Multistate Tax Commission Online Marketplace Seller Voluntary Disclosure Initiative

Multistate Tax Commission Online Marketplace Seller Voluntary Disclosure Initiative

The Texas Comptroller’s Office is participating in the Multistate Tax Commission (MTC) Online Marketplace Seller Voluntary Disclosure Initiative, which is designed to bring into compliance out-of-state (OOS) taxpayers who sell products in Texas and other states through online marketplaces.

NOTE:  This program does not apply to those OOS sellers that have nexus due to a physical presence (i.e., attending trade shows, presenting products and taking orders) and may have employees located in Texas.  In addition, any business that has already been contacted by the Texas Comptroller about their tax responsibilities, including a routine audit or Criminal Investigation, will not qualify for this program. Finally, these MTC agreements also do not waive any taxes collected but not remitted.

It is our understanding that ‘online marketplace’ activity means that the out-of-state (OOS) seller is selling products through: (1) fulfillment centers such as Amazon.com and (2) taking orders for products from a call center physically located in Texas.  It is not known if this program is meant to include those OOS sellers which have what is called ‘click through nexus’.

The MTC is accepting applications for this program Aug. 17 – Oct. 17, 2017. Taxpayers must make their requests for agreements through the MTC, and those who qualify must be registered and start collecting taxes as of Dec. 1, 2017. The program covers Texas sales and use and franchise taxes.  More information about applying for the program is available at the Multistate Tax Commission (MTC) Online Marketplace Seller Voluntary Disclosure Initiative.

 

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Hurricane Harvey – Hotel Occupancy Tax Exemptions

Hotel Tax Waiver

The collection of Texas state and local hotel occupancy tax, including venue project hotel tax, is temporarily suspended for disaster relief workers and people displaced by Hurricane Harvey. The hotel tax waiver is for a period beginning Aug. 23, 2017, and ending Oct. 23, 2017.

To Claim the Exemption

Hurricane Harvey victims and relief workers should complete a Texas Hotel Occupancy Tax Exemption Certificate (Form 12-302). Hotel managers should mark the “Exempt by Other Federal or State Law” box and write “Hurricane Harvey” anywhere on the form. Normally for the exemption certificate to be valid the hotel operator must attach a photo ID, business card or other document to verify a guest’s affiliation with an exempt entity. In addition, the name and complete address of the exempt entity must be filled out.  Both of these requirements appear to have been waived for hurricane victims and relief workers. To be certain the Comptroller’s Office should be contacted to confirm these instructions. These exemption certificates must be kept on hand for four years. Do not send these certificates to the Comptroller’s Office.

Tax Waiver Not Requested

If a person or organization that qualifies for the tax waiver does not request the exemption and purposefully pays tax to the hotel, the hotel should collect the tax. The hotel must report the room receipts as taxable room receipts and remit the tax to the state.

Refund Requests

For Hurricane Harvey victims and relief workers who have already paid hotel tax, refund requests should be made to the hotel that collected the tax. After refunding the tax, the hotel can adjust taxable receipts on a current return to take credit for the refund.  The hotel also has the option of completing the Assignment of Right to Refund (Form 00-985), which is for state hotel tax only.  This document is provided to the person or party who paid the Texas State hotel occupancy tax so they can request a refund directly from the agency.

See Section 3.161 – Definitions, Exemptions and Exemption Certificate for any other information regarding exemptions from the Hotel Occupancy Tax.

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Are Political Consulting Services Provided by an Out-of-state Firm Taxable?

Gilbert Zamora - Former Texas Comptroller Auditor & Tax Policy Expert, 31 Years

Gilbert Zamora – Former Texas Comptroller Auditor & Tax Policy Expert, 31 Years

Nexus, Franchise Tax, Sales Tax Implications

We were recently approached by a newspaper reporter asking us to address the franchise and sales tax ramifications of an out-of-state consulting firm sending an employee into Texas to conduct political consulting.  The consultant has visited Texas on multiple occasions and bills between $50,000 and $100,000 in fees on an annual basis.

Franchise Tax

We reviewed and researched the limited facts presented and advised that the Texas franchise tax is a privilege tax and nexus is created under the Texas Nexus Rule 3.586. Nexus is created by any of the revenue producing activities cited in that ruling if the imposition of nexus does not violate the due process clause of the US Constitution.

Based on the limited facts presented, the person coming to Texas for political consulting would fit under that rule. If nexus exists, and if it involves a taxable entity (i.e., certain exceptions apply), then the franchise tax responsibility would exist, and the person or entity should comply with the law accordingly. This would include registering with the Secretary of State’s office and the filing of franchise tax reports.

Each taxable entity doing business in Texas must file and pay applicable franchise tax. These entities include:

  • corporations;
  • limited liability companies (LLCs), including series LLCs;
  • banks;
  • state limited banking associations;
  • savings and loan associations;
  • S corporations;
  • professional corporations;
  • partnerships (general, limited and limited liability);
  • trusts;
  • professional associations;
  • business associations;
  • joint ventures; and
  • other legal entities.

If the entity has total revenues in 2016 or 2017 of less than $1,110,000, no tax would be due.

