Legislative Update
February, 2000
Letter From Comptroller Rylander
All Taxes
Boat and Boat Motor Sales and Use Tax
Cigarette and Tobacco Products
Franchise Tax
Strategic Investment Areas
Tax Credits for Child Care
Fuels Tax
Hotel Occupancy Tax
Insurance Tax
Motor Vehicle Sales and Use Tax
Oyster Sales Fee
Petroleum Product Delivery Fee
Sales and Use Tax
Severance Tax
Special Fees
I am providing you with a summary of tax law changes enacted by the 76th Legislature. I am pleased to report that many of the proposals I recommended during my first term as Comptroller of the State of Texas are reflected in these new tax laws. When I took the oath of office this year, I pledged to use all my energy, enthusiasm, know-how, and dedication to establish a taxpayer fairness and accessibility plan. I promised that treating Texas taxpayers as second-class citizens would come to a screeching halt. And I am pleased to report that it has! This session I recommended several pieces of legislation, which lawmakers approved, that will improve taxpayer services:
- Pay interest to Texans for tax overpayments: The state will be required to pay interest to taxpayers who overpay their taxes. The rate paid by the state will be the same as the amount charged to tax delinquents-1 percent over the prime rate. Before this legislation, Texas was one of only two states not paying interest on tax overpayments, and Texas charged the 9th highest interest rate in the nation on tax underpayments.
- Enhance settlement authority: My office was given the authority to clear up the backlog of cases, bring quicker closure to cases, and avoid the hazards of litigation.
- Save time and money with managed self-audits by businesses: We will be allowing certain taxpayers to perform managed self-audits with state oversight, allowing my office to perform more audits, which will help us to devote resources to pursuing tax cheats instead of law-abiding citizens.
- Set customer services standards: Ensures that complaints and requests for information from Texans are handled by state agencies in a timely manner and that agencies are aware of the need to provide superior customer service.
Additionally, I made several internal changes aimed at improving taxpayer service, including:
- Take government to the people: Our administrative hearings have been taken on the road making the process more convenient and accessible to taxpayers.
- Deliver service with a Comptroller Bill of Rights: I added teeth to an internal Bill of Rights that promises taxpayers prompt and accurate responses to all requests for information; rules and regulations that are readily available and easy to understand; complaints handled fairly and in a timely manner; a fair, timely, and confidential tax process; and an equitable tax system.
I hope you will be pleased with these new services. If you have questions about the tax law changes, please call my toll-free tax assistance line at 1-800-252-5555. Sincerely,
Carole Keeton Rylander
Comptroller of Public Accounts
ALL TAXES ADMINISTERED BY THE COMPTROLLER
House Bill 3211
Rules on Acceptance of Charge Cards and Debit Cards
Effective—September 1, 1999
House Bill 3211 amends Section 403.023, Government Code, which previously authorized the Comptroller to adopt rules concerning the acceptance of credit cards for the payment of fees, taxes, and other charges assessed by state agencies. The amendment allows the Comptroller to also adopt rules concerning the acceptance of charge cards and debit cards for such payments. Written Approval
Effective—October 1, 1999
This bill also authorizes the Comptroller to establish procedures to ensure that an attorney, accountant, or other representative who files a document on behalf of a taxpayer is entitled to take that action. This can be done by filing a written authorization of for the taxpayer in whose name or on whose behalf the document is submitted. An officer, director, or other employee of the taxpayer whose duties include administering the taxpayer’s responsibilities may sign the authorization. This will clarify procedures for both the state and tax practitioners and will help ensure that confidential information and access to taxpayer accounts is not available to unauthorized persons. Senate Bill 1321
Interest on Delinquent Taxes
Effective—January 1, 2000
This bill changes the interest rate charged on delinquent taxes for report periods originally due after December 31, 1999 to a variable interest rate. The 12 percent yearly interest rate continues to apply to delinquent taxes for report periods originally due on or before December 31, 1999. The variable rate is the prime rate plus one percent as published in the Wall Street Journal on the first day of each calendar year that is not a Saturday, Sunday, or legal holiday. This interest rate applies to delinquent taxes imposed under Title 2 of the Tax Code and begins accruing 60 days after the due date. There are several exceptions: A purchaser of a motor vehicle who fails to pay the motor vehicle sales or use taxes by the due date owes penalty but no interest. Interest on inheritance tax begins to accrue one day after the due date of any unpaid tax, regardless of extension granted. Interest on delinquent fuel taxes paid under the International Fuels Tax Agreement (IFTA) will continue to accrue at a rate of 12 percent per year. Interest on Refunds
Effective—January 1, 2000
The bill also authorizes the Comptroller to pay the same variable interest rate on refunds of amounts erroneously paid for report periods due on or after January 1, 2000. The interest begins to accrue 60 days after the date of payment or the due date of the tax report, whichever is later. Interest does not accrue on a credit taken on a taxpayer’s return, nor does it accrue on a refund for a report period due before January 1, 2000. Fuels taxes paid under the International Fuels Tax Agreement (IFTA) and amounts paid under Title 6, Property Code, (unclaimed property) do not earn interest. Settlement Authority
Effective—August 30, 1999
The bill amends Sections 111.101 and 111.102 to allow the Comptroller to settle a claim for a tax, penalty, or interest if the Comptroller conclusively determines that the total costs of collecting the total amount due would exceed the amount due or that the total costs of defending a denial of the claim would exceed the amount claimed. Prior to this amendment, the Comptroller was authorized to settle taxes before a petition for redetermination was filed if the amount of tax due was $300 or less and as part of redetermination order if the tax due was not more than $1,000. In both cases, the cost of collection had to exceed the amount of tax due.
BOAT AND BOAT MOTOR SALES AND USE TAX
House Bill 579
Boat Tax Paid by Purchaser
Effective—September 1, 1999
Under this bill, if a purchaser paid to a dealer the sales tax imposed on the purchase of a boat or boat motor and the dealer failed to remit the tax to the state, the dealer rather than the purchaser will be held liable for the tax. However, the purchaser must provide documentation (a sales contract, bill of sale, or purchase receipt) proving that the tax was paid to the dealer.
CIGARETTE AND TOBACCO PRODUCTS TAXES
House Bill 3211
Reporting and Notification Changes
Effective—October 1, 1999
This bill changes the due date for the Texas Distributor Monthly Report of Cigarettes and Tax Stamps, the Texas Distributor Monthly Report of Cigars and Tobacco Products, and the Texas Manufacturer Monthly Report of Cigars and Tobacco Products to the last day of each month following the report period. The bill provides that a taxpayer must file a written request for redetermination not later than the 30th day after the date a notice of deficiency is issued, rather than the 15th working day after it is received. The bill also allows the Comptroller to notify taxpayers of permit suspensions or revocations, deficiency determinations, and redetermination hearings by personal service or regular mail rather than certified mail. House Bill 3600
Importing and Transporting Cigarettes into Texas
Effective—September 1, 1999
A person who imports and personally transports 200 or fewer cigarettes into this state from a foreign country must pay the cigarette tax and have a tax stamp affixed to each individual package of cigarettes. A person who imports and personally transports 200 or fewer cigarettes into this state from another state is still not required to pay the cigarette tax if the person uses the cigarettes and does not sell them or offer them for sale. Senate Bill 15
Prohibited Sales of Cigarettes
Effective—September 1, 1999
The bill removes an offense under Section 154.504 from the list of Class A misdemeanors. Section 154.504 provides that a person commits an offense and is subject to a $100 fine if the person sells cigarettes in quantities less than an individual package containing at least 20 cigarettes. Senate Bill 16
Tobacco Compliance Grant Program
Effective—September 1, 1999
This bill allows the Comptroller to work with other local law enforcement agencies, in addition to county sheriffs and municipal police departments, to enforce restrictions on the sale of tobacco products to persons under 18 years of age. The bill also expands the tobacco compliance grant program to include all local law enforcement agencies. Effective September 1, 1999, county constables and school-based police departments, in addition to county sheriffs and municipal police departments, may apply for tobacco compliance block grants awarded by the Comptroller to be used in enforcing the restrictions on the sale of tobacco products. Senate Bill 17
An Opportunity for a Hearing
Effective—September 1, 1999
Starting September 1, 1999, a notice and an opportunity for a hearing are required before the Comptroller may take disciplinary action against a cigarette permit holder and/or a cigars and tobacco products permit holder for tobacco compliance violations. Prior to this change in the law, a notice and a hearing were required before the Comptroller could take disciplinary action against a permit holder for tobacco compliance violations. Senate Bill 451
Direct Access to Tobacco Products
Effective—September 1, 1999
To make it more difficult for persons under 18 years of age to purchase cigarettes and tobacco products, the Health and Safety Code prohibits most retailers from giving their customers direct access to such products and to vending machines containing such products. The law lists several exceptions to this rule, and this bill adds an exception for package stores. As a result, customers on the premises of a business licensed as a package store under the Texas Alcoholic Beverage Code may have direct access to cigarettes and tobacco products and to vending machines containing cigarettes and tobacco products. Senate Bill 1122
“Grey Market” or “Repatriated” Cigarettes
Effective—September 1, 1999
It is illegal to place Texas cigarette tax stamps on packages of cigarettes that are labeled “For Export Only,” “U.S. Tax Exempt,” “For Use Outside U.S.,” or that have any other wording indicating that the manufacturer did not intend to sell the cigarettes in the United States. In addition, cigarette tax stamps may not be affixed to cigarette packages that are imported into the U.S. after January 1, 2000, in violation of 26 U.S.C. Section 5754. Packages of cigarettes must comply with the Cigarette Labeling and Advertising Act concerning labels, warnings, and other information placed on a package of cigarettes to be sold within the United States. The package labeling must not violate federal trademark or copyright laws. Also, effective September 1, 1999, selling improperly labeled cigarettes in Texas, whether stamped or unstamped, is a deceptive trade practice.
