“Good Standing” Account Status – Changes Are Coming

Businesses have been reporting under the revised franchise tax since 2008. Due largely to the complications of combined reporting, companies can be “not in good standing” due to a reporting error, not a tax delinquency. A “not in good standing” status can be costly to a company conducting a business or financial transaction.

The Comptroller took another look at good standing in the light of concerns from businesses. The result of that review is that being “in good standing” for franchise tax will mean that the company’s right to transact business in Texas is intact.

Being in good standing has evolved over the years, as we made changes to accommodate processing times and filing requirement changes. There are also different types of good standing, and this office may not be able to issue a certificate under certain good standing conditions. In short, it’s become complicated.

The decision to simplify and update the franchise tax good standing status definition was based on several factors:

  • Fairness. The good standing calculation is done by the certificate of account status application in real time. If a report processes that is missing a schedule, for example, the website will show the company to be “not in good standing” immediately – even before the company has been notified of the problem.
  • Transparency. The term “good standing” is misleading in that it addresses only franchise tax, although a company in good standing could have liabilities in multiple other taxes.
  • Clarity. A good standing can be confused with a certificate of existence, which is issued by the Secretary of State and attests to the status of an entity’s registration in Texas.

What’s Next?

A project team is looking at the procedural and programming changes necessary to replace good standing with the status of the entity’s right to transact business in Texas. See Texas Tax Code 171.251 – 171.259. This new definition means that a business will receive a written notice of any issues with its franchise tax filing, and will have at least 45 days to cure those issues, before the business is not in good standing.

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2013/tpn1301.html#issue1.

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Revised Sales Tax Publications

The sales tax publications below have recently been revised. Our publications are intended as a general guide and not as a comprehensive resource on the subjects covered. They are not a substitute for legal advice.

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1212.html#issue4.

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Federal Excise Tax on Medical Devices is Part of the Sales Price

A new federal excise tax on medical devices equal to 2.3 percent of the sales price on sales of certain devices begins Jan. 1, 2013. The tax is imposed on manufacturers, producers and importers, not on their customers.

A seller may pass along the expense of the new tax to customers by separately stating a line item charge on the invoice or receipt given to their customers for “Federal Excise Tax” or something similar. A seller cannot characterize such a pass-through or reimbursement as a tax or fee imposed on the purchaser.

The Texas Tax Code requires that any money represented as and collected by a seller as a “tax” or “fee” be remitted to the state in full. So, if a seller characterizes reimbursements for the federal excise tax as a tax or fee imposed on its customers (the purchaser), the Comptroller’s office will regard such charges as tax collected in error. “Error tax” must either be refunded to customers or remitted to the state. See STAR document 201008851L for additional guidance regarding line item charges and sales tax.

If Texas sales tax is due on a medical device when it is sold, an excise tax reimbursement charge included with the billing is part of the sales price and also taxable. If a medical device is exempt from sales tax, the associated medical device tax reimbursement charge is exempt from sales tax.

For more information on the taxability of medical devices in Texas, please see Rule 3.284, Drugs, Medicines, Medical Equipment, and Devices. The federal law that imposed the tax is the Health Care and Education Reconciliation Act of 2010 (Health Care Act), P.L. 111-152.

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1211.html#issue4.

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Saving Money during the Drought

Gov. Rick Perry renewed a proclamation extending the drought emergency for certain Texas counties due to the ongoing exceptional drought conditions across the state. Texas tax law allows sales tax exemptions for certain items used to enhance the availability of water.

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1211.html#issue3.

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Holiday Shopping

When you shop online, remember Texas sales and use tax applies to orders for taxable items shipped or delivered to a location in Texas. If the seller didn’t collect tax from you, state law requires you to pay the tax directly to the state. If you hold a sales and use tax permit, report the tax on your next regular sales tax return. Otherwise, file a use tax return (PDF, 31KB).

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1211.html#issue2.

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State Employees Are Not Exempt from Hotel Occupancy Tax

State employees traveling on official business are not exempt from state or local hotel occupancy tax, unless an exception applies. State employees should not issue a hotel occupancy tax exemption certificate to a hotel.

