Tax Policy – How Texas Is Recapturing Lost Revenue

Texas Tax Rules

Texas Tax Rules
As states confront budgetary deficits due to declining tax revenues and increased government spending, tax authorities aggressively enforce state tax laws to recapture lost revenues.

Sulphur Production Tax
34 Tex. Admin. Code § 3.41 (48 Tex. Reg. 1149)—The Comptroller repealed this rule dealing with sulphur production tax to reflect the Legislature’s repeal of the tax with S.B. 757, 84th Legislature, R.S. (2015). RIP.

Cigarette Tax
34 Tex. Admin. Code § 3.102 (48 Tex. Reg. 1150)—The Comptroller adopted amendments to the rule on cigarette tax to implement S.B. 248, 87th Leg., R.S. (2021), which requires a person in this state who receives unstamped cigarettes from a manufacturer, bonded agent, distributor, or importer to store the cigarettes exclusively in an interstate warehouse. The Comptroller also added a definition of cigar, to remove language regarding sales by a permitted bonded agent from a vehicle, and to provide that a permitted importer is required to be a permitted distributor.

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

Franchise Tax

Research and Development Credit

STAR Accession No. 202302002L (Feb. 6, 2023)
In this memo to Audit, Tax Policy summarizes the federal statutes and regulations relating to internal use software that have been incorporated by reference under Texas law for purposes of the franchise tax research & development credit and the sales tax research & development credit. Tax Policy notes the that current Rules 3.340 (Qualified Research) and 3.599 (Margin: Research and Development Activities Credit) give taxpayers the election between two different versions of Treas. Reg. § 1.41-4(c)(6): the version of that regulation adopted in 2003 as contained in IRB 2001-5 and the one proposed in 2002 as contained in IRB 2002-4.

Mixed Beverage Taxes

Complimentary Drinks
Comptroller’s Decision Nos. 117,222 and 117,223—The ALJ found that a taxpayer that owned and operated a bar that served complimentary drinks to guests, that followed a procedure to report its complimentary drinks, and that intended to accurately report its complimentary drinks did not prove by a preponderance of the evidence that the auditor erred in not making allowances for complimentary drinks. Mixed beverage permittees are required by rule to prepare a service check for each individual or party served complimentary drinks as if it were a normal sale but clearly marked as complimentary.[1] These service checks must be grouped daily and filed with a daily summary.[2] While the taxpayer entered complimentary drinks into spreadsheet summaries, it could not enter these drinks into its point-of-sale system.

Sales or Use Tax

Telecommunications Services

STAR Accession No. 202301018L (Jan. 3, 2023)
In this private letter ruling, the Comptroller ruled that a taxpayer that was providing a set of remote services that included electronic data transmissions and Voice over Internet Protocol for a lump-sum charge was providing taxable telecommunications services. The Comptroller also found that the taxpayer’s lump-sum on-site support and maintenance services on its customers’ software and hardware, some of which taxpayer sold to its customers was taxable as the repair and maintenance of tangible personal property. Finally, the Comptroller determined that taxpayer’s lump-sum add-on services, which involved specific tasks related to customers’ telephony and communication infrastructure, were taxable as the repair of tangible personal property, because the taxpayer was not able to confirm whether or not they sold the computer program to customers that was involved in the add-on services. The taxpayer claimed it wasn’t possible to determine what equipment, software, and software maintenance its customer purchased from taxpayer and what equipment, software, and software maintenance the customer purchased from other vendors. The Comptroller noted that a lump-sum charge that includes taxable and nontaxable items is fully taxable and that a taxpayer must keep records to substantiate any exclusion from sales and use tax.

Comptroller’s Decision No. 116,890 (2023)
The ALJ denied a telecommunications provider’s refund claim under Tex. Tax Code § 151.3186 (Property Used in Cable Television, Internet Access, or Telecommunications Services) for tax paid on the purchase of high-density poly pipe conduits, high-density polyethylene, polymer concrete, concrete assemblies, wire cage enclosures, precast shelters, handholes, corner clamp kits, panel rise frame kits, retracting bar, panels, cable managers, and cabinets. [3] The ALJ determined that these items didn’t qualify for refund under that provision because they were not directly used to actually transmit a signal during the performance of telecommunications services.

Audit Methodology

Comptroller’s Decision No. 118,144 (2023)
The ALJ upheld the auditor’s assessment of sales tax on a certain bank deposits when the taxpayer didn’t provide documentation supporting its contention the bank deposits were nontaxable credit card statements or personal loans.[4]

State and Local Tax Services

[1] 34 Tex. Admin. Code § 3.1001(k)(1)(E) (Mixed Beverage Gross Receipts Tax).

[2] Id.

[3] Section 151.3186 provides a refund for state (but not local) sales and use tax paid by a provider or subsidiary of a provider on the sale, rental, use, or consumption of tangible personal property that is directly used or consumed by the provider or subsidiary in or during the distribution of:
-the distribution of cable television service;
-the provision of Internet access service; or
-the transmission, conveyance, routing, or reception of telecommunications services.
-See also 34 Tex. Admin. Code § 3.345 (Annual Refund Program for Providers of Cable Television, Internet Access, or Telecommunications Services).

The amount of the refund is equal to:
the amount paid by the provider or during the calendar year on eligible property, if the total amount of tax paid by all providers and subsidiaries that are eligible for a refund is not more than $50 million for the calendar year; or
a pro rata share of $50 million, if the total amount of tax paid by all providers and subsidiaries that are eligible for a refund is more than $50 million for the calendar year.
Tex. Tax Code § 151.3186(d).

[4] Taxpayers are required to keep records that reflect the total gross receipts from sales and the total purchases of taxable items. Tex. Tax Code § 151.025 (Records Required to be Kept); 34 Tex. Admin. Code § 3.281(b) (Records Required; Information Required). A taxpayer also must produce contemporaneous records and supporting documentation appropriate to the tax or fee for the transactions in question to substantiate and enable verification of its claim of audit error. Tex. Tax Code § 111.0041(c) (Records; Burden to Produce and Substantiate Claims).

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

TL Fahring

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