House Bill 2067
Banks and Savings and Loan Associations
Effective—for reports due on or after January 1, 2000
Banks and savings and loan associations will apportion interest and dividend receipts to the location of the payor. In other words, they will use the same interest and dividend sourcing methods used by other taxpayers. The location of the payor means the legal domicile of the payor. The legal domicile of a corporation is its state of incorporation. House Bill 3211
“Officer” Definition
This bill includes a provision that clarifies the definition of “officer” in connection with the compensation add-back for the earned surplus component:
• Any person designated as an officer is presumed to be an officer if that person:
(i) holds an office created by the board of directors or pursuant to the corporate charter or bylaws, and
(ii) has legal authority to bind the corporation with third parties by executing contracts or other legal documents.
• A corporation may rebut the presumption that a person is an officer if it conclusively shows, through the person’s job description or other documentation, that the person does not participate or have authority to participate in significant policymaking aspects of the corporate operations.Senate Bill 441
Small Business Relief
Effective – for reports due on or after January 1, 2000
A corporation will not owe any franchise tax if the gross receipts from its entire business for both taxable capital and taxable earned surplus purposes are each less than $150,000 during the period upon which the report is based. The corporation will be responsible for filing an abbreviated franchise tax information report, stating the amount of its gross receipts, along with a public information report. Economic Development Credits
Effective – for expenses and payments incurred, qualified investments or expenditures made, or new jobs created in Texas on or after January 1, 2000
The Legislature created three franchise tax credits for economic development and two credits for child care and before and after school care programs.. Eligible corporations may take advantage of these credits for certain research and development expenses and payments incurred, for qualified capital investments or expenditures made, or for certain new jobs created in Texas. Corporations who operate in strategic investment areas (SIAs) may qualify for special benefits, described below. An SIA is a Texas county with above state-average unemployment and below state-average per-capita income, or an area within Texas that has been designated by the federal government as an urban enterprise community or an urban enhanced enterprise community. For information and a list of designated SIAs, please see Strategic Investment Areas in this brochure. In addition, corporations primarily engaged in agricultural processing in a Texas county with a population of less than 50,000 may qualify for the jobs creation and capital investment credits. A list of those counties is included in the Strategic Investments Areas section of this brochure. The Comptroller will determine which areas qualify as SIAs by September 1 of each year and will publish a list and map of SIAs by October 1 of each year. The designation will be effective for the following calendar year for purposes of the credits. Additionally, a corporation will be allowed to claim a credit or carry forward a credit without regard to whether the SIA in which the corporation incurred expenses or made payments subsequently loses the SIA designation. We will provide forms on which to establish and claim the credits. The sum of the three credits cannot exceed 100 percent of a corporation’s franchise tax liability, after any other applicable tax credits. Research and Development (R & D) Credit
A corporation may claim a credit for certain incremental qualified research expenses incurred and basic research payments made for research conducted in Texas during the period upon which the tax is based. The law defines “basic research payment” and “qualified research expense” by referring reference to Section 41, Internal Revenue Code. Under that provision, “qualified research expenses” include expenses for research performed by the corporation, including wages for employees involved in the research activity, costs of supplies used in research, and payments to others for computer time used in qualified research. In addition, qualified research expenses include a portion of the expenses for research performed by other parties on the corporation’s behalf. “Basic research payments” include payments to qualified university or scientific organizations for research to advance scientific knowledge not having a specific commercial objective. Amount of Credit
For reports originally due prior to January 1, 2002, the R & D credit equals 4 percent of qualifying expenses and payments. For reports originally due on or after January 1, 2002, the credit equals 5 percent of qualifying expenses and payments. In computing the credit, a corporation will receive a bonus for any qualified R & D expenditures made in a strategic investment area (SIA). For reports originally due prior to January 1, 2002, a corporation may multiply by 1.5 the amount of any qualified R & D expenditures made in an SIA. For reports due on or after January 1, 2002, a corporation may double the amount of such expenditures made in an SIA. Although corporations primarily engaged in agricultural processing in a Texas county with a population of less than 50,000 may qualify for the jobs-creation and capital investment credit, they cannot qualify for the research credit bonus—unless the qualified R & D expenditures are made in an SIA. Limitations on Credit
For reports originally due on or after January 1, 2001, and before January 1, 2002, the total R & D credit is limited to 25 percent of the tax due on the report before other tax credits. For reports originally due on or after January 1, 2002, the total R & D credit for a report (including any credit carryforward) is limited to 50 percent. Any unused credit may be carried forward until the credit is used for up to 20 consecutive reports. A corporation that establishes an R & D credit cannot establish a jobs-creation credit in the same period. However, a corporation with an R & D credit carryforward may establish a jobs-creation credit in a period to which an R & D credit is carried forward. Example—Corporation A increases its qualified research expenses by $200,000 and makes basic research payments of $200,000 in Texas during calendar year 2000. Corporation A has a calendar year accounting period. The amount of R & D credit that Corporation A can establish on its 2001 annual report is $16,000 [$200,000 + $200,000 x 4%]. If Corporation A increased its qualified research and development expenses and made its basic research payments in an SIA, it would have been able to multiply the $400,000 amount by 1.5, totaling $600,000 for purposes of calculating the credit. The R & D credit would then have been $24,000 [$600,000 x 4%]. Corporation A’s franchise tax due before any other credits on its 2001 report is $40,000. The R & D credit is $10,000 and the $14,000 difference can be carried forward, until used, for 20 years. During calendar year 2001, Corporation A again increases its qualified research expenses by $500,000 and makes basic research payments of $500,000, both in an SIA. The amount of R & D credit that Corporation A can establish on its 2002 annual report is $100,000 [500,000 + 500,000 x 2 (SIA bonus) x 5%]. Corporation A’s franchise tax due before any other credits on its 2002 report is $250,000. The $100,000 credit from the 2002 report and the $14,000 carryforward from the 2001 report can both be used on the 2002 report. Let’s assume everything is the same, except that Corporation A calculates a tax due of $150,000 (rather than $250,000) before any other credits on its 2002 annual report. Corporation A could claim an R & D credit carryforward of $14,000 from the 2001 report, plus $61,000 credit from the 2002 report, for a total of $75,000 on its 2002 report. Corporation A would have a $39,000 credit to carry forward to the next year’s franchise tax report (or until the credit is used for up to 20 reports). Corporation A could establish a jobs-creation credit on its 2003 report, as well as apply its $39,000 R & D credit carryforward to the 2003 report. Jobs-Creation Credit
To be eligible for a jobs-creation credit, a corporation must be a qualified business and must create at least 10 qualifying jobs. In addition, the corporation must pay an average weekly wage for each year in which credits are claimed of at least 110 percent of the county-average weekly wage for the counties where the jobs are located. Qualified Business
A qualified business is an establishment primarily engaged in one of the following lines of business:
• agricultural processing—is activities described in the 1987 Standard Industrial Classification (SIC) Manual published by the federal Office of Management and Budget codes 2011-2099, 2211, 2231, or 3111-3199, such as manufacturing or processing foods and beverages for human consumption; weaving cotton and wool fabrics; and tanning, currying, and finishing leather and leather products. • providing central administrative office
services—examples include performing management or support services for related entities.
• manufacturing—is activities described in SIC codes 2011-3999, such as engaging in the mechanical or chemical transformation of materials or substances into new products; assembling component parts of manufactured products, if the new product is neither a structure nor other fixed improvement; and blending of materials, such as lubricating oils, plastic toxins, or liquors.
• distribution—is activities described in SIC codes 5012-5199, for example, the wholesale distribution of durable and/or nondurable goods, such as motor vehicles, furniture, lumber and other construction materials, professional and commercial equipment, electrical goods, hardware and plumbing and heating equipment, paper and paper products, apparel, and groceries.
• data processing—is activities described in SIC codes 7371-7379, such as computer programming, data processing, and other computer related services.
• research and development—is activities described in SIC code 8731, which are commercial physical and biological research and development provided on a contract or fee basis.
