixed Beverage Taxes?

The folks who get hit with mixed beverage taxes (other than consumers) are what are called “permittees.” [2] Chapter 183 defines a “permittee” is defined as someone who holds one of the following permits under the Texas Alcoholic Beverage Code:

-a mixed beverage permit;
-a private club registration permit;
-a private club exemption certificate;
-a private club registration permit with a retailer late hours certificate;
-a nonprofit entity temporary event permit;
-a private club registration permittee holding a food and beverage certificate;
-a mixed beverage permit with a retailer late hours certificate;
-a mixed beverage permit with a food and beverage certificate; or
-a distiller’s and rectifier’s permit.[3]


What’s a Mixed Beverage?
Chapter 183 defines a “mixed beverage” as “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 when 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.”[4]

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Written by | Posted in Mixed Beverage Taxes

Treasury Issues Proposed Regulations On IRS Appeals Procedures

Treasury Issues Proposed Regulations On IRS Appeals Procedures

Taxpayers routinely resolve their tax controversy matters without resort to litigation.  Indeed, good tax professionals will often seek to avoid costly and time-consuming litigation, if possible, by utilizing various administrative avenues within the IRS including the IRS Independent Office of Appeals (“IRS Appeals”).  Formed originally in 1927, IRS Appeals serves as a quasi-independent government agency staffed with the purpose of, among other things, resolving certain tax controversy matters in a manner fair to both the United States and the taxpayer.

However, IRS Appeals does not hear all tax controversy matters.  Rather, it has excepted from its jurisdiction certain tax matters which it feels are not within its scope of review.  Generally, this has been accomplished through a hodgepodge of administrative guidance, including publication in revenue procedures and the Internal Revenue Manual (“IRM”).

On July 1, 2019, Congress codified the objectives and purposes of IRS Appeals in the Taxpayer First Act of 2019, Pub. L. No. 116-25 (“2019 TFA”).  Thus, by statute, Congress provided that the IRS Appeals process “should be generally available to all taxpayers.”  See I.R.C. § 7803(e)(4).  Because the term “generally” denotes at least some type of exclusion, many taxpayers and tax professionals were left wondering how far the new statutory right extended.

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Written by | Posted in Proposed Regulations

Texas: Administrative Judges Rulings On Tax Matters

Texas: Administrative Judges Rulings On Tax Matters

Proposed Rules

General

34 Tex. Admin. Code § 3.9 (Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers) (proposed at 47 Tex. Reg. 3106 (May 27, 2022))—The Texas Comptroller proposed amendments to this rule to address reporting requirements for distributors of certain off-highway vehicles that were added as a result of SB 586, 87th Leg., R.S. (2021).  Prior to SB 586, Tex. Tax Code § 151.482 (Reports by Manufacturers and Distributors) only required manufacturers of such vehicles to file reports with the Comptroller.  See HB 1543, 86th Leg., R.S. (2019).

Notable Additions to the State Automated Research System

General

Fraudulent Transfers

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Written by | Posted in Administrative Judges Rulings • Texas

A Win For Taxpayers—Section 6330(d)(1) Is A Nonjurisdictional Deadline

A Win For Taxpayers—Section 6330(d)(1) Is A Nonjurisdictional Deadline

Collection Due Process Hearings And Jurisdiction

Collection Due Process (“CDP”) hearings are crucial to taxpayers. Taxpayers have a right to a Collection Due Process hearing with the IRS Independent Office of Appeals before levy action is taken. According to the IRS, a “CDP hearing is an opportunity to discuss alternatives to enforced collection and permits you to dispute the amount you owe if you have not had a prior opportunity to do so.”[1] When a taxpayer receives a notice of determination from IRS Appeals, the taxpayer has 30 days to petition the U.S. Tax Court. The U.S. Supreme Court in Boechler, P.C. v. Commissioner recently held that a Tax Court petition may still be considered by the Tax Court even if it is late. 

