Tax Policy News

October 2012

The Comptroller's office publishes this online newsletter to keep you informed about Texas taxes and what is happening in the Tax Policy Division. Tax Policy News provides general information and is not a substitute for legal or other professional advice.

In This Issue...

Announcing a Sales Tax Webinar

Go! Fight! Win! It's School Fundraising Time Again!

Taxpayers and practitioners are invited to participate in an upcoming sales tax webinar hosted by our office: Go! Fight! Win! It's School Fundraising Time Again! Participants must register in advance. Each session is limited to 1,000 participants.

When: Tuesday, Oct. 30, 10 a.m. - 12:00 a.m.

Description: This webinar will provide information on the tax collection responsibilities of Texas school districts; public and sales tax exempt nonprofit private elementary and secondary schools; bona fide chapters of these schools; parent-teacher associations and booster clubs.

If you missed the webinar, you can still access the webinar materials.

In the Works

Sales Tax – Tax Forms and Instructions Under Revision

Our Sales and Use Tax Report forms and instructions are being redesigned to add information about what to do if you overpay taxes and to clarify the $50 late filing penalty. We plan to have new forms and instructions available by November 2012.

Various Taxes – New and Amended Rules In Progress

Our office is currently in the process of updating numerous existing rules and drafting two new rules as shown in the following list. As rule drafts are completed, they will be published in the Texas Register as proposals and will be available for comment by the general public. We will also list proposed rules and dates in this newsletter as they appear.

Sales and Use Tax

3.284 – Drugs, Medicines, Medical Equipment, and Devices

This rule is being amended to implement a statutory change to Tax Code Section Section151.313 by House Bill 3319, 80th Legislature, 2007, which provides that in order for an over-the-counter drug or medicine to qualify for exemption, it must be required to be labeled with a Drug Facts panel according to Food and Drug Administration regulations.

The definition of "orthopedic appliance" is being amended and a new section outlining the treatment of equipment, instruments, tools and supplies used by medical service providers are also being incorporated as a result of the decision in Zimmer US, Inc. v. Combs, No. 03-11-00178-CV, 2012 Tex. App. LEXIS 1109 (Tex. App.- Austin Feb. 9, 2012, no pet.) to clarify longstanding agency policy.

3.295 – Natural Gas and Electricity

This rule is being amended to implement Senate Bill 575, 81st Legislature, 2009, which granted fire control, prevention, and emergency services districts and crime control districts the authority to impose a sales and use tax on the residential use of natural gas and electricity; and Senate Bill 1125, 77th Legislature, Regular Session, 2001 which provides that the use of electricity for timber operations is exempt from sales and use tax.

3.299 – Newspapers, Magazines, Publishers, Exempt Writings

This rule is being amended to codify the Comptroller's longstanding policy that a publication's cover or masthead price is used to determine the average sales price for the purpose of determining whether the publication qualifies for exemption as a newspaper

3.300 – Manufacturing; Custom Manufacturing; Fabricating, Processing

This rule is being amended to clarify that the acquisition of natural resource material is preparation for production and not manufacturing.

3.306 – Sales of Mobile Offices, Portable Buildings, Prefabricated Buildings, and Ready-Built Homes

This rule is being amended to implement House Bill 3182, 82nd Legislative Session, 2011 to provide that oilfield portable units, as defined in Tax Code Chapter 152.001(20), are subject to sales and use tax rather than motor vehicle or hotel occupancy taxes.

3.313 – Cable Television Service

This rule is being amended to codify the Comptroller's longstanding interpretation of Tax Code Section 321.203(j) which provides that the sale of cable television services is consummated at the point of delivery to the consumer; and to clarify that the statutory amendment which became effective October 1, 2003, simply meant to encompass all services related to cable television, not to expand 321.203(j) consummation of sale provisions to include other unrelated services.

3.316 – Occasional Sales; Joint Ownership Transfers; Sales by Senior Citizens' Organizations; Sales by University and College Student Organizations; and Sales by Nonprofit Animal Shelters

This rule is being amended to implement House Bill 373, 80th Legislative Session, 2007 which amended the definition of an "occasional sale" in Tax Code Section 151.304 to exempt from sales tax the sale of personal property by an individual who first purchased the property for personal or family use, as long as total receipts from such sales do not exceed $3,000 in a calendar year.

3.322 – Exempt Organizations

This rule is being amended to implement Senate Bill 1927, 82nd Regular Legislative Session, 2011 authorizing a volunteer firefighter organization that qualifies for a sales and use tax exemption under Tax Code Section 151.310(a)(4) to hold 10 tax-free sales or auctions during a calendar year, with each tax-free sale or auction limited to a duration of not more than 72 hours.

3.324 – Oil, Gas, and Related Well Service

This rule is being amended to clarify that nontaxable services include activities performed to gain access to natural resource materials.

3.334 – Local Sales and Use Tax (New)

This new rule will provide information about the rules that apply to the collection and accrual of local sales and use taxes by sellers and purchasers. It will replace current Subchapters N (County Sales and Use Tax), P (Municipal Sales and Use Tax), and R (Transit Sales and Use Tax) of Title 34, which are being proposed for repeal because they are out of date and not conveniently organized. The new proposed rule incorporates relevant content from the sections in Subchapters N, P, and R and includes updated information that implements House Bill 142, 80th Legislative Session, 2007 regarding the collection of transit sales and use taxes; and Senate Bill 636, 81st Regular Legislative Session, 2009 which amended Tax Code Sections. 321.203 and 323.203 regarding the location where a sale is consummated. The new rule also incorporates applicable law and policy changes and policy clarifications.