• warehousing—is activities described in SIC codes 4221-4226, such as public warehousing and storage.Qualifying Job
A “qualifying job” is a new permanent full-time job that is located in a strategic investment area, or, if the job is created by a business primarily engaged in agricultural processing, a Texas county with a population of less than 50,000. A “qualifying job” requires at least 1,600 hours of work a year, and pays at least 110 percent of the county average weekly wage for the county where the job is located. The job must be covered by a group health benefit plan for which the corporation pays at least 80 percent of the premiums or other charges assessed under the plan for the employee. The job must not be transferred from one area in Texas to another, and must not be created to replace a previous employee. A “qualifying job” must meet all of these requirements. Amount of Credit
The credit equals 25 percent of total wages and salaries paid for qualifying jobs for the applicable year. The credit must be taken in five equal installments over the five consecutive reports beginning with the report based upon the period during which the qualifying jobs were created. Limitations on Credit
The total credit for a report (including any credit carryforward) is limited to 50 percent of the tax due on the report before any other applicable credits. A corporation eligible for a credit from an installment that exceeds the 50 percent limitation amount may carry forward the unused portion of the installment until used for up to 5 consecutive reports. A corporation that establishes the jobs-creation credit cannot establish the R & D credit in the same period. However, a corporation with a jobs-creation credit carryforward may establish an R & D credit in a period to which a jobs-creation credit installment is taken or carried forward. Example— Corporation B is a qualified business that creates 10 qualifying jobs during calendar year 2000 for which it pays an average weekly wage of at least 110 percent of the county-average weekly wage. Corporation B has a calendar year accounting period. The total wages and salaries paid for these 10 qualifying jobs during calendar year 2000 is $400,000. The amount of the credit is $100,000 [$400,000 x 0.25]. The amount of each installment is $20,000 [$100,000 divided by 5]. Corporation B’s franchise tax due before any other credits on its 2001 annual report is $36,000. The jobs-creation credit is limited to $18,000, and the $2,000 difference can be carried forward, until used, for up to five consecutive reports. Corporation B creates 4 additional qualifying jobs during calendar year 2001. Corporation B does not qualify for a new job creation credit for calendar year 2001 because it created fewer than 10 new jobs during the year. Had Corporation B created at least 10 new jobs during 2001, then Corporation B would have established a new credit. Let’s assume that Corporation B created 15 new jobs during 2001. The total wages and salaries for the 15 new qualifying jobs during calendar year 2001 is $600,000. The amount of the credit is $150,000 [$600,000 x 0.25]. The amount of each installment is $30,000 [$150,000 divided by 5]. Corporation B’s franchise tax due before any other credits on its 2002 annual report is $200,000. The $30,000 installment for the 2002 annual report, the $20,000 installment (the second of five from the wages and salaries paid in the year 2000) and the $2,000 carryforward from the 2001 annual report can all be used on the 2002 annual report. Loss of Credit
The jobs-creation credit expires and remaining installments may not be taken if, during one of the 5 years in which the credit installment accrues, the number of full-time employees falls below the number of employees the corporation had in the year it qualified for the credit. The corporation may still take any portion of an installment that accrued in a previous year and was carried forward. Capital-Investment Credit
A corporation may use a capital investment credit to reduce its franchise tax liability. To take advantage of this credit a corporation must: • be a qualified business—using the same definition as “qualified business” for purposes of the jobs-creation credit;
• pay an average-weekly wage at the location where the credit is claimed that is at least 110 percent of the county-average weekly wage in the county where the job is located;
• offer a specified group health benefit plan to all full-time employees, for which the corporation pays at least 80 percent of the costs; and
• make a minimum $500,000 qualified capital investment (QCI).Qualified Capital Investment (QCI)
A qualified capital investment is tangible personal property first placed in service in an SIA, or, if the QCI is made by a corporation primarily engaged in agriculture processing, first placed in service in a Texas county with a population under 50,000. Tangible Personal Property
For purposes of this credit, tangible personal property means engines, machinery, tools, etc., used in a trade or business or held for investment and subject to depreciation or amortization, as described in Section 1245(a) of the Internal Revenue Code. The term includes tangible personal property leased under a capitalized lease. A “capitalized lease” means a transaction that is classified as a purchase for federal income tax purposes even though it is called a “lease.” For purposes of this credit, tangible personal property does not include:
• real property or buildings (and their structural components, such as building materials);
• property leased under an operating lease; and
• property that the corporation elects to expense under Section 179 of the Internal Revenue Code. (Section 179 allows a taxpayer to expense part of the cost of certain tangible personal property, rather than recover the cost over a number of years through depreciation.)Amount of Credit
The credit equals 7.5 percent of the qualified capital investment during the period upon which the tax is based. The credit must be taken in five equal installments over the five consecutive reports beginning with the report based upon the period during which the QCI was made. Limitations on Credit
The total credit for a report (including any credit carryforward) is limited to 50 percent of the tax due for the report before other applicable tax credits. A corporation eligible for a credit from an installment that exceeds the 50 percent limitation amount may carry forward the unused portion of the installment until used for up to 5 consecutive reports. A corporation that establishes a capital investment credit cannot claim the enterprise zone deduction authorized under Section 171.1015. (A corporation designated as an enterprise project may reduce its apportioned taxable capital or apportioned taxable earned surplus by qualifying capital investments made in the enterprise zone in which the enterprise project is located. For more information about the enterprise zone deduction, see Franchise Tax Rule 3.561.) Example— Corporation C is a qualified business that purchases and places in service on December 1, 2000, in an SIA, a $1 million piece of machinery. Corporation C has a calendar year accounting period. The amount of the credit is $75,000 [$1,000,000 x 7.5%]. The amount of each installment is $15,000. Corporation C’s franchise tax due before any other credits on its 2001 annual report is $24,000. The capital investment credit is $12,000 and the $3,000 difference can be carried forward, until used, for 5 years. Corporation C’s franchise tax due before any other credits on its 2002 annual report is $50,000. The $15,000 installment (the second of five from the investment made in the year 2000) and the $3,000 carryforward can both be used on the 2002 annual report. Loss of Credit
The capital investment credit expires and remaining installments may not be taken if, during any one of the 5 years in which the credit installment accrues, the corporation:
• disposes of the QCI;
• takes the QCI out of service;
• moves the QCI out of state; or
• fails to make wage payments as required by the law.
The corporation may still take the portion of an installment that accrued in a previous year and was carried forward.
Senate Bill 441 defined a Strategic Investment Area (SIA) as an area that is:
• A county within this state with above state-average unemployment and below state-average per-capita income; or
• An area within this state that is a federally designated urban- enterprise community or an urban-enhanced enterprise community.
115 counties qualify as full-purpose SIAs based on their relative unemployment rate and per-capita income. This designation is only good for expenditures made during calendar year 2000 (January 1 through December 31, 2000).
Federal urban enterprise communities are federally designated zones that confer federal benefits to persons and/or businesses located in a zone. Federal benefits include grants for neighborhood improvement, business access to federal loan programs, etc. Zones are typically sponsored by a city government and have specific goals related to that city. Thus, the benefits to business vary by zone.
A federal designation also confers a state enterprise zone designation, which allows businesses an additional benefit in state sales and franchise tax concessions.
This federal program is administered by the Department of Housing and Urban Development (HUD). The Texas Department of Economic Development coordinates the program and application process for Texas local governments.
This designation is only good for expenditures made during calendar year 2000 (January 1 through December 31, 2000). This designation will permit firms engaged in manufacturing, warehousing, wholesale distribution, or computer services or research laboratories to apply for jobs-creation and investment credits. Additionally, this designation will allow any corporation to apply for a research credit bonus.
Counties eligible for the full SIA designation can be viewed on Window on State Government under Franchise Tax - Strategic Investment Areas.
Four additional areas in the state qualify as full-purpose SIAs based on their selection as a federal urban enterprise community. This designation is only good for expenditures made during calendar year 2000 (January 1 through December 31, 2000). These areas are located in parts of Dallas, Harris, Bexar and McLennan counties. Businesses operating in these federally designated zones within these counties engaged in manufacturing, warehousing, wholesale distribution, computer services or research laboratories are eligible to apply for jobs-creation and investment credits. In addition, businesses operating in these federally designated zones will be eligible to apply for a research credit bonus. Corporations engaged in agricultural processing in counties with a population of less than 50,000 can apply for the job jobs-creation and investment credits. We have referred to these counties as limited-purpose SIAs. This designation is only good for expenditures made during calendar year 2000 (January 1 through December 31, 2000). There are 105 counties that qualify for the limited-purpose designation based on population. For a list of these counties, see Strategic Investment Areas on Window on State Government.
