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April 2011 TAX POLICY NEWS
a monthly newsletter about Texas tax policy

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FRANCHISE TAX

Hot Topics for the 2011 Filing

Franchise Tax Web Service – New for 2011 is the Franchise Tax Web Service. With this technology, software vendors can develop software to securely transmit franchise tax reports and payments to our office. Tax practitioners using this software will be able to electronically submit tax returns for their clients. Report and payment options vary by vendor. The software checks for accuracy which reduces rejected returns and streamlines the submission process. Tax preparers using this service can go online to review details relating to their franchise tax return status. This enables preparers to track processing and, if necessary, resubmit rejected returns with corrected data. An error-free return will process almost instantly to the taxpayer's account.

We also still offer the franchise tax WebFile and Smart Forms options. Be sure to use the PRINT button within the application to take advantage of the built-in edits that will check your return for accuracy. Using the print button on your Web browser bypasses the edit checks entirely, so let the edits work for you.

Passive Entity Reporting – Effective for reports originally due on or after Jan. 1, 2011, a passive entity that is registered, or required to be registered, with the Comptroller's office or the Secretary of State's Office is now required to file a No Tax Due Information Report (Form 05-163) (PDF, 93KB) to affirm that the entity qualifies as passive for the period upon which the tax is based. An entity that qualifies as passive is not required to file an Ownership Information Report.

Apportionment – The Texas franchise tax is apportioned to Texas using a single-factor apportionment formula based on gross receipts as specifically provided in Texas Tax Code Section 171.105. The apportionment provision in Texas Tax Code Chapter 141, related to the Multistate Tax Compact (MTC), does not apply to the revised Texas franchise tax, and entities may not elect to use the MTC's three-factor apportionment formula in lieu of the formula specified in Texas Tax Code Chapter 171.

Temporary Credit Election – A taxable entity elects to use the temporary credit by properly taking the credit on a report filed on or before the original or extended due date. Failure to blacken the circle for the 2008 Temporary Credit for Business Loss Carryforward on an Extension Request (Form 05-164) (PDF, 85KB) will not result in a loss of the temporary credit for the report year. A taxable entity filing a Franchise Tax Report (Form 05-158) (PDF, 254KB) must complete a Credits Summary Schedule (Form 05-160) (PDF, 78KB) if electing to use the temporary credit for business loss carryforward or if carrying over this year's temporary credit or the temporary credit from prior years.

Extensions and Mandatory Electronic Funds Transfer (EFT) – If an entity cannot file its annual report by the original due date, it may request an extension of time to file the report. If granted, the extension for a non-EFT payor will be through Nov. 15, 2011. EFT payors, see below. The extension payment must be at least 90 percent of the tax that will be due with the 2011 report or at least 100 percent of the tax reported as due on the 2010 franchise tax report (provided the prior report was filed on or before May 14, 2011).

The extension request must be made on Form 05-164 and must be postmarked on or before May 16, 2011. If a timely filed extension request does not meet the payment requirements, then penalty and interest will apply to any part of the 90 percent not paid by May 16, 2011, and to any part of the 10 percent not paid by Nov. 15, 2011. A taxable entity that became subject to the franchise tax during the 2010 calendar year may not use the 100 percent extension option. For information on combined group extensions, see below.

There are special provisions in the franchise tax law regarding filing extensions for taxpayers required to pay by EFT (mandatory EFT). The law provides for a first extension, from May 15 to Aug. 15, and for a second extension until Nov. 15.

For 2011, mandatory EFT taxpayers who submit an extension request by May 16 have an extended due date of Aug. 15 to file their reports or to request a second extension of time to file. If a mandatory EFT taxpayer does not request the second extension, a report filed after Aug. 15 is not timely and the taxpayer cannot claim the temporary credit and is subject to penalty and interest.

EFT payments must be initiated by 6 p.m. CST Friday, May 13, 2011, in order to be timely on Monday, May 16, 2011.

Combined Group Extensions – A combined group may only use the 100 percent extension option if the combined group has lost a member or if the members of the combined group are the same as they were on the last day of the period upon which the report due in the previous calendar year was based. A combined group must timely submit Forms 05-164 (PDF, 85KB) and 05-165 (PDF, 102KB) along with the required payment to request an extension of time to file its report.