State law exempts certain state employees from state and local hotel occupancy tax: mostly judicial officials, heads of state agencies, members of state boards and commissions and members of the Texas legislature. Each agency issues such employees a hotel occupancy tax exemption photo identification (ID) or card which must be presented to the hotel, along with a completed Texas Hotel Occupancy Tax Exemption Certificate (Form 12-302) (PDF, 66KB) , during the check-in process. Refunds are not available.

Employees of Texas institutions of higher education travelling on official business may claim exemption from the 6 percent state hotel occupancy tax by presenting a completed Texas Hotel Occupancy Tax Exemption Certificate to the hotel at check-in. These employees must pay any local hotel occupancy tax imposed.

Texas state agencies are exempt from sales tax, but they are not exempt from hotel occupancy tax. State employees are entitled to reimbursement for hotel occupancy taxes paid when traveling on official business of the state. Most state agencies reimburse their employees through travel vouchers. The hotel tax is an incidental expense and does not apply to the maximum lodging reimbursement rate.

State agencies that have submitted a blanket refund request will receive a refund through the state’s accounting system each fiscal quarter for hotel tax that the agency reimbursed to employees. A state agency not on the state’s accounting system must make separate quarterly refund requests with the Comptroller’s office and with each local taxing authority that collected hotel tax. Submit a Texas Claim for Refund of State Hotel Occupancy Tax (Form 12-104) (PDF, 65KB) to claim a refund.

For more information, see Tax Code Sections 156.103(c)351.006(d) and 352.007(d) andRule 3.163.

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1211.html.

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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.” (more…)

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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.

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at http://window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1210.html

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Texas Tax Group’s new location in San Antonio

Texas Tax Group is proud to announce our new location in San Antonio in the Jefferson Bank Building located at 1777 Northeast Loop 410, Suite 600, San Antonio, TX 78258.

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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.

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at http://window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1210.html

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Destination Texas: Tax-Free Purchases by Out-of-State Schools

Sales Tax

Government entities from other states are not exempt from Texas sales and use tax.

But, out-of-state public universities, colleges, junior colleges, community colleges, school districts and their respective schools can qualify for exemption from sales tax as educational organizations. Out-of-state nonprofit private schools can also qualify for sales tax exemption.

An out-of-state educational organization can establish the exemption by completing an educational application. We will notify the organization in writing of our determination. If the exemption is granted, we will assign the organization a taxpayer identification number and include it on the Comptroller’s exempt organizations database. (more…)

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AirCheckTexas Program

The AirCheckTexas program, administered by participating counties and Councils of Governments, provides vehicle replacement grants and vehicle repair assistance to low-income individuals with polluting vehicles. The program is codified in Health and Safety Code Chapter 382, Clean Air Act.

Vehicle Replacement Program

The maximum grant amount is $3,500. The law excludes the amount of the grant from total consideration paid for a motor vehicle. This means the grant amount is not subject to motor vehicle sales tax.

Vehicle Repair Assistance Program

Sales tax is due on parts used to repair qualifying motor vehicles, even under the AirCheckTexas program.

But, if the counties participating in this program pay the service provider directly for repair parts, no sales tax is due on the parts paid for with county funds.

Payments received from the county should be applied to taxable parts first. Tax is due on taxable repair parts above the amount of the county payment. For example, a car repair bill totals $1250. The taxable parts on the separated bill total $750 and the non-taxable labor totals $500. The county pays $600 directly to the service provider who applies the payment to taxable parts first, reducing the balance due on the parts portion of the bill to $150. The vehicle owner will owe tax on the remaining $150 for taxable parts when settling the account in addition to the labor cost. Exemption certificates are not required.

Questions concerning the program should be directed to the Texas Commission on Environment Quality.

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at http://window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1209.html

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Maintenance Taxes on Health Maintenance Organizations

The Texas Department of Insurance (TDI) sets maintenance tax rates each year. Maintenance taxes are used to fund the TDI, including the Division of Workers’ Compensation and the Workers’ Compensation Research and Evaluation Group. The maintenance taxes also fund the Office of Injured Employee Counsel, another state agency that is attached administratively to the TDI and is funded by that agency’s operating account. The Comptroller’s office collects the maintenance tax on the Texas Annual Insurance Maintenance, Assessment and Retaliatory Report (Form 25-102). (more…)

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Renewal Applications Due by November 30

The Comptroller’s office will mail renewal applications for a 2013 coin-operated amusement machine General Business License, Registration Certificate, Import License and Repair License the first week of October.