The Legislature created two franchise tax credits related to child care and before and after school care programs. Eligible corporations may take advantage of these credits for qualifying expenditures made in Texas on or after January 1, 2000. We will provide forms on which to establish and claim the credits. Child Care Credit
To be eligible for a child-care credit, a corporation must make certain qualifying expenditures for child care in Texas during the period upon which the tax is based. Qualifying expenditures include amounts paid to establish and/or operate a day-care center primarily to provide care for the children of employees of the corporation or of the corporation and one or more other entities sharing the costs of establishing and operating the center. Qualifying expenditures also include amounts paid to purchase child-care services provided to the children of the corporation’s employees at a day-care center or a family home registered with the Department of Protective and Regulatory Services under Chapter 42, Human Resources Code. Qualifying Expenditures
Specific expenditures that qualify include amounts for: • planning the day-care center;
• preparing a site to be used for the day-care center;
• constructing the day-care center;
• renovating or remodeling a structure to be used for the day-care center;
• expanding the day-care center;
• purchasing equipment necessary in the use of the day-care center and installed for permanent use in or immediately adjacent to the day-care center, including kitchen appliances and other food preparation equipment;
• maintaining and operating the day-care center, including paying direct administration and staff costs; and
• purchasing all or part of qualifying child-care services that are actually provided to children of employees of the corporation at a day-care center or registered family home.Amount of Credit
The credit is the lesser of $50,000 or 50 percent of qualifying expenditures. Limitations on Credit
The credit is limited to 90 percent of the tax due on the report. A corporation may not carry forward any unused portion of a child-care credit to future reports. Example—Corporation A makes qualifying expenditures of $80,000 during calendar year 2000. Corporation A has a calendar year accounting period. The amount of the credit on Corporation A’s 2001 annual franchise tax report is $40,000 [the lesser of $50,000 or 50% of $80,000]. Corporation A’s franchise tax due before the credit on its 2001 annual report is $300,000. Corporation A’s child-care credit on its 2001 annual report is $40,000. Credit for Contributions to Before-and-After-School-Care Programs
To be eligible for a credit, a corporation must make certain qualifying expenditures to a program the primary purpose of which is to provide “school-age child care” in Texas . “School-age child care” means care provided before and after school and during summer and holidays for children from five through 13 years old. Qualifying Expenditures
Qualifying expenditures include amounts for:
• constructing, renovating, or remodeling a facility or structure to be used by the program;
• purchasing necessary equipment, supplies, or food to be used in the program; and
• operating the program, including administrative and staff costs.Qualified Program Operators
Qualifying expenditures must be related to a school-age child-care program operated by:
• a nonprofit organization licensed under Chapter 42, Human Resources Code;
• a nonprofit, accredited educational facility or by another nonprofit entity under contract with the educational facility, if the Texas Education Agency or Southern Association of Colleges and Schools has approved the curriculum content of the program operated under the contract; or
• a county or municipality, if the governing body of the county or municipality annually adopts standards of care that include minimum child-to-staff ratios; staff qualifications; facility, health, and safety standards; and mechanisms for monitoring and enforcing the standards.Amount of Credit
The credit is 30 percent of qualifying expenditures during the period upon which the tax is based. Limitations on Credit
The credit is limited to 50 percent of the amount of net tax due after applying any other credits. There is no provision to carry forward any unused portion of the credit to future reports. If a corporation cannot establish that the facilities, equipment, supplies, food, administrative services, staff services, and other permitted expenditures are primarily used for the before-and-after-school-care program, the corporation is not eligible for this credit. Example— Corporation B makes qualifying expenditures of $100,000 during calendar year 2000. Corporation B has a calendar year accounting period. The amount of the credit on Corporation B’s 2001 annual franchise tax report is $30,000 [$100,000 x 30%]. Corporation B’s franchise tax due after all other credits are applied on its 2001 annual report is $300,000. Corporation B’s credit for contributions to before-and-after-school-care programs on its 2001 annual report is $30,000.
House Bill 3159
Tax Exemption and New Fee For Commercial Passenger Vehicles Operating On Fixed Routes
Effective—September 1, 1999
The law was amended to exempt diesel fuel used exclusively by commercial motor vehicles to transport passengers for compensation or hire between points in Texas on fixed or scheduled routes. To qualify for the tax exemption, the commercial motor vehicle must have a registered gross weight of more than 26,000 pounds or be designed to transport more than fifteen passengers, including the driver. This exemption does not apply to diesel fuel sold to a political subdivision. Persons using diesel fuel that qualifies for this exemption will be assessed a new school fund benefit fee of $0.04875 per gallon, which will be credited to the available school fund.
An entity that qualifies for the exemption must pay the motor fuel tax to its supplier on all purchases of diesel fuel, then file a claim for refund with the Comptroller in the calendar month following the month in which the diesel fuel is used while traveling fixed or scheduled routes in this state.
Persons using diesel fuel that qualifies for this exemption will be assessed a new school fund benefit of $0.04875 per gallon, which will be credited to the Available School Fund. The amount of school fund benefit fee due for each monthly reporting period will be paid from the proceeds of an entity’s monthly claim for refund of motor fuel taxes. Senate Bill 329
Odd-Numbered Years
Effective—September 1, 2001
Permitted gasoline distributors and diesel fuel suppliers will no longer be required to make an early prepayment for the motor fuel taxes due in August of odd-numbered years. The estimated prepayment is still due in August of 1999 and in August of 2001. Senate Bill 1547
Changes to the Fuels Tax Code
Effective—September 1, 2000
Under this bill, a number of significant changes have been made to the current Motor Fuels Tax Code.
• The bill will require all common and contract carriers operating in Texas to register with the Comptroller and file quarterly reports showing detailed information on the interstate and intrastate transportation of motor fuels.
• New restrictions have been placed on the use of signed statements for tax-free purchase of diesel fuel. A person who wants to use a signed statement to purchase up to 10,000 gallons per month of dyed diesel fuel for off-highway use is required to apply to the Comptroller for an end user number to be used in conjunction with a signed statement. The end user number may only be used to purchase tax-free dyed diesel fuel from a permitted supplier. An end user must pay tax when purchasing undyed (clear) diesel fuel but is eligible to file for a refund on fuel used in off-highway equipment.
A person who uses diesel fuel exclusively for an agricultural purpose in off-highway equipment and wants to issue a signed statement to purchase less than up to 10,000 gallons per month of tax-free dyed or undyed (clear) diesel fuel is required to apply to the Comptroller for an agricultural user exemption number to be used in conjunction with a signed statement. An agricultural user may furnish a permitted supplier a signed statement for purchasing dyed or undyed diesel fuel.
• The bill eliminates the previous bonded user permit and replaces it with a dyed diesel fuel bonded user permit and an agricultural bonded user permit. A dyed diesel fuel bonded user permit allows a person to purchase only dyed diesel fuel tax free for use in off-highway equipment. A dyed diesel fuel bonded user must pay tax when purchasing undyed (clear) diesel fuel but is eligible for a refund on fuel used in off-highway equipment.
• An agricultural bonded user permit allows a person to purchase dyed and undyed diesel fuel to be used exclusively for off-highway agricultural purposes. Only agricultural users will be able to purchase tax free undyed (clear) diesel fuel.
• A person who imports motor fuel to a destination in Texas or exports motor fuel to a location outside this state by any means must possess a shipping document for the fuel created by the terminal or bulk plant at which the fuel was received. The shipping document must contain specific information and copies must be maintained by the terminal, the bulk plant, the carrier, the permitted distributor or supplier, the importer, the exporter, and the person receiving the motor fuel for a period of four years.
• The bill requires that a person who acquires motor fuel for import by cargo tank into Texas must obtain an import verification number from the Comptroller before importing fuel into the state.
• The bill requires that a person obtain a diversion number from the Comptroller before diverting a delivery of a single cargo tank of motor fuel from the destination state printed on the shipping document.
• The records maintained by a diesel fuel supplier must include itemized statements showing by load number the number of gallons of both dyed and undyed diesel fuel received for export, exported, and imported.
• The bill requires that the seller of dyed diesel fuel post a notice stating “Dyed Diesel Fuel, Nontaxable Use Only, Penalty for Taxable Use” at each location where fuel is sold. The seller must provide this notice to every person that purchases dyed diesel fuel.
• Under the amended law, a person is prohibited from operating a motor vehicle on a public highway in this state with taxable motor fuel that contains dye unless the use of dyed diesel fuel is lawful under federal law. Taxable diesel fuel containing dye may be used in state and local government vehicles or busses.
• Prior to the effective date of this bill, permitted distributors and suppliers were allowed a deduction of two percent of the taxable gallons of gasoline or diesel fuel sold or used as compensation for collecting, accounting, reporting, keeping records, and remitting the tax collected to the Comptroller. This bill prohibits the Comptroller from allowing the two-percent deduction unless the tax is timely paid to the Comptroller.