I.R.C. § 6330(d)(1) – Collection Due Process Hearings

The statute at issue in Boechler is Section 6330(d)(1). For reference, the statutory language is reproduced below:

(d) Proceeding after hearing.—

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Written by | Posted in Section 6330(d)(1)

What Is A Section 962 Election?

The Section 962 Election

For years, section 962 was a relatively obscure tax-planning mechanism.  The Tax Cuts & Jobs Act, however, changed that, pushing the so-called section 962 election into vogue. Section 962 allows an individual shareholder of a controlled foreign corporation to elect to be taxed as a domestic C corporation.  As a result, a taxpayer making a section 962 election would be taxed at a 21% rate on a controlled foreign corporation’s undistributed subpart F income and at favorable GILTI rates on GILTI inclusions from a CFC (inclusions related to global intangible low-taxed income).  The election may also entitle the individual to take advantage of a deemed-paid foreign tax credit under section 960.

In effect, section 962 creates an alternative tax regime applicable to individual U.S. shareholders investing abroad through CFCs.  The election is intended to put individuals who directly own foreign investments on even footing with individuals whose foreign investments are held through a domestic corporation.

What is a Section 962 Election?

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Written by | Posted in Freeman Law • Section 962 Election

What Is A Grantor Trust?

What Is A Grantor Trust?

Grantor Trusts

Under the Internal Revenue Code’s “grantor trust”[1] rules, the grantor of a trust may be treated as the “owner” of all or part of the trust.  As such, the grantor is taxed on the trust’s income and reports its deductions.  That is, trust income and deductions are attributed to the grantor as if he or she owned the trust or a portion of the trust.

If the grantor trust rules apply, the trust is not treated as a separate taxable entity for Federal income tax purposes—at least to the extent of the grantor’s interest.  Said another way, the provisions “look through” the trust form and treat the grantor and the trust as one and the same.

Generally, the grantor trust rules apply where the grantor has transferred property to a trust but has not given up sufficient dominion and control over the property or the income that it produces.

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Written by | Posted in What Is A Grantor Trust?

Estate Planning And Cryptocurrency

Estate Planning And Cryptocurrency

The meteoric rise of cryptocurrencies has minted a new generation of millionaires and resulted in the mainstream adoption of virtual currencies as an increasingly important asset class. The crypto boom has also raised questions on how miners/stakers, investors, and other players can best transfer these digital assets to their heirs from a tax and estate planning perspective. For example, how do you ensure your heirs can control and inherit a virtual asset that, by design, has no personal identifying information and requires a passcode to access after you pass away? What are the estate and federal income tax implications of an inheritance of crypto assets that may have substantially appreciated at the time of transfer? Are there ways to minimize federal gift and estate taxes on the transfer of digital assets? We cover these questions and other issues further below.

Protecting Crypto Assets

For traditional assets like real estate or stock brokerage accounts, there is typically a certificate or another legal document identifying the owner of such assets. By contrast, cryptocurrency networks are largely decentralized, meaning users conduct and police financial transactions occurring within the system rather than a centralized authority.

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Written by | Posted in Estate Planning And Cryptocurrency

What Can The State Of Texas Do To Collect State Taxes?

What Can The State Of Texas Do To Collect State Taxes?

So, the Texas Comptroller of Public Accounts (“Comptroller”) says you owe state tax.  If the deficiency determination hasn’t yet become final, you still may be able to challenge the underlying tax liability (for more on that, read this post).  But say you don’t do that (or say the say the Comptroller has made a jeopardy determination and can begin collection action immediately)?  What happens then?