Sales Tax

As a general rule, political consulting services are not taxable unless they are connected to the sale of tangible personal property (i.e., printed materials, political signs or stickers, etc.) or one of the unique and often vague taxable services (Tax Rule 3.342 – Information Services and Tax Rule 3.330 – Data Processing Services) – see below.

Unrelated consulting services which are the expert or professional opinions of the political consultant are not taxable when they are separately stated and not connected in any way to the sale of a taxable item (tangible personal property or service).

For example, separately stated charges for general political consulting or professional services, such as management consulting, issue identification and policy decisions and public relations which are not related to a taxable item or service being sold would be considered nontaxable consulting services.

We addressed some services that may be provided by a political consultant and the sales tax implications of each, such as:

Tax Rule 3.342 – Information Services

Taxable information Services as set out in Rule 3.342(a)(6)- Information Services would include: Information that is gathered, maintained, or compiled and made available by the provider of the information service to the public or to a specific segment of the industry for a consideration is subject to sales tax. Examples of taxable information services include, but are not limited to, the following:

  • newsletters;
  • mailing lists (which represents names of persons located in Texas are taxable);
  • non-exempt demographic information
  • news clipping services and wire services;

Examples of nontaxable information services include:

  • Opinion Polls and Consultant Reports – are excluded as taxable information services under Rule 3.342 (a)(5)(A).

Tax Rule 3.330 – Data Processing Services

Data Processing. Political Consultants may provide their clients with data such as, voter lists, voting history by precinct, political party preference by zip code or precinct, etc.  A charge by the consultant for the compilation, information storage, manipulation or data entry would be taxable as data processing services if performed with the use of a computer.  Rule 3.330 Data processing services.

In summary, an out-of-state firm conducting political consulting on a recurring basis for consideration is likely engaged in business in Texas and must register for franchise tax reporting. Depending on the specific services provided in Texas, the consulting firm may be responsible for collecting and reporting sales taxes if it is also providing sales of taxable items or services.

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Inside the Mind of a Texas Comptroller Sales Tax Auditor

Dino Marcaccio, President Former Texas Comptroller State Tax Auditor, 16 Years

Dino Marcaccio, President
Former Texas Comptroller State Tax Auditor, 16 Years

Are auditors encouraged to over-assess tax?

I realize this is a provocative title. And I bet many of you are wondering HOW would I know what auditors think. After receiving my accounting degree from Texas A&M University, I went to work for the Texas Comptroller’s Office for 15 years and 10 months. While there, I became acquainted with over 100 auditors, supervisors and other employees during my tenure there.

Let me first say that I got to know many fine auditors who had the same attitude that I had, which was to see how little, if any, tax they could assess. We believed that our job was to HELP businesses understand the Sales/Use Tax laws of Texas. We also understood that many businesses, especially smaller ones, will not keep complete and accurate records and we as auditors should use reasonable and fair alternative audit methods to conduct the audits.

But part of the problem is that the agency maintains and provides to all auditors many tax assessment statistics which do nothing more than give a green light to aggressive auditing. These TAX STATS create a general idea among many auditors that if they are not assessing tax on at least 50% or more of your audits, then they are not doing their job.  That’s right, approximately 50% of all Sales/Use Tax audits conducted by the Comptroller result in a TAX ASSESSMENT.

If auditors are not at least maintaining a 50% TAX DUE ratio, then many of them believe they will not get promoted. And if they don’t get promoted, then they don’t make money. You must understand that the primary way to get a raise at the agency is to get promoted from Auditor Level 1 through 5. As auditors get promoted from one auditor level to another, their pay significantly increases. Everyone knows that the general cost of living raises happen once every 7 or 8 years.  Thus, promotions from one audit level to the next is the only realistic way to get a raise.

Some auditors even have TAX DUE percentages in the 60% to 75% range. In fact, a number of these auditors are promoted more than auditors with lower TAX DUE ratios. I am not making this up. I saw it happen over and over again and that is one of the main reasons I decided to QUIT the agency and start Texas Tax Group in 2007.

It always surprised me that these high tax due ratio auditors seemed to be treated more special at their respective audit offices. In most of the agency’s 23 audit offices, there is a fiscal year-end meeting. And at that meeting, the auditors who assess the most tax are often given special honors and attention.  These meetings always bothered me. At one meeting an auditor by the name of Al Jimenez was given special recognition for only having two NO TAX DUE audits out of over 30 audits conducted. Other auditors who assessed over 1 million in tax due for the fiscal year were singled out for recognition.

If anyone reading this article does not believe me, then I would suggest they send an Open Records Request to the Texas Comptroller’s Office and ask for ALL auditor’s TAX STATISTICS REPORTS for the last 10 years. You may be shocked by what you see.

These TAX STAT REPORTS include, among other troubling data, the total tax assessments per audit and for various periods of time. What is really disturbing is that there is also a particular stat that most auditors refer to as the ‘batting average’ (i.e. dollars/hour). The batting average is the TAX DOLLARS ASSESSED PER HOUR for TAX DUE audits. Let me explain. Auditors must track all hours worked for each audit conducted. Then, for tax due audits, the agency divides the total tax due by the auditor’s hours worked to compute a tax-assessed per hour statistic. This ‘tax dollars per hour’ statistic is also computed for ALL tax due audits and is then used as a tool in evaluating auditors. I could go on and on about these auditor statistics reports, but I think you get the idea.