House Bill 1014
Exemptions
Effective—September 1, 1999
Under this bill, a nonprofit organization or corporation exclusively operated for cleaning beaches is exempt from the state hotel occupancy tax. Organizations qualifying for this exemption should request a letter of exemption from the Comptroller’s Office. The definition of an “institution of higher education” has been amended to include only Texas organizations defined in Section 61.003, Education Code. This means that out-of-state public and private universities and colleges are no longer exempt from state hotel tax. The amendment does not affect the exemption for Texas public or private universities and colleges located in Texas, or independent school districts or public or private elementary and secondary schools of this and other states. The new law requires an allocation of state hotel tax revenues to an eligible general-law coastal municipality. One percent of the state hotel tax collected from hotels located in the city of South Padre Island will be allocated to the city for use in cleaning and maintaining public beaches in the city. House Bill 3211
More Exemptions
Effective—October 1, 1999
This bill codifies a 1996 district court decision regarding the hotel tax exemption for federal government agencies and their employees traveling on official business. Federal government agencies and their employees traveling on official business may claim a hotel tax exemption with the hotel. State agencies and state employees (except state employees issued a special hotel tax exemption identification card) must pay the state and local hotel tax to the hotel. The state agency may request a refund of the hotel tax paid from the Comptroller and from appropriate city and county taxing authorities.
House Bill 1837
Flat Tax Rates for Property and Casualty and Title Insurers; Definition of Premium for Independently Procured Insurance; Retaliatory Tax Clarification
Effective—for tax years beginning on or after January 1, 2000
Prior to the enactment of this bill, licensed property and casualty and title insurers paid premium taxes using tiered tax rates based on their qualifying investments in Texas as compared to the same types of investments in other states. With this change in the statutes, property and casualty insurers are subject to a flat tax rate of 1.6 percent, and title insurers are subject to a flat 1.35 percent tax rate. This bill made clarifications and other changes to the retaliatory tax statute applicable to licensed insurers domiciled in states other than Texas. The retaliatory tax is due from these insurers when their state of domicile assesses a higher aggregate tax and fee burden on Texas domestic insurers operating in their state than the State of Texas assesses on such insurers operating in Texas. The bill also clarified the definition of premium for taxation purposes of insurance “independently procured” outside the State of Texas from non-licensed insurers when such insurance was on Texas risks. Such taxes are due from policyholders at a 4.85 percent tax rate. House Bill 3211
Surplus Lines Tax Account Revisions; .Exemptions for Certain Coverage for Higher Education Employees and Public School Employees
Effective—October 1, 1999
This bill removes the requirement for licensed Texas surplus lines agents to maintain a separate tax trust account for taxes collected on policies sold through the surplus and excess lines insurance market. It requires agents to make prepayments of such taxes by the 15th of the month following the month in which $70,000 or more in premium taxes due the state accrues and further provides that agents may report and pay such premium taxes on either a premium-received or premium-written basis. These changes take effect January 1, 2000, and apply to reporting periods beginning on or after that date. This bill also clarified existing premium tax exemptions for licensed insurance companies and health maintenance organizations writing group insurance coverages under the Texas College and University Employees Uniform Insurance Benefits Act and under the Texas Public School Employees Group Insurance Act. Premiums on such insurance are exempt from all state taxes, including premium and maintenance taxes and other regulatory fees. In addition, this bill changed the due date for premium taxes on insurance “independently procured” outside of this state from non-licensed insurers. Such taxes are due from policyholders. The previous due date was March 1 of the year following the issuance of such policies, and the new due date is May 15, the same as the original due date for franchise tax. House Bill 3697
Disposition of Certain Surpluses of the Workers’ Comp Insurance Fund
Effective—August 30, 1999
The Texas Workers’ Compensation Insurance Fund (the Fund) was created by the Legislature in 1991 to act as the insurer of last resort in the placing of workers’ compensation insurance in this state. The Legislature authorized the issuance of $300 million in revenue bonds to provide initial operating expenses and provide coverage through the Fund. The payment on these bonds was made by assessing a maintenance tax surcharge against all insurers writing workers’ compensation insurance in this state. Approximately $200 million has been collected from such insurers and “certified self-insurers” for bond debt payment purposes. Since the Fund was required to insure any employers requesting workers’ compensation coverage, regardless of their loss experiences, the Fund was granted a 2 percent premium and maintenance tax credit each year, equal to 2 percent of their premium for the year, to offset anticipated losses. The Fund was also excluded from being a member of the Property and Casualty Insurance Guaranty Fund Association. Recently the Fund has retired the remaining bond debt; therefore, the surcharge will no longer be collected. This bill requires the Fund to refund, out of its surplus, all of the surcharge paid by such insurers and certified self-insurers. The insurers are required to refund the surcharge on a pro-rata basis to all policyholders with policies effective during the periods beginning January 1, 1991 through December 31, 1996. In addition, the bill removes the 2 percent tax credit and, effective January 1, 2000, makes the Fund a member of the Guaranty Fund Association. Senate Bill 530
Single Non-Profit Trust Exemption
Effective—January 1, 2000
Prior to enactment of this bill, insurance premiums on certain group health, accident, and life policies covering municipal and county employees were exempt from premium taxes. The bill expands the exemption to include coverage for employees of hospital districts and employees of county or municipal hospitals where the premiums are paid from a single non-profit trust for the sole purpose of funding such benefits.
MOTOR VEHICLE SALES OR USE TAX
House Bill 351
Civil Liability/Audit of County Tax Assessor-Collector
Effective—September 1, 1999
This bill establishes the Comptroller’s authority to audit a county tax assessor-collector’s records and the time period within which the Comptroller may commence a civil action against the tax assessor-collector. If the Comptroller conducts an audit, it must be initiated within one year of the end of the assessor-collector’s term of office and completed not later than the second anniversary of the date the term of office ends. The Comptroller may then commence a civil action against the assessor-collector no later than four years after the audit is completed. If the Comptroller does not conduct an audit, any civil action must be brought within four years from the end of the assessor-collector’s term of office. House Bill 2140
New Residents/Leased Vehicles
Effective—September 1, 1999This bill increases from $15 to $90 the use tax imposed on a new resident of Texas who brings into the state a motor vehicle that was registered previously in the new resident’s name in another state or foreign country. The bill also imposes the new resident use tax on a motor vehicle brought into Texas by a new resident who leased the vehicle in another state or foreign country. In the past, a new resident was required to pay 6.25 percent motor vehicle use tax on such leased vehicles brought into the state. House Bill 3072
Taxable Value/Cash Back
Effective—August 30, 1999
This bill provides that a purchaser may reduce the taxable purchase price of a new vehicle by the total amount allowed by the dealer on a traded-in vehicle, including any cash equity given back to the purchaser. House Bill 3211
Available Fair Market Value Deductions for Leasing Companies
This provision clarifies that a leasing company may deduct the fair market value of a vehicle retired by certain other leasing companies in computing the taxable value of a purchase of a new vehicle. In order to qualify to use another leasing company’s retired vehicle as a deduction, one of the companies must hold at least 80 percent beneficial interest in the other leasing company; or one of the leasing companies must acquire all of its vehicles exclusively from franchised dealers whose franchiser shares common ownership with the other leasing company. Unremitted Tax Paid To A Motor Vehicle Dealer
This amendment clarifies that a purchaser who paid tax to a dealer will not be held liable for motor vehicle sales tax if the dealer failed to submit the tax and file the paper work to transfer the title and registration. The purchaser must give the county tax-assessor collector documentation that tax was paid to the dealer. The county tax-assessor will notify the Comptroller of the dealer’s failure to remit the tax. Senate Bill 977
Timber Operations
Effective—October 1, 2001
Senate Bill 977 exempts the purchase, purchase for lease, and rental of a machine or trailer used primarily for timber operations.
Senate Bill 1685
Fees on Oysters
Effective—June 19, 1999
Under this bill, the responsibility for collecting the Oyster Sales Fee is transferred from the Texas Department of Health (TDH) to the Comptroller. The Comptroller is required to collect a fee of $1 per barrel of oysters from the first certified shellfish dealer who harvests, purchases, handles, or processes oysters taken from Texas waters. For purposes of assessing the fee, three 100-pound containers of oysters are the equivalent of one barrel of oysters. A certified shellfish dealer may not purchase or pack oysters in containers that, when packed, exceed 110 pounds in weight. A dealer who violates this weight limit is liable for a penalty of $5 for each container that exceeds 110 pounds. The Oyster Sales Fee, and any penalty for exceeding the weight limit, are due not later than the 20th day of the month following the month in which the barrel of oysters was handled. A dealer who fails to pay the fee or penalty by the due date is liable for an additional penalty of 10 percent of the amount of the fee or penalty due. Under the bill, the Comptroller is required to certify to the TDH that a fee is past due, and to certify to the TDH when a certified shellfish dealer has refused to pay the fee, penalty, or additional penalty on written demand. This office will send a monthly report to the Texas Department of Health listing the amount of oyster sales fees and any penalties that are collected.
