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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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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Aerial Wildlife Management

Selling a gunner’s seat on an aircraft used in agriculture operations to a person who will participate in predator control (such as feral hog eradication) is subject to Texas sales and use tax as an amusement service. The seller must obtain a Texas sales and use tax permit, collect tax on the sale of the seat, and remit the tax to the Comptroller.

Although items used by the provider of an amusement service are typically taxable, the purchase of an aircraft used to provide predator control is exempt from tax under Tax Code Sec. 151.328 (a)(5) if it is bought for exclusive use in agricultural operations as the term is defined in Tax Code Section. 23.51.

Qualifying agricultural activities include:

  • predator control;
  • wildlife or livestock capture;
  • wildlife or livestock surveys;
  • census counts of wildlife or livestock;
  • animal or plant health inspection services; and
  • crop dusting, pollination or seeding.

An aircraft is considered to be “exclusively” used in agricultural operations if 95 percent of its use is for one of the purposes listed above. The 95 percent provision allows travel of less than 30 miles each way to a location to perform these exempt services.

The aircraft owner must maintain flight records for all uses of the aircraft and must make them available to the Comptroller upon request.

Any use of the aircraft for nonagricultural purposes will result in loss of the exemption.

The exemption under Tax Code Section 151.328 also applies to repair and replacement parts for the aircraft and repair labor. The exemption does not apply to firearms, ammunition or other machinery or equipment used on or with the aircraft or used by the aircraft owner or operator. But, an aircraft operator performing crop dusting or other operations classified as “agricultural” under 14 C.F.R. Section 137.3, may,obtain an Ag/Timber number from the Comptroller and then claim an exemption on chemicals and other equipment used exclusively to perform crop dusting and the other agricultural services specifically identified in the federal definition under Tax Code Section 151.316(a)(11). This exemption does not apply to firearms, bullets or other equipment used to perform predator control, wildlife census counts or other services not included under 14 C.F.R. Section 137.3.

For more information, see Tax Exemptions for Agriculture (Pub. 94-101).

*Originally published in the July edition of 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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Fees Relating to Insurance

Many different kinds of insurance companies operate in Texas to provide residents and businesses with the coverage they need. These companies can be classified into two categories: admitted insurers and non-admitted insurers.

The admitted insurance market is composed of all licensed insurance companies that have received a certificate of authority from the Texas Department of Insurance (TDI) to conduct the business of insurance in Texas. The premium associated with the issuance of a policy of insurance by an admitted insurance company is subject to a premium tax that insurers are required to pay.

The non-admitted insurance market refers to insurers who are not licensed by the TDI, including insurers who have met eligibility requirements to write coverage in the surplus lines market. This market also includes insurance placed as “independently procured” or as “unauthorized” insurance. In the non-admitted market, the premium tax is a transaction tax that is either collected from the policyholder and remitted by the surplus lines agent, or is paid directly by the policyholder, the agent or the insurer.

Insurance Code Chapters 221, 222, 225 and 226 define premium for tax reporting purposes to include premiums, membership fees, assessments, dues, and any other consideration for insurance. In addition, Rule 3.822(a)(4) defines premium to include “agent fees that are charged in addition to, or in lieu of, a commission.” Therefore, “fees in lieu of commission” are considered premium in the admitted and non-admitted insurance markets and as such are subject to premium tax.

An insurance agent or broker who did not include these fees in the taxable premium base, collect, report and pay the surplus lines or other non-admitted insurance premium tax for “fees in lieu of commission” or an insurer who failed to include these fees in the tax base should amend prior premium tax returns in order to correct this reporting error.

Fees charged that are not related to procuring a policy of insurance are not considered premium, and an agent or broker is not required to report and pay premium tax on these fees. The fees could, however, be subject to sales tax if charged for the performance of taxable insurance services. Insurance agents and brokers often provide services that may or may not be in connection with selling or placing an insurance policy, such as loss prevention services that minimize the occurrence of accidents, losses or damage. Other examples of taxable insurance services include loss and damage appraisal, inspection, investigation, actuarial analysis and research and claims adjustment and processing.

See Rule 3.355 for additional information on sales tax on insurance services and STAR document 200603647L for information regarding sales tax on fees in lieu of commission.

*Originally published in the July edition of 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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Complimentary Champagne

In a recent communication, a restaurant asked how complimentary champagne would be treated for audit purposes. The champagne would be given away one day a week as a marketing tool. The restaurant does not sell champagne, but does sell other types of wine.

The restaurant’s plan was to have the restaurant’s vendor issue a separate purchase invoice for the champagne, and the restaurant would pay sales tax on the purchase of champagne. Champagne would be given away both to customers who purchase a meal and to customers who do not purchase a meal. The restaurant would not advertise in any way that champagne is included with the purchase of a meal.

Rule 3.1001, regarding mixed beverage gross receipts tax, defines a complimentary alcoholic beverage as one served without any consideration paid to the permittee. “Consideration” includes a purchase of a meal, any other item sold with service of the beverage, an entertainment fee or an entry fee. Champagne given indiscriminately to customers who purchase and do not purchase a meal is a complimentary alcoholic beverage. Since the restaurant receives no consideration for the complimentary champagne, it should be excluded from the mixed beverage gross receipts tax base.

Written or verbal advertisements and promotions that suggest in any way champagne is included with the purchase of a meal, such as champagne brunch, champagne buffet or dinners receive complimentary champagne, is viewed as selling champagne and not as complimentary.

The restaurant must keep all purchase invoices showing sales tax paid on the complimentary champagne, as required by Tax Code Section 111.0041 and Rule 3.1001. A service check must record each individual service of complimentary champagne with the total number of complimentary services of champagne included in the restaurant’s daily summary.

*Originally published in the July edition of 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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