In my opinion, I also believe that there is a tendency for the agency to sometimes encourage (i.e., look the other way) auditors to attempt to over-assess tax. I will also say there are MANY auditors who DO NOT ever attempt to abuse the audit process to over-tax businesses. I have met many conscientious auditors whom I have become good friends with. But there are many other auditors who use alternative unfair audit methods to attempt to assess more tax than may be due.

You are probably wondering what ‘tricks’ can an auditor use to over-assess tax. Let me give you an example of just one of many that I have seen over the last 10 years while defending nearly 3,000 audits.  In August of 2017 a CPA from Beaumont, Texas had a client who had been assessed over $140,000.00 in ‘bogus’ tax based on his IRS returns. How did it happen? The auditor simply applied Sales and/or Use Tax to 100% of the client’s asset and expense items per the IRS returns. The reason? The CPA could not reconcile all the summary IRS and financial statement asset and expense purchases to the final actual invoices. Unfair? Heck yes. Could the auditor do it legally? Heck yes. Were there other more reasonable audit methods? Of course there were, but neither the auditor nor the supervisor would budge. What happened? This audit was billed and the client had not yet decided whether to hire my firm to help. I gave the client a 50/50 chance at fixing this messy audit. In my opinion, I would estimate the business owners may have owed a fraction of this unreasonable assessment.

The point of this article is to WATCH OUT. You get ONE AUDIT. Be prepared. If you can afford it, hire a qualified Texas State Tax consulting firm that has an office in your city or surrounding area and is staffed by ex-Texas Comptroller auditors.

Best of luck,

Dino

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Guide to Selecting a Sales Tax Consultant

Dino Marcaccio, President Former Texas Comptroller State Tax Auditor, 16 Years

Dino Marcaccio, President
Former Texas Comptroller State Tax Auditor, 16 Years

11 Questions to Ask Your Sales Tax Consultant

There is NO licensing or regulation of any type in Texas for Sales Tax Consulting companies. You should CAREFULLY investigate any company soliciting your business. To begin with, you should look at their website and identify the location of their office and the background and college degree (if any) of the owner and all consultants. Often owners and their consultants do not have an accounting degree (i.e., Red Flag). In addition, many of these less qualified consultants have a single ‘rent-a-room’ (virtual office) not located in your city.

These 11 simple questions below are meant to assist any business that is under audit and would like to hire a consultant. This guide is most helpful to those businesses located in and around Houston, Dallas, Austin and San Antonio (i.e., 80% of all audits occur in these four Texas cities). If you are located outside of these cities, we can still represent your business.

1. WHO IS THE OWNER AND DO THEY HAVE AN ACCOUNTING DEGREE (or any degree at all)?

Certain websites will not identify the owner (or the consultants). It is recommended to steer clear of these companies. If the owner is identified, then find out if they have an accounting degree. If the owner does not have an accounting degree, but has any other unrelated degree, then this should be a Red Flag because almost all audits involve the use of accounting skills. Note: It is a requirement for all Texas Comptroller auditors to have a 4-year accounting degree from an accredited university.

Dino Marcaccio, owner of Texas Tax Group (TTG), has an accounting degree from the Texas A&M University AND worked as a Sales/Use Tax auditor for 16 years at the Texas Comptroller’s Office. 

2. IS THE OWNER AN EX-TEXAS COMPTROLLER SALES TAX AUDITOR?

There is no better experience than working as an auditor at the Comptroller’s Office to understand the audit process and to know what is and IS NOT subject to sales and/or use tax. Don’t be fooled by a ‘colorful’ sales brochure or a salesperson who avoids answering these questions. Find out the business background of the owner of the consulting firm that is asking to represent you. An owner that worked as a Texas Comptroller auditor is a better choice.

Dino Marcaccio, owner of Texas Tax Group (TTG), worked at the Texas Comptroller’s Office as a Sales Tax auditor for 16 years. Dino also hired 15 ex-auditors to work at his 4 offices (Houston, Dallas, Austin, San Antonio).

3. DOES THE COMPANY HIRE EX-TEXAS COMPTROLLER SALES TAX AUDITORS AS CONSULTANTS?

Ex-Texas Comptroller auditors are without a doubt the best consultants. Auditors will initially receive over 300 hours of intensive training during their first six months at the agency. They then receive approximately 75 hours of additional training each year. In addition, they will normally complete 25 to 30 sales tax audits per year. This equates to nearly 2,000 hours per year in agency training and actual field audit experience. There is absolutely no substitute for working as an auditor. This in-depth experience allows a person to become a much more effective sales/use tax consultant.

Texas Tax Group (TTG) has on staff over 15 ex-Texas Comptroller auditors (all with accounting degrees) who completed approximately 5,000 sales tax audits and worked at the Texas Comptroller’s Office for a combined total of over 350 years. No other firm contacting you has a staff with their combined experience.