PETROLEUM PRODUCT DELIVERY FEE
House Bill 2816
Fee Rate Change
Effective—September 1, 1999
This bill decreases the Texas petroleum product delivery fee by 25 percent. The decreased fee will apply to petroleum products withdrawn from a bulk facility and delivered into a cargo tank or barge or imported into this state on or after September 1, 1999. The bill provides that the fee will not be collected when the unobligated balance in the petroleum storage tank remediation account equals or exceeds $100 million dollars, rather than $125 million as the law provided in the past. The expiration date of the reimbursement program is changed from September 1, 2001 to September 1, 2003, and the fee may not be collected on or after March 1, 2002.
House Bill 652
Exemption for Adjustable Eating Utensil
Effective—July 1, 1999
This bill amends Tax Code §151.313(a) to provide an exemption from sales and use tax for the purchase of an adjustable utensil that facilitates independent eating. The specialized utensil must be purchased for use by an individual who does not have full use or control of his or her hands or arms, for example, because the person is elderly or physically disabled, has had a stroke, or is a burn victim. House Bill 871
Animals Sold By Nonprofit Animal Shelters
Effective—July 1, 1999
This bill exempts the sale, including the acceptance of a fee for adoption, of an animal by a nonprofit animal shelter. An “animal shelter” is a facility that keeps or legally impounds stray, homeless, abandoned, or unwanted animals. House Bill 2146
Coin-Operated Vending Machines
Effective—July 1, 1999
The bill exempts toys designed primarily for children, food (but not beverages), candy, and chewing gum if they are sold through a coin-operated bulk vending machine for 50 cents or less, rather than 25 cents or less as the law previously provided. House Bill 2406
Refund of Tax Paid On Exports
Effective—September 1, 1999
This bill imposes a time period before which a retailer may not refund the sales tax on items exported outside of the United States if the export documentation provided by the purchaser is a State of Texas Licensed Customs Broker’s Export Certification. Retailers in counties bordering Mexico may not refund tax before the 24th hour after the time the goods are shown to be exported on the customs broker’s certification. Retailers in counties not bordering Mexico may not refund tax before the seventh day after the date of export shown on the documentation. These time restrictions apply to refunds claimed on or after January 1, 2000. House Bill 2858
Transit Authority Approval
Effective—June 19, 1999The governing board of a transit authority may not repeal or reinstate the transit authority sales tax exemption for telecommunications services unless the action is approved by a majority of the members of the governing body of each municipality that created the transit authority. This change applies only to an exemption that has not been repealed before June 19, 1999, and to transit authorities created under Chapter 451, Transportation Code, which currently are the Austin Metropolitan Transit Authority (MTA), Corpus Christi MTA, Houston MTA, and San Antonio MTA. House Bill 3211
Tax-Free Sales or Auctions
Effective—October 1, 1999
An organization created for religious, educational, or charitable purposes, an organization qualifying for an exemption from federal income taxes under Section 501(c)(3), (4), (8), (10), or (19), Internal Revenue Code, and each chapter of these organizations may hold two one-day tax-free sales during a calendar year. However, this exemption did not apply to items sold for more than $5,000. This bill extends the exemption to include sales of items for more than $5,000 if the items are manufactured by or donated to that qualified organization and are not sold to the donor. University and College Student Organizations
Effective—October 1, 1999
The sales tax law also provides that a qualified student organization may hold a one-day tax-free sale each month to raise funds for the organization. However, this exemption did not apply to items sold for more than $5,000. This section of the bill exempts an item sold for more than $5,000 if the item is manufactured by the organization. Additionally, the bill exempts the sale of an item for more than $5,000 if the item is donated to the organization and is not sold to the donor. Educational Organizations
Effective—October 1, 1999
Under this bill, the exemption for amusement services provided by educational organizations extends to public, as well as private, institutions of higher education. Audio and Video Tapes of Exempt Periodicals and Writings
Effective—October 1, 1999
No sales tax will be due on audio tape, videotape, and computer disks of periodicals and writings published and distribution distributed by religious, philanthropic, charitable, historical, and similar nonprofit organizations. Natural Gas and Electricity
This section of House Bill 3211 rewrites (without changing) the exemptions provided for natural gas and electricity in a manner that is easier to understand. House Bill 3211 also includes a provision that clarifies the exemptions provided for manufacturers. Here’s a brief summary of the items manufacturers may purchase tax free:
• Tangible personal property that will become an ingredient or component part of tangible personal property manufactured, processed, or fabricated for ultimate sale.
• Tangible personal property directly used or consumed in or during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use of the property is necessary or essential to the manufacturing, processing, or fabrication operation and directly makes or causes a chemical or physical change to the product being manufactured, processed, or fabricated for ultimate sale or to any intermediate or preliminary product that will become an ingredient or component part of the product being manufactured, processed, or fabricated for ultimate sale.
• Services performed directly on the product being manufactured prior to its distribution for sale to make the product more marketable.
• Actuators, steam production equipment and its fuel, in-process flow through tanks, cooling towers, generators, heat exchangers, transformers and the switches, breakers, capacitor banks, regulators, relays, reclosers, fuses, interrupters, reactors, arrestors, resistors, insulators, instrument transformers, and telemetry units that are related to the transformers, electronic control room equipment, computerized control units, pumps, compressors, and hydraulic units, that are used to power, supply, support, or control equipment that qualifies for exemption under certain provisions of the manufacturing exemption or to generate electricity, chilled water, or steam for ultimate sale.
• Transformers located at an electric generating facility that increase the voltage of electricity generated for ultimate sale, the electrical cable that carries the electricity from the electric generating equipment to the step-up transformers, and the switches, breakers, capacitor banks, regulators, relays, reclosers, fuses, interruptors, reactors, arrestors, resistors, insulators, instrument transformers, and telemetry units that are related to the step-up transformers.
• Transformers that decrease the voltage of electricity generated for ultimate sale and the switches, breakers, capacitor banks, regulators, relays, reclosers, fuses, interruptors, reactors, arrestors, resistors, insulators, instrument transformers, and telemetry units that are related to the step-down transformers.
• Tangible personal property used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use is necessary and essential to a pollution control process.
• Lubricants, chemicals, chemical compounds, gases, or liquids that are used or consumed during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if their use is necessary and essential to prevent the decline, failure, lapse, or deterioration of exempt manufacturing equipment.
• Gases used on the premises of a manufacturing plant to prevent contamination of raw material or product, or to prevent a fire, explosion, or other hazardous or environmentally damaging situation at any stage in the manufacturing process or in loading or storage of the product or raw material on the premises.
• Tangible personal property used in the manufacturing, processing, or fabrication of property for sale if the use is necessary and essential to a quality control process.
• Safety apparel or work clothing used during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if:
1. the manufacturing process would not be possible without the use of the apparel or clothing; and
2. the apparel or clothing is not resold to the employee.
• Tangible personal property used or consumed in the actual manufacturing, processing, or fabrication of personal property for ultimate sale if the use is necessary and essential to comply with federal, state, or local laws or rules that establish requirements related to public health.
• Tangible personal property specifically installed to:
1. reduce water use and wastewater flow volumes from the manufacturing, processing, fabrication, or repair operation; 2. reuse and recycle wastewater streams generated within the manufacturing, processing, fabrication, or repair operation; or 3. treat wastewater from another industrial or municipal source for the purpose of replacing existing freshwater sources in the manufacturing, processing, fabrication, or repair operation. The manufacturing exemption does not include:
• intraplant transportation equipment, including intraplant transportation equipment used to move a product or raw material in connection with the manufacturing process and specifically including all piping and conveyor systems, provided that the following remain eligible for the exemption:
1. piping or conveyor systems that are a component part of a single item of manufacturing equipment or pollution control equipment that qualify for exemption under certain provisions of the manufacturing exemption; 2. piping through which the product or an intermediate or preliminary product that will become an ingredient or component part of the product is recycled or circulated in a loop between the single item of manufacturing equipment and the ancillary equipment that supports only that single item of manufacturing equipment if the single item of manufacturing equipment and the ancillary equipment operate together to perform a specific step in the manufacturing process; and 3. piping through which the product or an intermediate or preliminary product that will become an ingredient or component part of the product is recycled back to another single item of manufacturing equipment and its ancillary equipment in the same manufacturing process.
Piping through which material is transported forward from one single item of manufacturing equipment and its ancillary support equipment to another single item of manufacturing equipment and its ancillary support equipment is not considered a component part of a single item of manufacturing equipment and is not exempt. An integrated group of manufacturing and processing machines and ancillary equipment that operate together to create or produce the product or an intermediate or preliminary product that will become an ingredient or component part of the product is not a single item of manufacturing equipment:
• maintenance supplies not otherwise exempted, maintenance equipment, janitorial supplies or equipment, office equipment or supplies, equipment or supplies used in sales or distribution activities, research or development of new products, or transportation activities;
• hand tools;
• machinery and equipment or supplies, to the extent not otherwise exempted, used to maintain or store tangible personal property; or
• tangible personal property used in the transmission or distribution of electricity, including transformers, cable, switches, breakers, capacitor banks, regulators, relays, reclosers, fuses, interruptors, reactors, arrestors, resistors, insulators, instrument transformers, and telemetry units not otherwise exempted, and lines, conduit, towers, and poles.