The applications are due by Nov. 30, 2012. The Coin-Operated Machines Law provides that renewal applications, inventory forms and payments postmarked by Nov. 30 will be timely filed. Renewal applications mailed after this date must include a $50 late fee.

In addition to the renewal fee, the law requires payment of a $60 Occupation Tax for each coin-operated amusement machine that is “exhibited or displayed on location.” An Occupation Tax Permit sticker (decal) must be affixed to each machine in use.

For information on license and registration fees and tax permits, including a fee schedule, see the Coin-Operated Machines Tax section of our website.

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at http://window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1209.html

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“Common” Sense and Homeowners’ Association Golf Courses

Many homeowners’ associations have golf courses within them. Even though a homeowners’ association may own a golf course, the golf course is almost always commercial in nature and treated as such for sales tax purposes.

Tax law recognizes that certain areas in neighborhoods wholly owned by homeowners’ associations are for the common use of the residents and are therefore residential in nature. That is, a person may not have a private front yard in a homeowners’ association, but a local park that is solely for the use of the residents of the homeowners’ association is treated as the “yard” of all residents in the neighborhood. So, the term “residential property” includes homeowners’ association-owned and apartment-owned swimming pools, laundry rooms and other common areas for tenants’ use. See Rule 3.357(a)(13).

Nevertheless, the fact that certain grounds and structures are merely owned by a homeowners’ association and may be used by residents is not necessarily an indication that the property is a residential common area. (more…)

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School Supplies Purchased for Classroom Use

Texas public schools are government entities exempted from the payment of sales tax under Tax Code Section 151.309.

Under Tax Code Section 151.310, nonprofit private schools also may qualify for sales tax exemption, but must apply to the comptroller. See Rule 3.322, Exempt Organizations.

An exempt school or its authorized agent can purchase items tax free by issuing a properly completed sales tax exemption certificate (PDF, 57KB) in the name of the school. A purchase voucher issued by a public school may also be used to claim an exemption from Texas sales and use tax as provided in Rule 3.322(g)(3), and an exemption certificate is not required when a public school pays with a purchase voucher. (more…)

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Back to School; Back to Fundraising

Acting as a Sales Agent or Representative of a For-Profit Fundraising Company

When a school, school group, PTA/PTO, booster club or other nonprofit organization raises funds by holding a book fair or selling candy, food products, gift wrap, holiday ornaments, candles or similar items using a for-profit fundraising company’s brochures, catalogs, sales forms or marketing materials and receives a share of the proceeds (for example, “commission,” “split” or “cut”), the nonprofit organization is functioning as a sales agent or representative of the fundraising company. See Rule 3.286(d)(6).

Even though the nonprofit organization may take orders, collect money and deliver merchandise to the purchaser, the seller is the for-profit fundraising company. This type of fundraising activity does not qualify as a tax-free sale and tax must be collected on the sale of all taxable items. (more…)

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Personal Liability for Fraudulent Tax Evasion

An officer, manager or director of a corporation, association or limited liability company who takes an action or participates in a fraudulent scheme or plan to evade taxes can be held personally liable for tax evasion. This also applies to a partner of a partnership and a managing general partner of a limited partnership or limited liability partnership. See Tax Code Section 111.0611.

The liability is for taxes, penalties and interest due from the business entity, including an additional 50 percent penalty for fraud provided in Section 111.061.

Actions that may indicate a fraudulent plan to evade taxes include: (more…)

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National Collegiate Athletic Association (NCAA) Conference Realignments

Changes to NCAA conference affiliations are bringing new travelers to Texas who are unfamiliar with Texas hotel tax law. With Texas A&M University joining the Southeastern Conference (SEC) and West Virginia University (WVU) joining the Big 12 Conference, sports and academic teams and their fans from the SEC and WVU are booking hotel stays throughout the state.