4. DOES THE CONSULTANT HAVE OFFICES & CONSULTANTS IN HOUSTON, DALLAS, AUSTIN & SAN ANTONIO?

If your business is located in Houston, Dallas, Austin, San Antonio or surrounding areas, then you would want your consulting firm to have an office nearby. If the consultant does not have an office nearby, then how can they defend your audit? Worse yet, if they don’t have an office nearby, then it is very likely their consultant also does not live nearby. If the company says it has an office in your city, then you should ask if that office is a ‘rent-a-room’ (executive suite) office or a fully functioning office with the following:

  • Separate locked office space to securely store client records (i.e., a one- room office won’t work)
  • Separate locked office space for the consultants
  • Separate office space for HOSTING the auditor

WARNING:  Some questionable consultants will simply allow the auditors to take your hard copy or electronic records to their office (or their home if it is an outside State contractor auditor).  This is not recommended. If you hire a consultant, you want your records protected, a pre-audit to be conducted and for the audit to be HOSTED in the consultant’s office. You are not required to surrender your records to be taken off-site by an auditor. It is also suggested that if you do not hire a representative, you request the audit take place at your place of business under your supervision.

If the consulting firm has only a single office, which is not located in your city or surrounding area, then that is a RED FLAG. How can any sales tax consulting firm effectively represent you if they DO NOT have an office or their consultants do not live in your surrounding area?

TTG has fully functioning offices in Houston, Dallas, Austin and San Antonio. Please refer to our website to view each office location. Each one of our offices has a secure client record storage area, consultant’s offices and auditor HOSTING stations. Our ex-auditor consultants conduct pre-audits and HOST auditors in our offices under their direct supervision. 

NOTE:  Your records DO NOT leave our consulting offices (unless certain approved activities need to take place at our client’s office locations).

5. WILL THE CONSULTANT PERFORM A ‘PRE-AUDIT’ PRIOR TO MEETING WITH THE AUDITOR?

A ‘Pre-Audit’ is a specific series of steps that should be taken by the consultant before meeting with the Texas Comptroller Auditor (i.e., Entrance Conference). These would include:

  • Gross Sales Reconciliation (i.e., comparing all sources of client revenue to the gross sales reported by the client)
  • Sales/Use Tax Reconciliation (i.e., comparing all sales taxes reported to sales taxes collected by the client)
  • Resale/Exemption Certificates (i.e., obtaining ALL completed/signed certificates BEFORE the Entrance Conference date)
  • Research Taxability of all Sales (i.e., research Tax Policy Letters, Statutes, Tax Rules and Administrative Hearing Decisions to determine the correct taxability of sales)
  • Asset and Expense Purchase Review (i.e., identify and confirm tax paid on assets and expenses subject to tax)

For all clients, TTG requests 30-day extensions in order for our consultants to perform this 5-step ‘Pre-Audit’ process (as listed above). The pre-audit results will then be provided to the auditor at one of our offices under the direct supervision of one of our consultants. It is vital that certain pre-audit activities be conducted before the auditor arrives for the Entrance Conference. Many less qualified firms will simply hand over your records to the auditor. That will not happen with at TTG.

6. WILL THE CONSULTANT ‘HOST’ THE AUDITOR IN THEIR OFFICE AND SECURELY STORE RECORDS?

If you are located in Houston, Dallas, Austin, San Antonio or surrounding areas, you should ask your consultant if they have an office nearby to securely store records and HOST the audit.  HOSTING the auditor is a vital part of the audit defense process.  In most cases, you do not want the consultant and auditor to do their work in your office nor is it a good idea to simply allow auditors to take records to their offices.  It should be noted that the average audit conducted without supervision by a qualified consultant can take 4 to 6 months.

Since most auditors have 20 to 25 active audits in progress, it is the job of the consultant to keep the audit moving. In addition, the consultant should also be the ‘gatekeeper’ and provide, after the pre-audit phase, only those client records that are relevant to the audit process. Although the consultant may not withhold records from the auditor, it is his/her job to initially review them and be sure that the auditor understands the content of the records presented (i.e., certain business accounting records have unique differences).

TTG has auditor HOSTING stations located in each of their 4 offices. HOSTING stations are used by the visiting auditor to conduct their work.  Our ex-auditor consultants work directly with the assigned auditor to work towards an accurate audit. 

7. DOES THE CONSULTANT HAVE FORMER TEXAS COMPTROLLER ‘TAX POLICY EXPERTS’ ON STAFF?

Over the last few decades, the Texas Comptroller’s Office has issued over 100,000 Tax Policy Letters, which are drafted by Tax Policy Experts who are considered the agency tax experts. These Letters are considered a leading source of Sales Tax authority and are relied upon to this day by auditors, business owners and even consultants, to determine correct taxability.

TTG has 4 former Texas Comptroller TAX POLICY EXPERTS (60 years total agency experience). Together, these 4 experts wrote over 5,000 Tax Policy Letters as well as performed other important agency functions which give TTG a leading position when it comes to Texas taxes. Full BIO information can be found on TTG’s website for their Tax Policy Experts: Gilbert Zamora – CPA (retired), John Fitzgibbons – CPA, Glenda Aguirre and George Aguirre.

8. DOES THE CONSULTANT HAVE ‘PROFESSIONAL LIABILITY INSURANCE?

Ask the consulting firm if they have what is called ‘Professional Liability Insurance’ (‘Errors and Omissions’ – E&O). These policies help protect a client if a consulting firm has committed some form of negligence related to the audit.  Be sure to ask if the policy is ‘active’ and how much coverage does it provide. Don’t be afraid to ask for a copy. These policies will award damages if the consultant causes damages to their client.