In addition to the other items exempted under the manufacturing exemption, pre-press machinery, equipment, and supplies, including computers, cameras, film, film developing chemicals, veloxes, plate-making machinery, plate metal, litho negatives, color separation negatives, proofs of color negatives, production art work, and typesetting or composition proofs, that are necessary and essential to and used in connection with the printing process are exempted if purchased by a person engaged in:
1. printing or imprinting tangible personal property for sale; or
2. producing a publication for the dissemination of news of a general character and of a general interest that is printed on newsprint and distributed to the general public free of charge at a daily, weekly, or other short interval.Lights, Camera, Exemption
This section of the bill clarifies that a production company may claim exemption from sales or use tax on the following items if they are necessary and essential to and used or consumed directly in the production of motion pictures or video or audio recordings, a copy of which is sold or offered for ultimate sale, licensed, distributed, broadcast or otherwise exhibited, and in the production of broadcasts by a producer of cable programs or by a radio or television station licensed by the Federal Communications Commission:
• tangible personal property that becomes a component part of the qualifying motion picture, video or audio recording, or broadcast;
• cameras;
• film;
• film developing chemicals;
• lights;
• props;
• sets;
• teleprompters;
• microphones;
• digital equipment;
• special effects equipment and supplies;
• audio or video routing switchers located in a studio;
• certain services; and
• certain other equipment and tangible personal property that are necessary and essential to and used directly in the production.
A qualifying production does not include a production for broadcast that is not intended to be broadcast to the general public or to cable television service subscribers or paying customers. The exemption does not include and tax is due on: • office equipment or supplies;
• maintenance or janitorial equipment or supplies;
• machinery, equipment, and supplies used in sales, transmission, or transportation activities;
• machinery, equipment, or supplies used in distribution activities, unless otherwise exempted;
• taxable items used incidentally in a qualifying production or broadcast;
• telecommunications equipment and services;
• transmission equipment;
• security services;
• motor vehicle parking services; and
• food sold ready for immediate consumption.Restoration in a Disaster Area
Tax Code §151.350 exempts separately stated charges for labor to restore property damaged in an area that is declared a disaster area by the governor or the President. This section of the bill clarifies that the exempted labor to “restore” includes repairing, treating, or applying protective chemicals to carpet, upholstery, rugs, or drapery. Managed Property
Effective—October 1, 1999
This section exempts services performed by employees of a property management company or its affiliate if:
1. the employee is permanently assigned to one rental property by the property management company,
2. the property management company is reimbursed on a dollar-for-dollar basis for the services provided, and
3. the employee remains assigned to that property while employed by successive owners or management companies.
The property management company must:
1. be contractually obligated to the property owner to exercise control over the activities of the employee providing the service and
2. manage and direct the employee’s day-to-day activities.
The property management company or the affiliate must pay tax on taxable items purchased and provided to employees providing services on managed property. A property management company is defined as an entity who, for consideration, operates and manages all the activities at a rental property, including an office building, mall, or other retail or office complex, apartment complex, duplex, or home, and whose responsibilities include securing tenants, hiring and supervising employees for operation or upkeep of the property, receiving and applying revenues, and incurring and paying expenses derived from the operation of the property as directed by the property owner. For purposes of this exemption, a corporation, limited liability company, partnership, trust, or estate is an affiliate of a property management company if an 80 percent ownership interest in the property management company or the corporation, limited liability company, partnership, trust, or estate is held by the other, or if a third person has an 80 percent ownership interest either directly or indirectly in both the property management company and the corporation, limited liability company, partnership, trust, or estate. Bad Debt Deductions
Effective—October 1, 1999
This provision allows a person who extends credit to a purchaser under a retailer’s private label credit agreement, or an assignee or an affiliate of the creditor or retailer, to take credit for Texas sales or use tax remitted to the Comptroller on accounts that have been written off as bad debts for federal income tax purposes. An affiliate is any entity that would be classified as a member of an affiliated group under 26 U.S.C. Section 1504. The provision also allows a person whose volume and character of uncollectible accounts warrants it to use an alternative method of substantiating the reimbursement or credit. The records must apportion taxable and nontaxable amounts of a bad debt and compute the amount of sales tax imposed and remitted to the Comptroller on the taxable charges remaining unpaid on the debt. Additionally, such a person may, with the Comptroller’s approval, report future tax responsibilities based on a historical percentage from a sample of transactions. If a person who took credit or reimbursement for tax remitted on a bad debt later collects payments on that account, the person must remit tax on that portion of the debt. House Bill 3623
Exclusion of Surveying
Effective—October 1, 1999
House Bill 3623 excludes surveying from taxable real property services if purchased by the owner of real property as a part of the improvement of the real property with a new structure to be used as a residence or other improvement immediately adjacent to the new structure and used in the residential occupancy of the structure. This exclusion expires on October 1, 2001. Senate Bill 7
Transmission or Distribution of Electricity
Effective—September 1, 1999
Under this bill, transmission or distribution of electricity to an end-user is a taxable service if the sale of the electricity is taxable. If the sale of the electricity is exempt from tax, the transmission or distribution service is not taxable. Senate Bill 441
Internet Access
Effective—October 1, 1999
Effective October 1, 1999, the first $25 of the monthly charge for Internet access service is exempt from tax regardless of the billing period used by the service provider or whether the Internet access service is bundled with another service. The $25 exemption applies to the total sales price for the Internet access service without regard to whether the service provider charges one lump-sum amount or separately bills the purchaser for each user. Internet access service is defined as a service that enables users to access content, information, electronic mail, or other services offered over the Internet and may also include access to proprietary content, information, and other services as part of a package of services offered to consumers. Internet access does not include telecommunications services or any other taxable service (including data processing services and information services) unless the taxable service is provided in conjunction with and is merely incidental to the provision of Internet access service. Information and Data Processing Services
Effective—October 1, 1999
This section provides an exemption from tax for 20 percent of the value of information services and data processing services sold on or after October 1, 1999. As a result, customers will owe tax on only 80 percent of the amount charged for data processing and information services. Reminder: Additionally, under the sales tax law as currently written, a company that derives a benefit from the data processing or information services both inside and outside of Texas may claim an exemption from tax by giving the service provider an exemption certificate. The company claiming the exemption must remit tax on the portion of the service that represents the amount of benefit the company derives from the service in Texas. Over-the-Counter Drugs and Medicines
Effective—April 1, 2000
Effective April 1, 2000, no tax will be due on over-the-counter drugs that are labeled with a national drug code issued by the federal Food and Drug Administration. The bill also provides an exemption for blood glucose monitoring test strips. Previously, these strips were exempt only when purchased under a doctor’s prescription. Three-Day Tax-Free Clothing Holiday
Effective—June 3, 1999
This bill provides a three-day tax holiday for purchases of certain clothing and footwear. The tax holiday will be held every year on the first Friday, Saturday, and Sunday of August. This year, the exemption applied to both state and local sales taxes. In future years, however, cities, counties, and other local taxing entities will have the choice of participating in the holiday or continuing to impose the tax. During the tax holiday, most clothing and footwear priced at less than $100 is exempt from sales taxes. Customers receive the exemption on individual items, regardless of the total amount they buy. For example, sales tax is not due if a customer buys six shirts, each priced at under $100. But the full tax must be paid on a shirt sold for $110; the first $99.99 cannot be exempted. Clothing and footwear that are used primarily for athletic activities or for protective wear are not eligible for the exemption. Customers buying golf cleats and football pads, for instance, must pay sales taxes. But the tax is not due on athletic wear that is commonly worn other than while participating in an athletic activity, such as tennis shoes, baseball caps, and jogging suits. Also not included in the sales tax holiday are accessories, such as jewelry and watches; items that are carried rather than worn, including handbags, briefcases, and wallets; clothing rentals, such as formal wear and costumes rentals; and repairs and alterations. Senate Bill 456
Pan American and Olympic Games
Effective—August 30, 1999
