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Texas Tax Roundup – Interesting Tax Court Cases And Rulings



Texas Taxes

[In this very special “throwback” edition of the Texas Tax Round Up, newly reemerged from out the Super-Saragossa Sea of the Internet, we travel back to a much simpler time—February 2022.]

Howdy y’all!  Has it been a month already?  We’ve got another action-packed month of Comptroller-related news.  Here we go!

Court Cases

Courts of Appeals

Hegar v. Black, Mann, and Graham, L.L.P., No. 03-20-00391-CV (Tex. App.—Austin Feb. 25, 2022)

  • The Texas Third Court of Appeals held that a taxpayer may self-assess and pay tax under protest for subsequent periods after the filing of a protest suit and include those periods in the suit by amending the petition— in other words, there’s no requirement that the Comptroller actually assess tax for those periods. Thus, the Court of Appeals upheld that the District Court’s denial of the Comptroller’s plea to the jurisdiction for those subsequent periods.
  • On the merits, however, the Court of Appeals held that the taxpayer—a law firm that specialized in preparing loan packages for lending institutions—purchased taxable data processing (instead of nontaxable legal or paralegal) services from vendors when the vendors created an interface between each lenders’ loan origination systems and the vendors’ document generation systems that produced the loan package, which the law firm then reviewed to ensure the legal requirements were met.

Proposed Rules

Franchise Tax

34 Tex. Admin. Code 3.589 (Margin: Compensation)—Proposing an update to the rule on the compensation deduction by incorporating changes:

  • in statute—B. 1286, 83d Leg., Reg. (2013) (relating to professional employer organizations) and H.B 1195, 87th Leg., Reg. (2021) (relating to Covid relief loans and grants);
  • due to a court case—Winstead PC v. Combs, No. D-1-GN-12-000141 (201st Dist. Ct., Travis County Feb. 7, 2013) (finding that certain provisions of the current rule were invalid to the extent they disallowed deductions that were allowed for federal tax purposes);
  • in Comptroller policy—STAR Accession Nos. 201510539L (June 14, 2016) (stating that wages include those paid to employees at offices outside of the United States and reported on forms in such foreign country that are substantially equivalent to a W-2), and 201206444L (June 12, 2012) (allowing taxpayers to amend franchise reports to change or make an election to deduct costs of goods sold or compensation).

See 47 Tex. Reg. 715, 753 (Feb. 18, 2022).

Notable Additions to the State Tax Automated Research (STAR) System

General

Successor Liability

Comptroller’s Decision No. 111,061 (2022)—The ALJ found that an operator that acquired natural gas leases was liable for the natural gas severance tax owed by the preceding operator.

Personal Liability

Comptroller’s Decision No. 117,194 (2022)—The ALJ found that the Comptroller did not prove by clear and convincing evidence that a company’s president was personally liable for sales and use taxes that the company had failed to pay.  The Comptroller did not provide evidence showing that the president was involved in the company’s sales and use tax reporting for the periods in question. To the contrary, evidence showed that the president did not work at the company, did not supervise or train employees, and did not hold or attend meetings during the years in question.

Franchise Tax

Flow-through Funds

Comptroller’s Decision No. 117,091 (2021)—The ALJ found that a taxpayer that provided audiovisual equipment to hotels for use by the hotels’ customers in events could not exclude from gross revenue certain “sales commissions” that the taxpayer paid to the hotels. The taxpayer did not show that the hotels were licensed as real estate brokers or sales agents under Texas Occupations Code chapter 1101 nor that the taxpayer issued Forms 1099-MISC to the hotels as purportedly required by Tex. Tax Code § 171.1011(k)(1).

Forfeiture

Comptroller’s Decision No. 117,904 (2022)—The ALJ found that the sole member and officer of a company whose corporate privileges were forfeited for a period of approximately seven months due to failure to file a franchise tax report before being reinstated was liable for the assessment of sales tax made against the company for this period and could not challenge the underlying liability.

Sales and Use Tax

Amusement Services

Comptroller’s Decision No. 117,180 (2021)—The ALJ found that a taxpayer that purchased and resold tickets to sporting events, concerts, and theatrical performances was providing a taxable amusement service.

Comptroller’s Decision No. 117,326 (2021)—The ALJ determined that an entry fee charged for access to riding trails for use by all-terrain vehicles was subject to sales and use tax as an amusement service.

Debt Collection Services

Comptroller’s Decision No. 117,422 (2022)—The ALJ found that a taxpayer was providing taxable debt collection services when it provided “legal services, transport services, truck and semi-truck recovery, aircraft recovery, skip tracing, filing court orders in Texas and nationwide, locating property for litigation, and property recovery services.”

Real Property Services

Comptroller’s Decision No. 115,679 (2022)—The ALJ found that a taxpayer’s vent hood maintenance and cleaning services were taxable real property services and that the taxpayer did not provide evidence that the services were exempt from tax under Tex. Tax Code § 151.1011 because the vent hoods were used in the manufacturing of food.

Manufacturing Exemption

Comptroller’s Decision No. 116,783 (2022)—The ALJ determined that a taxpayer that provided threading services on oilfield casing was providing processing services and thus could purchase certain items tax-free under the manufacturing exemption. In making this determination, the ALJ found that threading casing causes it to operate in a new or different manner, that the casing could not be installed downhole without being threaded, and that the fact that the taxpayer did not own the casing was irrelevant for purposes of the manufacturing exemption.

Nontaxable Services/Taxable Data Processing Services

STAR Accession No. 202201017L (Jan. 7, 2022)—In this private letter ruling, the Comptroller determined that a taxpayer’s fees to reimburse itself for charges by medical service providers for providing copies of medical records and preparing requests for medical records were not subject to sales and use tax. However, taxpayer’s copy fees for optical character recognition, electronic Bates labeling, bookmarking records, duplicating film, and copying CDs were found to be taxable data processing services.

Also in February, the Texas Supreme Court heard oral arguments in Hegar v. Health Care Service Corp., No. 21-0080, relating to insurance taxes.  So, maybe we’ll have an opinion to mull over soon!

Have a question? Contact TL Fahring, JD, Freeman Law.

TL Fahring

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