3.346 – Use Tax

This rule is being amended to clarify the method to be used by direct pay permit holders to allocate local tax so that it is consistent with the Tax Code and to correct the amendment effective Feb. 9, 2011. Therefore, subsections (f) and (g) are deleted and correct information is now stated in subsection (b)(1) regarding the local tax responsibilities of direct payment permit holders and other persons who purchase items out of state that are stored in the state, but it is unknown at the time if the items will be used in Texas or out of state.

3.357 – Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance

This rule is being amended to implement House Bill 3319 and House Bill 142, both from the 80th Reg. Session, 2007 regarding the application of local sales and use tax, including transit sales and use tax, on nonresidential repair and remodeling services. The rule is also amended to clarify the meaning of the term "completely used up or destroyed," as it applies to consumable items in order to address the findings of Austin Engineering Co., Inc. v. Combs (TX Ct. App. 3, August 5, 2011).

3.365 – Sales Tax Holiday – Clothing, Shoes and School Supplies

This rule is being amended to implement Article 33, Senate Bill 1, 82nd Legislature, 1st Called Session, which amended Tax Code Section 151.326, to set the dates of the annual three-day sales tax holiday by using a calculation based on the first date the majority of non-year-round school districts may begin classes as provided by Section 25.0811(a), Education Code.

3.370 – Natural Resource Material Acquisition and Transportation (New)

This new rule will explain and clarify the taxability of activities engaged in by persons that sever natural resource materials from realty and persons that transport such materials that have become tangible personal property, such as oil, gas, rock and water.

Manufactured Housing

3.481 – Manufactured Housing

This rule is being amended to reflect the addition of oilfield portable units due to statutory changes to Tax Code Sections 151.308 and 152.001 by House Bill 3182, 82nd Legislature, 2011.

Motor Vehicle Sales and Use Tax

3.72 – Farm Machines, Timber Machines and Timber

This rule is being amended to implement House Bill 268, 82nd Regular Legislative Session, 2011 which provides that farmers, ranchers and timber operators who wish to claim an exemption from motor vehicle sales or use tax on qualifying motor vehicles, must register with the Comptroller and obtain a registration number.

Hotel Occupancy Tax

Tax is Due on Short-Term Home Rentals

Texas will be host to a number of major sporting and entertainment events this fall, including football games, baseball playoffs, music festivals and now Formula One racing. Individual homeowners and leasing companies often rent their homes and properties to vacationers attending these events. Like the rental of a traditional hotel room, hotel occupancy tax is also due on the rental of a home.

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-201). Hotel tax is due on past rentals, as well.

See the April 2011 Tax Policy News for additional information.

Mixed Beverage Gross Receipts Tax

Electronic Reporting Information

Wholesalers, distributors, wineries, package stores holding local distributor permits and certain beer manufacturers and brewers are required by law to electronically report their monthly alcoholic beverage sales to retailers in Texas.

After the Texas Alcoholic Beverage Commission notifies the Comptroller that a qualifying permit or license has been issued, the Comptroller sends a letter to the new permit or license holder explaining how to electronically file their monthly alcohol sales report.

A report must be filed even if the permit or license holder does not receive the letter. See Alcohol Reporting for additional information.

Sales Tax

Policy Correction Regarding Ultrasound Equipment and Section 151.338 Exemption for Environment and Conservation Services

A recent inquiry concerning an exemption from tax, as provided in Texas Tax Code Section 151.338, for labor to repair, maintain, restore and remodel ultrasound equipment has led us to reconsider our position as previously discussed in STAR document 201009943L and STAR document 201112317L (December 2011 Tax Policy News).

The exemption provided in Texas Tax Code Section 151.338 states:

"The services involved in the repair, remodeling, maintenance, or restoration of tangible personal property are not taxable under this chapter if the repair, remodeling, maintenance, or restoration is required by statute, ordinance, order, rule, or regulation of any commission, agency, court, or political, governmental, or quasi-governmental entity in order to protect the environment or to conserve energy."

Our previous position erroneously considered that ultrasound equipment emitted radiation and was subject to oversight by the Radiation Control Act administered by the Texas Department of State Health Services (DSHS). This led us to erroneously conclude that ultrasound equipment was eligible for the sales tax exemption found in Section 151.338.

Information available on the DSHS website specifically states that ultrasound equipment and Magnetic Resonance Imaging (MRI) equipment DO NOT use radiation or radioactive materials. This information was confirmed with personnel at DSHS along with confirmation that the Radiation Control Act as administered by DSHS provided no oversight or regulation of persons repairing, maintaining, restoring or remodeling ultrasound equipment and Magnetic Resonance Imaging (MRI) equipment.

In light of this new information, STAR document 201009943L and STAR document 201112317L will be superseded as they relate to ultrasound equipment.

The correction regarding ultrasound equipment is effective as of Sept. 28, 2012, and applies on a prospective basis. All refund requests related to the repair, maintenance, restoration and remodeling of equipment subject to the Radiation Control Act received after Sept. 28, 2012, will be governed by STAR document 201209577L. This corrected response does not impact any valid refund requests that were submitted prior to Sept. 28, 2012.

The Holidays are Near!

It's not too soon to be thinking about holiday shopping, decorating and events. To learn what is taxable or not for all the upcoming seasonal fun please see our past article, Tis the Season.

Recently Adopted Rules

State Sales and Use Tax

The following rule adoption was filed with the Secretary of State on Oct. 22, 2012 with a publication date of Nov. 2, 2012, effective 20 days after filing.

3.346 - Use Tax