Some consulting firms operate under a ‘shell’ corporation that has no assets in case they are sued, or worse, there is no corporate entity and the owner is operating as a sole owner with no business liability insurance. Be sure to ask about the ENTITY you are signing a contract with. If your consultant causes you to be over-taxed or even lose your business, you must know that you have legal recourse through professional liability insurance.

TTG has a $5,000,000 ‘Professional Liability Insurance’ (‘Errors and Omissions’ – E&O) which covers both the entity ‘Texas Tax Group, Inc.’ as well as all consultants individually.  TTG has this policy CONTINOUSLY in place since the company was formed in 2007 and has never had a claim on this policy.  TTG also has an A+ Rating with the BBC since 2007.  

9. DOES THE CONSULTANT HAVE ‘IARC’ INDEPENDENT AUDIT REVIEW CONFERENCE EXPERIENCE?

Ask the consultant how many IARC (Independent Audit Review Conferences) do they attend each year.  Experience matters.  An IARC is a type of ‘pre-hearing’ that takes place BEFORE the tax bill is issued.  This informal hearing is led by a Texas Comptroller Dispute Officer who reviews all research presented and listens to both sides of oral arguments.  The consultant should have conducted extensive tax research and prepared written arguments and exhibits to present at the IARC.  If the IARC decision is in the business’ favor, then the auditor must remove any contested items.

Many inexperienced consultants LOSE their chance to request an IARC because they simply did not RESERVE their right in writing. When this happens, the auditor is allowed to process and bill the audit, leaving only a costly and lengthy Administrative Hearing process remaining.

TTG has prepared for and attended over 75 IARC’s since 2007.  TTG has had conferences with all 3 Dispute Conference Officers and met personally with current and past IARC Agency Directors to discuss procedural concerns. TTG has also HOSTED several of these Conferences at their Houston and Dallas offices because they have advanced audio/visual systems for each side to present tax research and client documentation.

10. DOES THE CONSULTANT HAVE ADMINISTRATIVE HEARING EXPERIENCE?

Ask the consultant how many Administrative Hearings have they been involved with on a yearly basis. Again, experience matters. For instance, once the Hearing is granted, the consultant must prepare ALL documents (client records and tax research) that is needed within 60 Days of the Hearing approval date. The consultant must then be prepared to meet with the auditor and present all supporting documents and attempt to resolve all audit issues.

Many consultants do little to nothing to prepare for this important ‘60 Day Period’ auditor meeting, which means that the audit will then be transferred to an aggressive Texas Comptroller Hearings Attorney, allowing for the best chance to resolve the audit to be lost. Once a hearing attorney is assigned, that person will issue what is called a Position Letter (i.e., detailed legal arguments).  The consultant must file a REPLY to the Position Letter within 45 days, countering any position(s) taken by the hearings attorney. If this REPLY is not timely filed, the hearing can be cancelled and the total audit liability could be due immediately.

If the REPLY to the Position Letter is timely filed, then the hearings attorney can also issue requests for additional records or possibly Interrogatories and/or Admissions and Denials.

If you get that far, then you must prepare for the actual trial and submit numbered exhibits, additional legal arguments and witness lists.  The hearing (trial) itself can also be intimidating because certain rules must be followed regarding the questioning of witnesses (i.e., your consultant must prepare you or other witnesses to be sworn in and to answer specific questions).  Your consultant must also be prepared to question (under oath) the agency’s auditor or other subject matter experts presented by the agency.  If your consultant is not familiar with all aspects of your case and doesn’t present an overwhelming amount of supporting evidence and testimony, then you could easily lose your case.  If that happens, there is no alternative except to either pay the entire audit liability or close the business.  In certain cases, the audit liability can be assessed against the business owner individually.

Since 2007, TTG has been involved with over 100 ‘oral’ or ‘written submissions’ Administrative Hearings.  TTG has its own Director of Administrative Hearings (JEFF JANSEN – Attorney).  TTG is one of the leading consulting firms for the number of Sales Tax Administrative Hearings filed by a single firm from 2013-2016. 

Knowledge of the tax rules, audit methodology and the hearings process are vital to winning a case. As auditors and consultants, TTG has been involved with over 7,000 audits and have a total combined 450 years of agency and consulting Texas Sales/Use Tax experience.  Don’t hire an inexperienced firm to represent you in the time consuming and complex Administrative Hearings process. 

11. DOES THE CONSULTANT HAVE EXPERIENCE WITH ‘SETTLEMENT & COMPROMISE AGREEMENTS?

Ask your consultant if they are familiar with how to obtain an interest-free payment plan or else possibly waive some or all the penalties applied to your audit.  Settlement agreements are not easy to obtain and many actions must be taken to obtain them.  To begin with, an Administrative Hearing must be correctly filed for and granted.  If the hearing is denied for lack of legal grounds (i.e., contentions), then additional penalties and interest will be applied and the entire audit assessment will be due at once.  Failure to pay can result in cancellation of the sales/use tax permit and possible closing of the business and seizure of all assets.  If the hearing is granted, then the consultant must negotiate on behalf of the client and present various arguments to obtain a settlement.