This bill authorizes the Department of Economic Development to support efforts by municipalities to host the 2007 Pan American Games and the 2012 Olympic Games. The bill creates a Pan American Trust Fund and an Olympic Games Trust Fund. These funds will be held in trust by the Comptroller to provide assurances that adequate funding for the games will be available. An endorsing city with a population of over 850,000 may bid for the games by creating a nonprofit organizing committee to execute an agreement with a site-selection organization, the US Olympic Committee or the Pan American Sports Organization. Under the bill, the Comptroller will determine the economic impact on the state resulting from the preparation for the games and the market area for the selected site. The revenue resulting from the incremental increases in the sales and use tax, motor vehicle sales and rental tax, state hotel occupancy tax, mixed beverage receipts tax, and tax imposed on manufacturers of alcohol in the market area for the Pan American Games will be deposited into the Pan American Trust Fund, which cannot exceed $20 million. The revenue resulting from incremental increases in sales and use taxes in the market area will be deposited into the Olympic Games Trust Fund, which cannot exceed $100 million. Additionally, the municipalities in the market area may also impose user fees on parking and ticket fees to be deposited into the Olympic Trust Fund. The local organizing committee that is exempt from paying federal income tax under Internal Revenue Code Section 501(c) qualifies for exemption from sales and use tax, motor vehicle sales and rental taxes, hotel occupancy tax, and franchise tax. A local organizing committee qualifying for this exemption will have to request a letter of exemption from the Comptroller’s Office. Senate Bill 769
Advanced Transportation District
Effective—May 21, 1999
This bill amends Chapter 451 of the Transportation Code to allow creation of an Advanced Transportation District within the boundaries of a metropolitan transportation authority (MTA) with an MTA sales tax rate of .5 percent and in which the principal municipality has a population of more than 700,000 (currently the San Antonio MTA meets these criteria). The bill defines “advanced transportation” to include light rail, high occupancy vehicle lanes, etc. With voter approval, the District may impose a 0.25 percent sales and use tax within the same boundaries as the existing MTA. Senate Bill 977
Timber Items
Effective—October 1, 2001
Senate Bill 977 provides a state and local sales tax exemption for seedlings, certain chemicals, and machinery and equipment used in the production of timber effective January 1, 2008. Effective October 1, 2001 and prior to January 1, 2008, state and local sales taxes must be paid on the purchase of seedlings, chemicals, and machinery and equipment used in the production of timber, but the purchaser is entitled to a credit or refund of a portion of the taxes paid on these items. The amount of the credit or refund is determined by the date on which the item is purchased. The following schedule identifies the portion of the state and local taxes that may be refunded or credited on items purchased during each applicable period: 33 percent 10-1-2001 -12-31-2003
50 percent 1-1-2004 - 12-31-2005
75 percent 1-1-2006 - 12-31-2007Component parts, repair and replacement parts, and lubricants for the equipment used in timber operations will be treated for tax purposes the same way the equipment used exclusively in the timber operations are treated. On January 1, 2008, services to maintain, remodel, repair, or restore equipment used in timber operations will also become exempt as a result of the application of Section 151.3111. Section 151.3111(a) of the Tax Code provides that services to maintain, remodel, repair, or restore equipment are exempt if the equipment repaired qualifies for a sales tax exemption. Prior to January 1, 2008, services to maintain, remodel, repair, or restore timber equipment will remain taxable. Gas and electricity used by a person engaged in timber operations, including gas and electricity used in pumping for irrigation of timberland, are exempt from state and local sales taxes effective October 1, 2001. Also effective October 1, 2001, the bill repeals the current exemption for the first $50,000 of the purchase price of each unit of certain machinery or equipment used exclusively in a commercial timber operation to prepare the site, plant, cultivate, or harvest timber. Senate Bill 1319
Effective—October 1, 1999
Managed Audits, Percentage-Based Reporting, Determination Of Overpaid Amounts
This bill allows the Comptroller to enter into a written agreement to authorize a taxpayer to conduct a managed audit to determine the taxpayer’s sales or use tax liability. The Comptroller may review the taxpayer’s records to verify the results of the taxpayer’s audit. In determining whether to authorize a managed audit, the Comptroller may consider the following: (1) the taxpayer’s history of tax compliance;
(2) the amount of time and resources the taxpayer has available to dedicate to the audit;
(3) the extent and availability of the taxpayer’s records; and
(4) the taxpayer’s ability to pay any expected liability.
The Comptroller may waive the penalty and all or part of the interest that would otherwise accrue on any amount identified to be due in a managed audit, unless the audit discloses fraud or willful evasion of the tax. Penalty and interest may not be waived on tax that the taxpayer collected but did not remit. Percentage-Based Reporting
This portion of the bill allows the Comptroller to authorize the holder of a direct payment permit to use a percentage-based reporting method to report use tax due on its purchases. A percentage-based reporting method is one by which a taxpayer categorizes purchase transactions according to standards specified by the Comptroller, reviews an agreed-on sample of invoices in that category to determine the percentage of taxable transactions, and uses that percentage to calculate the amount of use tax to be reported. The authorized percentage must be used for a three-year period specified by the Comptroller, unless the Comptroller revokes the authorization because the percentage is no longer representative as a result of a change in law or in the taxpayer’s business operations. Determination of Overpaid Amounts
Under this section, a person with a sales or use tax permit who has purchased taxable items and remitted Texas sales or use tax on those items in error may compute the amount of overpayment by use of a projection that is based on a sampling of transactions. The sampling method used must comply with generally accepted sampling methods as approved by the Comptroller. The person may obtain reimbursement for amounts determined to have been overpaid by taking a credit on one or more sales tax returns or by filing a claim for refund with the Comptroller within the statute of limitations (usually four years). The person must record the method by which the projection and computation were performed and be prepared to show to a representative of the Comptroller the records on which the projection and computation were based.
House Bill 2104
Two-Year Inactive Wells
Effective—June 19, 1999
This bill extends the application period for the current ten-year exemption for oil or gas produced from a well that has been certified by the Texas Railroad Commission as a “two-year inactive well.” (In spite of the name, there can be one month of production during that two-year period.) The application period now ends on August 31, 2009, rather than August 31, 1999. Under the bill, the Commission may designate two-year inactive wells through February 28, 2010, rather than February 29, 2000. (This bill and House Bill 2615 were both passed with identical language for the two-year inactive well exemption.) House Bill 2615
High-Cost Gas Wells and Two-Year Inactive Wells
Effective—August 30, 1999
This bill extends the application period for the current ten-year exemption for oil or gas produced from a well that has been certified by the Texas Railroad Commission as a “two-year inactive well.” (In spite of the name, there can be one month of production during that two-year period.) The application period now ends on August 31, 2009, rather than August 31, 1999. Under the bill, the Commission may designate two-year inactive wells through February 28, 2010, rather than February 29, 2000. This bill also extends the current reduced tax rate exemption for high-cost wells to include wells spudded or completed after August 31, 2002, and before September 1, 2010. Senate Bill 115
Extension of the Oil-field Cleanup Regulatory Fee for Crude Oil and Natural Gas
Effective—August 30, 1999
The bill deletes the language which stated that this fee would end on August 31, 1999. Because the fee no longer has an ending date, it can only be suspended if the balance in the Oil-field Cleanup Fund equals or exceeds $10 million. Senate Bill 290
Exemptions
Effective—March 11, 1999
This bill created a temporary exemption from the severance tax for oil and gas produced from certain low producing wells or leases on or after February 1, 1999 and before August 1, 1999. The exemption applied to oil from oil wells producing no more than 15 barrels of oil per day per well. The monthly average price of oil also had to be below $15 per barrel of oil as reported on NYMEX (New York Mercantile Exchange) for three consecutive months prior to the reporting period. The bill also provided for a temporary exemption for gas from gas wells producing not more than 90 mcf of gas per day and casinghead gas from oil wells producing no more than 15 barrels of oil per day per well. The monthly average price of gas also had to be below $1.80 per mcf as reported on NYMEX for three consecutive months prior to the reporting period. The exemption for crude oil was the only part of this temporary exemption to meet all of the requirements for price levels and only for the reporting months February 1999, March 1999, and April 1999. The reporting months of May 1999, June 1999, and July 1999 were lost for this exemption because the price of oil was above $15 per barrel during at least one of the three consecutive months prior to these reporting months. The average price for gas never fell below $1.80 per mcf, so the temporary gas exemption never went into effect. Senate Bill 329
Odd-Year Prepayments
Effective—September 1, 2001
This bill eliminates the estimated prepayment of oil and gas severance taxes for the reporting month of July, due on August 15 of each odd-numbered year. Because the effective date is September 1, 2001, the odd-year prepayment will still have to be made on August 15, 1999, and August 15, 2001.
House Bill 1983
911 Fees
Effective—September 1, 1999
This bill expands the Comptroller’s duties to audit for and collect the fees and surcharges imposed and administered by the Commission on State Emergency Communications under Subchapter D, Chapter 771, Health and Safety Code:
• the 9-1-1 emergency service fees collected by local exchange service providers, wireless service providers, and certain business service users and remitted to the commission, and
• the 9-1-1 equalization surcharge collected by intrastate long-distance service providers and remitted to the commission.
If the Comptroller audits a service provider that collects these fees or surcharges, the bill requires the Comptroller to also audit the service provider’s collection and disbursement of the fees and surcharges. The commission may also notify the Comptroller of any irregularity that may indicate that an audit of a service provider collecting these fees or surcharges is warranted. The Comptroller, rather than the commission, will collect past due fees and surcharges and recover the costs of collection from service providers or business service users.