At that point, the Comptroller, acting independently or with the Attorney General of the State of Texas (“Attorney General”), may try to collect the taxes claimed to be due.  Here are some of the tools they have at their disposal.[1]

State Tax Liens

One item in the Comptroller’s arsenal is the state tax lien.  Automatically arising when a taxpayer owes tax, penalties, or interest to the state, a state tax lien attaches to all of the taxpayer’s property that is subject to execution.[2]  But, it only becomes effective against a bona fide purchaser once a notice of state tax lien is filed with the county clerk in the appropriate county.[3]

A notice of state tax lien must include the name of the taxpayer, the type of tax owed, each period for which the tax is claimed, the tax due for each period (excluding penalties, interest, and other costs), and any other relevant information.[4]  The Texas Tax Code provides that a single notice of state tax lien “is sufficient to cover all taxes administered by the Comptroller, including penalty and interest computed by reference to the amount of tax, that may have accrued before or after the filing of the notice.”[5]  Meaning that the notice may cover taxes that the notice doesn’t even mention.

State tax liens remain in effect until the taxpayer fully pays the taxes, interests, penalties, and fees that the taxpayer owes the state.[6]  Nevertheless, the Comptroller and Attorney General may agree to a partial release of a state tax lien on specific real or personal property if the taxpayer pays the Comptroller the “reasonable cash market value” of the property (such “reasonable cash market value” being determined as prescribed by the Comptroller).[7]

In order to challenge the validity of a state tax lien, a taxpayer (or any other person) must file suit in Travis County district court within 10 years of the date when the lien is filed.[8]  However, this limitations period won’t apply only if a taxpayer provides “substantive evidence” that the Comptroller “considers satisfactory” that rebuts the presumption that the taxpayer received proper notice of the taxpayer’s tax liability (so probably almost never).[9]  As result of a suit challenging the validity of a state tax, the lien will either be 1) perpetuated and foreclosed or 2) nullified.[10]

Levies

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Written by | Posted in TaxConnections

The Foreign Tax Credit Basics

Foreign Tax Credit Basics - Lawyer Jason Freeman

U.S. taxpayers are generally taxed on their worldwide income.  But what happens when that income is also taxed by another country?  The Internal Revenue Code’s primary mechanism to alleviate this double taxation of income is the foreign tax credit.  The foreign tax credit provides U.S. taxpayers who owe taxes to a foreign country with a credit against their U.S. tax equal to the amount of qualifying foreign taxes paid or accrued.

Generally, U.S. taxpayers are entitled to a credit for income, war profits, and excess profits taxes paid or accrued during a tax year to any foreign country or U.S. possession, or any political subdivision of the country or possession. U.S. taxpayers living in certain treaty countries may be able to take an additional foreign tax credit for the foreign tax imposed on certain items of income.  In addition, note that taxpayers making an election under section 962—to be taxed at corporate rates on certain income from a controlled foreign corporation (CFC)—are required to include that income in gross income under sections 951(a) and 951A(a) and may be entitled to claim the credit based on their share of foreign taxes paid or accrued by the CFC.

Foreign Tax Credit Basics

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The Travel Act Makes It A Federal Crime To Travel, Use The Mail, Or Use Any Interstate Commerce Facility For Unlawful Activity

The Travel Act Makes It A Federal Crime To Travel, Use The Mail, Or Use Any Interstate Commerce Facility For Unlawful Activity

The Travel Act, 18 U.S.C. § 1952, makes it a federal crime to travel, use the mail, or use any facility in interstate or foreign commerce for the purpose of furthering an “unlawful activity.”

At the time of its enactment in 1961, the Travel Act was originally intended to give the federal government a leg up in the fight against organized crime. An example of the sort of situation that the Travel Act was intended to target is where a crime boss resided in one state and operated an illegal enterprise in another. In such a situation, it was feared that neither state would have jurisdiction to prosecute the crime boss for operating the illegal enterprise and, in the absence of something like the Travel Act, the conduct would go unpunished.

From its origins combating organized crime, the Travel Act has since been used in a variety of other contexts, including in conjunction with the Foreign Corrupt Practices Act (“FCPA”), as a predicate offense under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and, recently, in health care corrupt payment prosecutions.

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Written by | Posted in The Travel Act
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