As educational organizations, Texas colleges and universities and their employees (coaches) traveling on official business qualify for exemption from the 6 percent state hotel occupancy tax. The exemption does not apply to local hotel occupancy tax. See Texas Tax Code Section 156.102.

Educational organizations, as defined in Rule 3.161(a)(2), include independent school districts, public and nonprofit private elementary and secondary schools and Texas institutions of higher education. Universities, colleges, junior colleges and community colleges from other states or countries are not exempt and must pay all hotel occupancy taxes imposed.

For example, an SEC team traveling to College Station to play Texas A&M may not claim a hotel tax exemption. The same is true for a team from WVU when it travels to a Big 12 school in Texas. On the other hand, teams from Baylor, Texas Christian University, Texas Tech University and the University of Texas may claim a state hotel tax exemption when traveling to a Texas city.

A completed Texas Hotel Occupancy Tax Exemption Certificate (Form 12-302) (PDF, 66KB) should be submitted to the hotel to claim the exemption. A hotel may accept the exemption certificate, in good faith, when presented with a letter of hotel tax exemption from the Comptroller or proof the school has received a letter of hotel tax exemption, such as a copy of the exempt verification from the Comptroller’s Texas Tax-Exempt Entities Search. See Rule 3.161(b)(2).

In addition to reserving hotel rooms, travelers may also use other non-conventional types of lodging, such as renting a person’s home. A hotel is defined in Texas Tax Code Section 156.001 as a building in which members of the public obtain sleeping accommodations for consideration. Therefore, the rental of a home, apartment or condominium unit is also subject to hotel occupancy tax.

For more information, see the Hotel Occupancy Tax section on the Texas Comptroller’s Window on State Government’s website and Hotel Occupancy Tax Exemptions (Pub 96-224).

*Originally published in Tax Policy News – a monthly newsletter about Texas tax policy at http://window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1208.html

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Multistate Benefit Exemption

Taxable services performed for use in Texas are subject to tax. Because some services are performed for use both within and outside Texas, the Legislature created Section 151.330(f) to provide an exemption for that portion of the taxable services performed for use outside Texas. The exemption was specifically limited to those services that became taxable on or after Sept. 1, 1987. This exemption is commonly referred to as the “multistate benefit exemption.”

The services that became taxable after Sept. 1, 1987, include:

  • credit reporting services;
  • debt collection services;
  • insurance services;
  • information services;
  • real property services;
  • real property repair and remodeling services;
  • telephone answering services; and
  • Internet access services

Additionally, when the statutory definition of tangible personal property changed on Oct. 1, 1987, to include custom computer programs, the services to repair, remodel, maintain or restore custom computer programs also became taxable. These same taxable services performed on canned computer programs do not qualify for the multistate benefit exemption because they became taxable before Sept. 1, 1987 (i.e., Oct. 2, 1984).

When determining whether a taxable service qualifies for the multistate benefit exemption, two thresholds must be met.

First, the taxable service must be included in the list of services that became taxable on or after Sept. 1, 1987. If the service became taxable before that date (such as maintenance of canned software or the repair of construction equipment that may be used both inside and outside Texas), a customer is not entitled to assert a claim to the exemption.

Next, the customer must establish that the taxable service in question supports or benefits a separate, identifiable segment of the customer’s business and that the separate, identifiable segment is located both within and outside of Texas.

An “identifiable segment” is defined by the Comptroller as a part of a business that has its own identity apart from, and performs a function that is separate from, the general administration or operation of the company. The existence of a separate, identifiable segment must be demonstrated by evidence of the organizational and operational structure of the business. The location where the service is actually used, and any allocation of charges, must be supported by taxpayer books and records. The mere fact that a taxpayer operates in multiple states does not mean that services purchased by a taxpayer in Texas were partly used outside of Texas.

Once an identifiable segment is demonstrated, the taxpayer may use any reasonable method for allocation that is supported by business records. But, to the extent the use of the service cannot be assigned to a separate, identifiable segment, it is presumed to be used to support the taxpayer’s business generally at the principal place of business, which is deemed to be the place from which trade or business is directed or managed.

*Originally published in Tax Policy News a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1207.html

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