HOTEL OCCUPANCY TAX

Renting Homes Via Social Media is On the Rise in Texas

Texas is seeing an increase in the number of homes offered as lodging accommodations through online social media marketing services. Social media marketing services make renting one's home easy, efficient and effective. Individual homeowners and leasing companies market homes and rental property via the Internet to persons seeking a place to stay for business trips, vacations and special events, such as music festivals and athletic contests.

Texas hotel tax law defines a hotel as a building in which members of the public obtain sleeping accommodations for consideration. The term includes a furnished home, house, apartment or condominium. Homeowners who rent their homes to members of the public are responsible under Texas Tax Code Section 156.053 for collecting and remitting a 6 percent tax on lodging charges, unless an exemption applies.

Persons and companies renting furnished homes to members of the public who have not registered for the 6 percent state hotel occupancy tax must submit a completed Texas Hotel Occupancy Tax Questionnaire (Form AP-102) (PDF, 393KB). Hotel tax is due on past rentals, as well.

Taxpayers requesting assistance to complete a form or to make payment arrangements should contact our Tax Assistance Section at (800) 252-1385 or a local Enforcement field office. Normal business hours are 8:00 a.m. to 5:00 p.m. Monday through Friday.

Local hotel occupancy tax is administered and collected by the local taxing jurisdiction. Homeowners should contact the county and, if applicable, city and special purpose district where the rental home is located to determine local hotel tax responsibilities.

Links to the state hotel tax questionnaire (PDF, 393KB), hotel occupancy tax reports (Form 12-100) (PDF, 93KB) and additional tax information, including our Hotel Occupancy Tax Exemptions publication (96-224), are available on the Hotel Occupancy Tax section of our website. State hotel occupancy tax reports can also be filed online through WebFile.

SALES TAX

Energy Star Sales Tax Holiday

In addition to the annual August clothing sales tax holiday, Texas shoppers get a break from state and local sales and use taxes during Memorial Day weekend every year on purchases of certain energy-efficient products.

This year the Energy Star Sales Tax Holiday begins Memorial Day weekend at 12:01 a.m. on Saturday, May 28, and ends at 11:59 p.m. on Monday, May 30.

Energy Star is a joint program of the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Energy (DOE). Earning the Energy Star means a product meets strict energy efficiency guidelines set by the EPA and the DOE.

The products qualifying for the exemption are:

  • air conditioners priced at $6000 or less;
  • clothes washers (but not clothes dryers);
  • ceiling fans;
  • dehumidifiers;
  • dishwashers;
  • light bulbs (incandescent and fluorescent);
  • programmable thermostats;* and
  • refrigerators priced at $2000 or less.

Qualifying products display the Energy Star logo on the appliance, the packaging or the Energy Guide label. The Energy Star program does not require Energy Guide labels on clothes dryers because all models use similar amounts of energy; therefore, one model is not considered more energy efficient than another. As a result, clothes dryers are not included in the items qualifying for exemption during this tax free weekend.

There are no limits on the number of items that may be purchased during the Energy Star Sales Tax Holiday, and an exemption certificate is not required.

This tax-free holiday also applies to some Internet and catalog sales of eligible products. Layaway plans can also be used to take advantage of the sales tax holiday, within certain parameters. See our FAQs for more information.

To learn more about cutting energy costs, visit the State Energy Conservation Office website.

*The Energy Star specification of programmable thermostats was suspended in 2009; however, existing stock of Energy Star programmable thermostats sold by retailers is still eligible for the exemption.

SALES TAX

Court Case Summary: Scaffolding is Taxable as Rental of Tangible Personal Property; Additional Claims Not Raised in the Administrative Hearing Cannot Be Raised in Motion for Rehearing

Combs et al. v. Chevron, Inc., 319 S.W.3d 836 (Tex. App. – Austin 2010, pet. denied).

Between 1993 and 1996, Chevron paid independent contractors to install temporary scaffolding at one of its refineries so that maintenance work could be performed on tall structures. Chevron paid sales tax on the transactions and then sought a refund from the Comptroller, claiming that it had purchased scaffolding installation, which it characterized as a nontaxable service. The Comptroller denied the refund claim, treating the purchase of temporary scaffolding as a taxable rental of tangible personal property.

