Tax Policy News

April 2013

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...

Franchise Tax

REMINDER – Franchise Tax Due Date

The Franchise Tax due date is May 15. See the Texas Franchise Tax section of our website for complete information about filing franchise tax.

Future Roundtable Discussion on Cost of Goods Sold and the Printing Industry

The Tax Policy Division will hold a roundtable discussion regarding the cost of goods sold deduction and the printing industry. A date has not been set for the roundtable, but we are looking at the month of June.

If you would like to be involved in the development of our future policies in this area by attending the roundtable meeting, please email Teresa Bostick.

New eSystems Portal May Require New User Sign-In

Many taxpayers file and pay Texas franchise taxes online using Webfile. In the past, users accessed Webfile through the myCPA portal. Effective Dec. 6, 2012, users access Webfile through our new portal, TxComptroller eSystems.

Most people will log in as a First-Time eSystems User, even if they have filed franchise tax online through the myCPA portal in the past. Our conversion from myCPA to eSystems makes you a new user.

For more information about filing franchise taxes online, please see the Webfile section of our website.

Franchise Tax Account Status

The Comptroller has historically issued Certificates of Account Status ("good standing") in response to inquiries about the status of an entity's franchise tax account. The ability to search the franchise tax status of an entity is also available on the Comptroller's public website, Window on State Government.

In the past, being "in good standing," or being able to obtain a Certificate of Account Status, meant that all franchise tax filing requirements had been met and no franchise tax was due.

With the revision of the franchise tax in 2008, businesses found themselves "in bad standing" for franchise tax purposes due to a paperwork error or omission, rather than a failure to file the report or pay the tax due. The Comptroller worked with companies and business organizations to discuss the problems this caused. A key issue was that franchise tax status was posted online possibly before the affected company received notice in the mail. Another was that bad standing could complicate a company's ability to complete a business transaction. As a result of these discussions, the Comptroller has refined how it determines franchise tax account status.

As of May 5, 2013, an online search on "franchise tax account status" will return whether that entity's right to transact business in Texas is intact.

The Comptroller is required by law to forfeit a company's right to transact business in Texas if the company has not filed a franchise tax report or paid a franchise tax required under Chapter 171. The law also requires the Comptroller to give at least 45 days after the notice of pending forfeiture is mailed before the actual forfeiture. Any franchise tax deficiencies must be cured during that period to avoid the forfeiture of the right to transact business in Texas.

As noted in the January Tax Policy News, we have made conforming changes to our franchise tax account status page. You will be able to print the results page from a search.

To request a certificate required by the Business Organizations Code for filing termination and similar documents with the Secretary of State, complete Form 05-359.

Sales Tax

Future Roundtable Discussion on Internet Hosting and Nexus

The Tax Policy Division will hold a roundtable discussion regarding House Bill 1841 (passed during the 82nd Legislature) and how the change in the law should impact our policies on Internet hosting and nexus. A date has not been set for the roundtable, but it will likely take place after the 83rd Legislature adjourns in June.

If you would like to be involved in the development of our future policies in this area by attending the roundtable meeting, please email Bryant Lomax.

Local Sales Tax Rate Increases – Calculating and Reporting Tax for Sellers Operating on a Cash Basis of Accounting

Businesses operating on the cash basis of accounting record all transactions in their books when money actually changes hands, meaning when payment is actually received by the company or when money is paid out by the company.

If your business operates or reports using the cash basis of accounting, and there is a change in the local tax rate between the time you execute a sales contract and payment is received, you should collect tax based on the rate in effect when the sales contract was executed, unless your contract allows for a change in the contract price based on a tax rate increase. Sales contracts must be dated and state a definite price and terms.

For example, as of April 1, 2013, San Antonio increased its city sales and use tax rate by .125 percent, bringing the total state and local sales and use tax rate to 8.25 percent. For sales contracts executed before that date, a San Antonio business operating on a cash basis should collect tax based on the old rate of 8.125 percent, even if amounts due under those contracts were not paid to the business until after April 1, 2013.

The business must adjust its taxable sales figure on its sales tax report to reflect sales made at two different tax rates.

Example - A San Antonio business operating on a cash basis has $1,000 in taxable sales subject to the 8.125 percent rate and $2,000 in taxable sales subject to the 8.25 percent rate.