Settlements are not guaranteed, and if not granted, then the Comptroller will continue to take various collections actions until the entire audit liability is paid. The Enforcement Division of the Texas Comptroller’s Office is very AGGRESSIVE and will seek to close any business not paying an audit assessment owed. In addition, operating without a sales tax permit can result in large fines by the agency against the business owner.

Since 2007, TTG has obtained over 230 ‘interest-free payment plans’ for clients as well as waived penalties in over 200 audits.  TTG’s Settlement Coordinator (Margie Merwin) is personally involved with each settlement and can answer any questions you may have about this complex process.  In all cases, it is required to file a correct Request for Administrative Hearing and then continue to negotiate with the agency, often for 2 months or more, to secure a favorable settlement.  In August of 2017, TTG hired Nancy Meyer, Assistant Settlement Coordinator, to assist Ms. Merwin with the large caseload of settlements.  TTG files for more administrative hearings and obtains more settlements than any other firm in Texas.

CONCLUSION

Deciding which consulting firm to hire is an important decision. Take your time. Do your homework.

VISIT WEBSITES OR OFFICES. If needed, talk to the owner of the consulting firm and their consultants and ask these specific 11 questions listed above. And then make your choice.

TTG hopes you will allow them to represent you with your audit. If your office is in Houston, Dallas, Austin, San Antonio or surrounding areas, you can be assured that they have a fully functioning office in your area, staffed by consultants who worked as Texas Comptroller auditors. Thank you.

0 COMMENTS

Texas Administrative Code Rule 3.330 Data Processing Services – The Most Vague Sales Tax Law in Texas

RE: Private Letter Ruling #142730026

The question should not be ‘What IS data processing?’ but instead, ‘What ISN’T data processing?’.

On January 3, 2017 the Texas Comptroller issued Private Letter Ruling #142730026. This Private Letter Ruling (PLR) was issued to an unidentified company (i.e., lender) which underwrote (i.e., loaned money on) collateralized real estate loans. The lender wanted to know if the purchase of a specific service from one of their vendors was taxable under Tax Rule 3.330 – Data Processing.

Specifically, the lender paid a vendor to track or monitor the insurance status of the collateralized real property. That is, the lender needed to know that the borrower was maintaining hazard and/or flood insurance on the real property they were loaning money on. In this PLR the lender is asking the Texas Comptroller to issue a decision on whether this particular service is subject to Tax Rule 3.330 – Data Processing.

Both parties seemed to agree that there were certain aspects of data processing involved in the tracking / monitoring service in question. The PLR provided no specific details as to how these services were provided except to say that the vendor in question provided insurance status information via some sort of automated system which apparently could be accessed online. I am assuming it was the automated online access aspect of the service which made the lender uneasy about whether sales tax was due under Tax Rule 3.330 – Data Processing.

Footnote: As required the lender had to submit actual vendor invoices / contracts and a complete description of how the automated information could be accessed online. In addition, the lender (or its representative) had to conduct and provide their own extensive research into existing applicable Texas sales tax law / authority (i.e., Statutes, Tax Rules, Tax Policy Letters and Administrative Hearing Decisions) to prove to the agency that this particular service had not been addressed before. This is actually a difficult requirement for submitting a PLR request. The agency would then decide if they would answer the tax question or just refer the business to some existing authority. For more information on how to submit a request for a PLR see Section 3.1 – Private Letter Rulings.

Bottom line, Private Letter Ruling #142730026 stated that these tracking / monitoring services were NOT taxable data processing services. Specifically, the agency believed this service was not a taxable data processing service because:

(1) Professional knowledge was involved and
(2) Any data processing activities were ancillary and incidental to the ‘professional service’ provided by the vendor.

Does online automated access cause any service to become taxable subject to tax rule 3.330 – Data Processing?

There are many services which involve some sort of automated online access. But this does not mean those services are subject to sales tax per Tax Rule 3.330 – Data Processing. The questions to ask are:

  1. Is the service provided via some sort of automated online access?
  2. Does the provision of the service require specifically trained and educated professionals?
  3. Are data processing activities, if any, ancillary and incidental to this service?

If you can answer YES to all three of these questions, then, in the opinion of Private Letter Ruling #142730026, your service SHOULD probably not be subject to sales tax per Tax Rule 3.330 – Data Processing. But ‘reader beware’.

The Texas Comptroller has recently issued a general ‘SYSTEM DISCLAIMER’ for every Private Letter Ruling which states in part:

“The Comptroller of Public Accounts maintains the STAR system as a public service. The documents which provide the Comptroller’s interpretation of the tax law are accurate for the time periods and facts presented in the documents. Letters on STAR (State Tax Automated Research) system can be the basis of a detrimental reliance claim only of the taxpayer to whom the letter was directly issued….. There is no assurance that a document on STAR represents a current policy, even if it has not been marked as superseded. If there is a conflict between the law and the information found on STAR, any decisions will be based on the law.”

The bottom line is that Tax Rule 3.330 – Data Processing is a dangerous and hard to understand tax law. And we at Texas Tax Group are here to help you. Thank you.

