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

Comptroller’s Decision Nos. 116,910, 116,911, and 116,912 (2022)—The administrative law judge found that a purchaser who, for no consideration, acquired business assets that were abandoned by a bankruptcy trustee at the conclusion of a bankruptcy case succeeded to the state tax liability of the former owner of those assets. Although a bankruptcy trustee’s sale of assets is not considered a sale of assets by the former owner (see 34 Tex. Admin. Code § 3.7(h) (Successor Liability: Liability Incurred by Purchase of a Business)), under the federal bankruptcy code any assets abandoned by the trustee are retained by the former owner (citing 11 U.S.C. § 554(c) (Abandonment of property of the estate)). Therefore, the purchaser acquired the business assets from the former owner—an entity with outstanding state tax liabilities—for no consideration.

The administrative law judge further found intent to hinder, delay, or prevent the collection of the former owner’s tax liabilities in that: 1) both the former owner and the purchaser were owned by the same individual; 2) the purchaser was formed the day after the former owner declared bankruptcy; 3) the purchaser immediately began operating at the same location as the former owner, 4) the purchaser offered the same goods and services as the former owner; and 5) the purchaser, although newly formed, stated that it had 25 years of experience in its field.

As such, the administrative law judge determined that the purchase of the business assets met the definition of a fraudulent transfer or sham transaction, meaning that the purchaser was liable for any state tax, penalty, and interest owed by the former owner. See Tex. Tax Code § 111.024(a), (b)(2) (Liability in Fraudulent Transfers).

Franchise Tax

Combined Groups

STAR Accession No. 202204015L (Apr. 4, 2022)—In this private letter ruling, the Texas Comptroller determined that a subsidiary’s temporary credit for business loss carryforward was not transferred to the combined group of which it was initially part when the subsidiary was sold to a third-party purchaser’s combined group. See 34 Tex. Admin. Code 3.594(c)(3) (Margin: Temporary Credit for Business Loss Carryforwards).  In this connection, the Comptroller found that nothing in the Texas franchise tax obligates Texas to recognize federal tax elections under 26 U.S.C. § 336(e) (Gain or loss recognized on property distributed in complete liquidation).

Comptroller’s Decision No. 116,701, 116,702, 116,703, and 116,704 (2022)—The administrative law judge determined that retirement benefits costs paid by a member of a combined group after that member had ceased acquiring or producing goods couldn’t be included in the combined group’s cost of goods sold, even though other members continued to be involved in the acquisition and production of goods.

Motor Vehicle Sales, Rental, and Use Tax

Standard Presumptive Value

Comptroller’s Decision No. 116,846 (2022)—The administrative law judge found that a taxpayer who ran a used-car dealership that was permitted for seller-financed motor vehicles sales tax owed tax on the sale of vehicles having a standard presumptive value greater than the price for which the vehicles were reportedly sold. While standard presumptive value is defined as the private-party transaction value of a motor vehicle as determined by the Texas Department of Motor Vehicles (see 34 Tex. Admin. Code § 3.79(a)(9) (Standard Presumptive Value)), the administrative law judge found that standard presumptive value also could be used when, as in this hearing, the taxpayer failed to maintain or provide complete records, particularly sales contracts showing sales prices and trade-in values. The administrative law judge also upheld the Comptroller’s assertion of the 50% fraud penalty against taxpayer when the overall error rate was more than 48% and the taxpayer didn’t provide an explanation for the underreporting.

Sales and Use Tax

Computer Software/Hardware

Comptroller’s Decision No. 117,239 (2022)—The administrative law judge determined that a taxpayer that provided information technology management services for certain customers, which included maintaining and upgrading hardware and software, providing consultation regarding business needs with respect to its computing environment, and advising on technology changes was selling taxable items to these customers. These taxable items included:

• the sale of computer programs (taxed as tangible personal property under Tax Code § 151.009 (“Tangible Personal Property”));
• the repair or maintenance of a computer program performed by the person that sold the computer program (a taxable service under Tax Code 151.0101(a)(5) (“Taxable Services”) and 34 Tex. Admin. Code § 3.308(c)(2) (Computers–Hardware, Computer Programs, Services, and Sales));
• the sale of a computer hardware (tangible personal property); and
• the repair or maintenance of computer hardware (a taxable service under Tax. Code § 151.0101(a)(5)and 34 Tex. Admin. Code § 3.292(b) (Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property).

In addition, the administrative law judge found that charges for consulting services performed in connection with the sale of these taxable items were included in sales price of the taxable items and thus subject to sales or use tax themselves.  See Tex. Tax Code § 151.007(b) (“Sales Price” or “Receipts”) (“The total amount for which a taxable item is sold, leased, or rented includes a service that is a part of the sale and the amount of credit given to the purchaser by the seller.”).

[Activities involving software, software-as-a-service (SaaS), and basically anything involving information technology is a potential minefield under the Texas sales or use tax. Watch your step!]

Information Services

Comptroller’s Decision No. 116,293 (2022)—The administrative law judge found that a national retailer with seven brick-and-mortar stores in Texas purchased a taxable information service when it purchased mailing lists from another company containing the nationwide addresses of potential customers that it used in mailing advertisements and coupons. Thus, the Comptroller properly assessed tax on the Texas address portion of the mailing lists. See 34 Tex. Admin. Code § 3.342(a)(6)(C) (Information Services) (including mailing lists as a taxable information service, but stating that only “that percentage which represents names of persons located in Texas is taxable”).

Manufacturing Exemption

Comptroller’s Decision No. 117,668 (2022)—The administrative law judge determined that the Comptroller properly denied a refund claim submitted by an oil and gas operator for materials incorporated into separators and heater treaters, which the operator claimed were exempt manufacturing equipment. The administrative law judge found that the operator did not show by clear and convincing evidence that the separators and heater treaters were exempt manufacturing equipment or that the materials were components of such equipment.  See, e.g., Southwest Airlines Co. v. Bullock, 784 S.W.2d 563, 569 (Tex. App.—Austin, 1990, no writ) (defining a component as item that is “reasonably essential” to the functioning of another piece of equipment).

[This illustrates another problem area under the sales and use tax: claiming the manufacturing exemption in connection with oil field equipment.]

Data Processing

STAR Accession No. 202204028L (Apr. 29, 2022)—In this private letter ruling, the Texas Comptroller determined that a taxpayer that offered customers the ability to manage and customize debit and prepaid cards by contracting with issuing banks and working with these banks and payment card networks to authorize, process, and settle its customers’ card transactions was providing a nontaxable payment processing service.  See Tex. Tax Code § 151.0035(b)(3)(D) (“Data Processing Service”) (excluding from the definition of a “data processing service” the settling of an electronic payment transaction by a person who has entered into a sponsorship agreement with a federally insured financial institution for the purpose of settling that institution’s electronic payment transactions through a payment card network); SB 153, 87th Leg., R.S. (2021)(amending Section 151.0035 to exclude service payment processing services from the definition of a data processing service).

[The issue here was that data processing has such a broad (i.e., vague) definition that it could basically apply to anything involving the compilation and manipulation of data, such as for instance processing of electronic payments. See, e.g., Comptroller’s Decision No. 35,785 (1997) (“The processing of credit card transactions is taxable data processing . . . .”). As such, the Legislature last session thought it wise to clarify that data processing generally shouldn’t be considered to include payment processing.]

Have a question? Contact TL Fahring, Freeman Law.