To calculate the adjusted taxable sales, the business would:

Total all sales subject to the 8.125 percent tax rate. $1,000
Multiply this amount by the old tax rate of 8.125 percent and divide the product by the new tax rate of 8.25 percent. $1,000 x .08125= $81.25
$81.25/ .0825= $984.85 (rounded)
Add the adjusted taxable sales made under the old rate to the taxable sales made at the new tax rate, and enter this figure in Item 2 of your sales tax return. $2,000 + $984.55= $2,984.85
Court Case Summary: Plush Toy Prizes Used to Stock Coin-Operated Amusement Crane Machines May Qualify for Resale Exemption

Roark Amusement & Vending, L.P. v. Combs, et al., Cause No. D-1-GN-06-004725

Roark Amusement & Vending, L.P. (Roark) owns and leases coin-operated amusement crane machines that customers operate to try to grab a toy prize. Roark filed a refund claim for Texas sales and use tax paid under protest on its purchases of plush toys used in its coin-operated amusement crane machines, arguing that the plush toy purchases qualified for the sale for resale exemption.

Roark alleged that the toys it purchased for the machines should be exempt from sales tax because:

  • the toys were purchased for resale to the customers who operate the amusement machine;
  • the toys were purchased for resale as part of a taxable service; and
  • the toys were effectively resold to those customers who operated the machines because care, custody and control of the toys was transferred to those customers.

The Comptroller denied the refund request and Roark filed a protest suit in district court. The district court ruled for the Comptroller, but the Third Court of Appeals reversed the district court's judgment for the Comptroller and rendered judgment for Roark. On March 8, 2013, the Texas Supreme Court upheld the Third Court of Appeals' ruling for Roark, holding that Roark's purchase of plush toys for its coin-operated amusement machines qualified for the sale for resale exemption.

The Supreme Court reasoned that, under the plain text of Tax Code Sections 151.006 and 151.302, Roark's plush toys were resold to the customers and integral to the sale of a taxable amusement service because:

  • all of the toys were eventually transferred to customers who played the games; and
  • no one would play the games if there were no potential to win a prize.

The Court also explained that, even though services provided through coin-operated amusement crane machines were exempt from sales tax under Tax Code Section 151.335, they were not considered a non-taxable service. The amusement service was still a taxable service, even though it was exempted from sales and use tax.

As a result, the policy set out in Comptroller's Decision Nos. 102,354 (2010) and 47,857 (2006), and in relevant Comptroller rules, will be revised and amended to conform to the Supreme Court's decision.

Direct Pay Permit Holders and "Tax-Included" Sales

Tax responsibilities can be confusing when a sale occurs between a seller and a direct pay permit holder, and the seller indicates that tax will be included as part of the sales price.

The Comptroller is considering amendments to appropriate rules to explicitly state that a seller who uses "tax-included" language in contracts and on invoices is responsible for remitting the tax to the Comptroller, without regard to who the purchaser is, consistent with longstanding law.

Additionally, if tax-included language is part of a contract when the purchaser holds a direct pay permit, the seller must remit the tax and cannot claim a refund if the direct pay permit holder also accrues and remits tax on the same transaction.

Public Outreach

Sales Tax Reporting Requirements for Contractors

The Comptroller's office was asked to provide a speaker to discuss the applicability of sales tax for plumbing contractors at the Buda headquarters of the Plumbing-Heating-Cooling Contractors Association of Texas. Jim Mathieson spoke to the association about reporting requirements under Rules 3.291, 3.357, 3.292 and 3.322.


Proposed Rules

The following rules were submitted for filing with the Secretary of State with a publication date of April 26, 2013. The comment period ends 30 days after publication.

Insurance Tax

Rule 3.834 – Volunteer Fire Department Assistance Fund Assessment

Rule 3.835 – Reporting of Unauthorized Insurance Premium Tax by Nonadmitted Captive Insurers

Motor Fuel Taxes

Rule 3.436 – Liquefied Gas Dealer Licenses and Operation of Unmanned Compressed Natural Gas Retail Locations

Effective Rules

General Rule

Rule 3.9 – Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers, became effective March 26, 2013.

State Sales and Use Tax

Rule 3.324 – Oil, Gas, and Related Well Service, became effective March 28, 2013.

Other News

Texas Legislature

The 83rd Texas Legislature is in session. At the conclusion of every legislative session, we publish a Tax Policy News Legislative Update issue summarizing the changes to Texas tax laws resulting from house and senate bills passed during the session. You can also visit our website for notices of legislative changes as they become available.