 

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Here Come the Millennial Auditors

High Sales Tax Auditor Turnover May Mean Over Assessed Sales Tax Audits

I bet a lot of you would like to know why you are getting audited by young, inexperienced and sometimes aggressive Texas Comptroller Sales Tax Auditors. To do that I must make sure you understand WHO ARE the MILLENNIALS (see below).

Baby Boomers (born 1940 – 1960, approximate period)
Generation X (born 1960 – 1980, approximate period)
Millennials (born 1980 – 2000, approximate period)

Millennial Texas Comptroller Auditors

Wikipedia defines Millennials with college degrees as those folks who DO NOT STAY at any job for more than 2 or 3 years and then move to the next job. This cycle usually continues for an average of 3 jobs before they finally settle down for the long haul. If the Texas Comptroller continues to hire young new college graduates then it is a given that most of them will quit in 2 to 3 years and move on to their 2nd job or 3rd job.

Because of the above probability you have a good chance of being audited by one of these young, inexperienced and possibly aggressive auditors. And that is bad news since auditors from the past (hired from 1980 to 2000) usually stayed around much longer, were much more experienced and were in general less aggressive. It is also likely that a 1 to 3 year old Texas Comptroller auditor will not have a firm grasp of proper auditing and estimation techniques and will certainly not know taxability as well as seasoned auditors (i.e., what is taxable and what is not).

Are Auditors Ranked on How Much Tax is Assessed?

It is a fact that the agency continues to provide most auditors with a periodic printout of HOW MUCH tax they are assessing along with other statistics such as ‘tax assessed per hour’ on tax due audits. It is inevitable that many auditors will then believe that they are being reviewed and possibly promoted based on TAX ASSESSMENT factors.

No More Tax Policy Letters

Let me add one more depressing thought. Since 2012 the Texas Comptroller has ceased to issue what are called Tax Policy Letters. These are considered by any serious Texas Sales Tax student to be the most important source of sales tax authority (trumping the statutes, tax rules and hearings). And why has the Texas Comptroller stopped issuing these critical pronouncements. It is easy. Most of the senior Tax Policy Experts have left the agency (i.e., quit, retired, died). I have written another detailed blog on this subject. It should be noted that Texas Tax Group has four former Texas Comptroller Tax Policy Experts on staff.

The takeaway here is to watch out. Take your audit and auditor seriously. If you decide to hire an outside consulting firm then you must also do your homework. Texas Tax Group is committed to a singular activity – defending and representing you with your Texas Comptroller Tax Audit.

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Buying an Existing Business and Successor Liability

If you buy the assets of a Texas business, are you then responsible for that company’s existing state tax liability?

The answer is often YES. It is called Successor Liability (Tax Code Section 111.020 and 111.024) and it is applied by the Texas Comptroller to the purchasers of many businesses in this state. Many people don’t know that just buying the assets of a company can cause the prior tax liability to be assigned to the purchaser. Even if you didn’t buy the assets, the Comptroller can still attempt to assign the debt if a number of other criteria are met. The bottom line is that this is a very gray area of Texas taxation and only an experienced firm can help.

The Texas Comptroller’s Publication titled Buying an Existing Business (Form 98-117) begins with: “Before you buy an existing business, find out if the owner owes any Texas taxes”.

Worst Case Scenario: Erroneous Successor Liability Assigned

It is also possible that the Comptroller’s Office will ERRONEOUSLY assign Successor Liability even if little or no credible supporting evidence is found. Once these tax bills are issued, the person or business must quickly file for an Administrative Hearing and then prove they don’t owe the debt.

Texas Tax Group has represented clients who have received these Successor Liability tax bills and simply DID NOT OWE THEM. In one case the Client simply occupied the same space and continued to run the same type of business. This client didn’t even know the prior client much less purchase their assets. But they received a Successor Liability tax bill based on Tax Code Section 111.020 and 111.024 and the Comptroller then demanded payment within 30 days. We were able to eventually cancel the tax assessment after providing a significant amount of documentation.

These are truly difficult cases since the Comptroller can simply send the Successor Liability tax bill to anybody and then make them prove they are not responsible. The Comptroller can issue these tax bills with as a very little burden to prove these assessments, but the business owner must I can truly say that the Comptroller is often careless when issuing these Successor Liability assessments.

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Sexually Oriented Business Fee (aka the Pole Tax)

If the Comptroller issued you an estimate for this fee, then it is probably wrong. Defend yourself against it now. 

Most, if not all, of these SOB fee estimated assessments are wrong. Very wrong. Consultants at Texas Tax Group (ex-Texas Comptroller auditors) have carefully reviewed the Texas Comptroller’s SOB fee estimation method on SOBF client assessments and found many errors.  These audit methodology errors can easily DOUBLE what the business actually owes in SOB fee.  Texas Tax Group can help you defend yourself against these harsh and significantly over stated assessments. (more…)

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Revenue Suppression Software (aka Zapper Programs)

Texas Comptroller Auditors Are On The Lookout!