In its motion for rehearing filed in the administrative hearing, Chevron added 98 new tax refund claims. Chevron then filed suit in district court to contest the denial of its refund claim, but challenged only the taxability of the installation of temporary scaffolding and two of the issues raised in the motion for rehearing. Chevron moved for partial summary judgment on the scaffolding claim, and the Comptroller filed a Plea to the Jurisdiction to contest the late-filed refund claims. The district court ruled for Chevron on both issues, and the Comptroller appealed.

On April 9, 2010, the Third Court of Appeals issued an opinion in favor of the Comptroller on both issues concluding that: (1) the installation of temporary scaffolding was properly taxed as the rental of tangible personal property; and (2) the trial court lacked jurisdiction on the late-filed tax refund claims that were raised for the first time in the taxpayer's motion for rehearing at the administrative level.

On Feb. 25, 2011, the Texas Supreme Court denied the petition for review filed by Chevron. The Supreme Court's denial of Chevron's petition for review preserved the Court of Appeals ruling in favor of the Comptroller.

Scaffolding is taxable as rental of tangible personal property.

With respect to the scaffolding claim, the facts showed that the only people who used the scaffolding to access high-up areas were the taxpayer's employees and maintenance contractors, whose services were not at issue. The court acknowledged that under Comptroller precedent, possession of the scaffolding was transferred to Chevron because it was Chevron's employees and contractors who used the scaffolding. This demonstrated that Chevron had operational control of the scaffolding. The court concluded that because possession of the scaffolding was transferred to Chevron, a “rental” occurred for Tax Code purposes.

Furthermore, even though the rental of scaffolding also involved attendant services, such as erection and inspection of the scaffolding, the court concluded that the essence of Chevron's scaffolding contracts was the rental of the scaffolding itself, not the attendant services. Chevron's underlying goal in executing the contracts was to facilitate maintenance work at its refinery. It was scaffolding, not the services incidental to use of scaffolding, that Chevron primarily wanted. Thus, its contracts were taxable as rentals of tangible personal property.

Additional claims not raised in the administrative hearing could not be raised in the taxpayer's motion for rehearing.

The Court of Appeals also held that the district court had no jurisdiction over the 98 contentions raised for the first time in Chevron's motion for rehearing during the administrative hearings process. The court held that, “in order to maintain an action against the Comptroller for a refund of taxes, a party must meet the procedural requirements of the tax protest law. Compliance with these procedures is a jurisdictional prerequisite for the trial court to hear and decide the merits of a tax refund suit. (citation omitted).

The administrative procedures for filing a tax protest are contained in Tax Code Sections 111.104 and 111.105. Section 111.104 requires that an initial refund claim must 'be written,' must 'state fully and in detail each reason or ground on which the claim is founded,' and must be 'filed before the expiration of the applicable limitation period.' Section 111.105(c) states that a 'tax refund claimant who is dissatisfied with the decision on the claim is entitled to file a motion for rehearing.' Tax Code Section 112.151 states categorically that a party must have followed the administrative procedures specified in both Sections 111.104 and 111.105 before it can bring a lawsuit on a tax refund claim.”

The court held that the statutory scheme makes clear that trial courts only have jurisdiction over tax refund claims that are first raised in accordance with Tax Code Section 111.104 and then appealed in a motion for rehearing under Tax Code Section 111.105. The court noted that there are two parts to the administrative procedure that creates trial-court jurisdiction over tax refund claims. Chevron completed only the second part, the filing of a motion for rehearing, for the claims that the Comptroller challenged in its plea to the jurisdiction. The court concluded that the trial court lacked jurisdiction over those claims because Chevron failed to fulfill all the administrative prerequisites to filing suit.

You may find this case on the Texas Third Court of Appeal's website.

ABOUT THE NEWSLETTER

The Comptroller's office publishes this newsletter to keep you informed about state taxes. Tax questions can be complicated, so please use these summaries as guidelines only.

For a Copy of a Proposed Rule

For a copy of a proposed rule or information about a proposed rule, write to Bryant Lomax, Tax Policy Division, 1700 North Congress Avenue, Austin, Texas, 78701-1436, or submit a request via Texas Tax Help.

For Publications, Rules or Other Tax Information

For a wealth of tax information sorted by tax type or by subject matter, please visit the Texas Taxes section of our website.

Contributors to This Month's Issue

Robin Corrigan, Elizabeth Davis, Don Dillard, Herman Mason, Lindey Osborne, Carol McAnnally, Jerry Oxford, Jo Samuel, Viki Smith, Karen Specht, Jennifer Specchio and Steve White

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