If you run a business that takes in a lot of cash (convenience store, restaurant, nightclub, etc.), you might be tempted to buy one of these Zapper programs. Bad idea. Although these programs do a pretty good job of excluding the cash sales from your POS cash register system, an alert Federal or State Auditor can often figure out the scam. (more…)

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Hotel Occupancy Tax Lawsuits Argue for Collection by Online Travel Companies

And What Does It Potentially Mean for Sales Tax Issues Involving Out-of-State Retailers

For over 10 years, online travel companies (OTCs) hotel occupancy tax cases have been initiated by a large number of individual cities, municipalities and states all over the country.  At this time over 100 lawsuits have been initiated.  The central argument in most cases is whether these OTCs should be required to remit the hotel tax on their markup / profit.  For example, assume the hotel and the OTC agree to a contract whereby the hotel will receive $70/night and the OTC charges $100 for a particular room.  Assuming the hotel tax rate is 10% the OTC will remit $80 to the hotel ($70 room charge plus the $10 hotel tax) and keep the remaining $20 (OTC markup). (more…)

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Has the Texas Comptroller Stopped Issuing Tax Policy Letters?

Due to a significant loss of Tax Policy Experts, the Texas Comptroller’s Office has not issued a Tax Policy Letter (TPL) since late 2012. Folks, that is over 4 years!

You might say, ‘Who cares and what the heck is a Tax Policy Letter anyway?’. Well, let me tell you. (more…)

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If You Provide a Service Using the Internet Then Beware

Tax Rule 3.330  – Data Processing

There is, without a doubt, one taxable service Tax Rule that stands out far above ALL others as being vague and undefined and which can be applied, right or wrong, at the discretion of an inexperienced rookie Texas Comptroller auditor. Think about it. Just about any company’s services which are provided by the use of the internet can be subject to sales tax for a four year look-back audit period based on this poorly drafted tax rule.    (more…)

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Are You Personally Liable for Fraudulent Tax Evasion?

Section 111.0611: Personal Liability for Fraudulent Tax Evasion

I prefer to call it the ‘Personal Officer Fraud’ Tax Code Section. Either way, you have probably never heard of this tax law unless you or your client has received some type Texas Comptroller Notification usually based on a Sales Tax or Liquor Tax audit assessment. These assessments are absolutely deadly and very often result in liens on officers’ homes and if not paid, a personal lawsuit by the Texas Attorney General’s Office on behalf of the Texas Comptroller’s Office. I personally believe that over 50% of these assessments have little to no legal basis and often can be challenged and BEAT. (more…)

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The Texas Comptroller Managed Audit Program: A Win-Win Scenario

The Managed Audit Program (MAP) was initiated by the Texas Comptroller’s Office in 1999 in order to allow qualifying businesses to conduct quasi self-audits with minimal input from the Texas Comptroller’s Office. The benefit to the Comptroller’s Office and the State are significant cost savings because less resources are being expended. The numerous business benefits are listed below. (more…)

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Successor Liabilities – Audit Assessments Can Be Transferred

What is a Successor Liability?

Since 2010 the Texas Comptroller’s Office has nearly tripled the annual number of successor liability assessments based on the three tax code sections listed below. Most of these assessments involve either a Sales Tax audit or a Mixed Beverage Gross Receipts Tax audit, which are transferred to a successor entity or individual using one or more of the following three tax code sections: (more…)

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Sales Tax Issues for Upstream Oil and Gas Operators: Smell that? That’s the smell of money!

On any windy day in the Permian Basin, Eagle Ford Shale or the Barnet shale areas, the unmistakable smell of oil and gas is clearly evident in the air.  To oil and gas producers that is the smell of money.  However, it can also signal a possible leak on a flow line, gathering line, tank battery or other lease site equipment.  When money is flowing in hand over fist, it is easy to overlook the expense side of oil production, the development of a lease, building roads, building a pad, drilling the well, casing the well and completing the well site with flow lines, processing equipment and storage tanks for produced water and oil. However, this equipment on the lease site is subject to exposure to the elements along with exposure to the corrosive nature of the produced water, oil and gas, thus requiring ongoing maintenance and detection of leaks in the wellbore, casing, flow lines, etc. (more…)

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Update to Glenn Hegar, et al v CheckFree Services Corp (RULE §3.330 – Data Processing Services)

The Texas Attorney General’s office did not appeal the decision reached by the 14th Court of Appeals in Glenn Hegar, et al v CheckFree Services Corp, therefore the decision becomes final and we now await to see how the Comptroller’s office will apply the decision to similar data processing cases pending in district court and where protective claims were filed pending the outcome of CheckFree Services. (more…)

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State to challenge Decision in Glenn Hegar, et al v CheckFree Services Corp

The Texas Attorney General’s office on July 20, 2016 filed its Reply Brief in Glenn Hegar, et al v CheckFree Services Corp before the 14th Court of Appeals. (more…)

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Texas Supreme Court to Hear Case on Exemption for Downhole Equipment

The Texas Supreme Court has agreed to review the appellate court decision in Southwest Royalties v. Glenn HegarComptroller of Public Accounts. The case addresses the taxability of oil and gas production equipment used below ground by upstream petroleum companies, primarily big dollar items such as casing and tubing. Southwest Royalties is arguing that the below-ground equipment used in oil and natural gas production qualifies as processing equipment under Texas Tax Code Sec. 151.318, and Comptroller Rule 3.300 – Manufacturing; Custom Manufacturing; Fabricating; Processing. (more…)

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