The 76th Texas Legislature made important changes to the Texas tax code affecting businesses and consumers alike. An overview of the major tax provisions is included below. Please contact a Ryan & Company professional for more information.
House Bill 3211 - Clarification of the Sales Tax Manufacturing Equipment Exemption.
In the last days of the session, the Comptroller’s technical correction bill, S.B. 1488, was incorporated into H.B. 3211, the Comptroller’s appropriations bill. H.B. 3211 passed on the final day of the session. The bill clarifies the sales tax manufacturing exemption under Tax Code § 151.318. The exemption excludes the purchase of certain tangible personal property used or consumed during manufacturing from the Texas sales and use tax.
H.B. 3211’s primary focus for manufacturers is a clarification of the exemption in light of a 1997 amendment to the exemption and the court decisions in Sharp v. Tyler Pipe Industries, Inc., 919 S.W.2d 157 (Tex. App. – Austin 1996, writ denied) and Sharp v. Chevron Chemical Co., 924 S.W.2d 429 (Tex. App. – Austin 1996, writ denied). These court cases effectively ended the Comptroller’s pre-1997 argument that unless equipment made a "direct" chemical or physical change in a product being manufactured, it was considered one-step removed and ineligible for the exemption. They also clarified the exemption for piping used in the manufacturing process. Effective October 1, 1997, primarily in response to these court cases, the Legislature enacted H.B. 1855 to overturn the pro-taxpayer decisions in Tyler Pipe and Chevron Chemical.
H.B. 1855 reversed the Tyler Pipe case by requiring that qualifying equipment make a "direct" change in the property being manufactured. The piping section was changed to only exempt pipe that is a component part of a single item of manufacturing equipment. The Comptroller has aggressively interpreted the changes made by H.B. 1855 and has excluded many items that would qualify for exemption under Tyler Pipe and Chevron Chemical. For example, before October 1, 1997, quality-testing equipment qualified for the exemption. After the passage of H.B. 1855, the Comptroller determined that quality-testing equipment did not qualify because it did not make a direct chemical or physical change to products being manufactured. H.B. 3211, however, specifically provides that quality-testing equipment is eligible for the exemption.
H.B. 3211, § 2.19, amends Texas Tax Code Sections 151.318(a), (c), (g), (o), (q), and (s). These changes are summarized below.
|The bill clarifies that the exemption applies to items sold, leased, or rented to, or stored, used, or consumed by a manufacturer.
|The bill clarifies that the exemption includes pumps that generate electricity, chilled water, or steam for ultimate sale; transformers located at an electric generating facility that increase the voltage of electricity generated for ultimate sale; the switches, breakers, capacitor banks, regulators, and relays that are related to such transformers; and the electrical cable that carries the electricity from the electric generating equipment to such transformers.
|The bill specifically provides that the exemption includes tangible personal property used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary and essential to a pollution control process.
|The exemption is also amended to specifically include the following:
|lubricants, chemicals, chemical compounds, gases, or liquids that are used or consumed during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if their use or consumption is necessary and essential to prevent the decline, failure, lapse, or deterioration of equipment exempted by this section;
|gases used on the premises of a manufacturing plant to prevent contamination of raw material or product, or to prevent a fire, explosion, or other hazardous or environmentally damaging situation at any stage in the manufacturing process or in loading or storage of the product or raw material on premises;
|tangible personal property used or consumed during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary and essential to a quality control process;
|safety apparel or work clothing that is used during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use of the apparel or clothing is necessary and essential to the manufacturing process and the apparel or clothing is not resold to the employee. Such apparel or clothing is necessary and essential only if the manufacturing process would not be possible without its use; and
|tangible personal property used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary and essential to comply with federal, state, or local law or rules for public health.
|The bill specifically provides that conveyor systems qualify for the exemption provided they are a component part of a single item of manufacturing equipment or pollution control equipment eligible for the exemption under Tax Code 151.318 subsections (a)(2), (a)(4), or (a)(5).
|The bill specifically includes certain piping, including piping through which the product or an intermediate or preliminary product that will become an ingredient or component part of the product is recycled or circulated in a loop between the single item of manufacturing equipment and the ancillary equipment that supports only that single item of manufacturing equipment if the single item of manufacturing equipment and the ancillary equipment operate together to perform a specific step in the manufacturing process; and piping through which the product or an intermediate or preliminary product that will become an ingredient or component part of the product is recycled back to another single item of manufacturing equipment and its ancillary equipment in the same manufacturing process.
|The bill also specifically provides that piping through which material is transported forward from one single item of manufacturing equipment and its ancillary support equipment to another single item of manufacturing equipment and its ancillary support equipment is not considered a component part of a single item of manufacturing equipment and is not exempt and that an integrated group of manufacturing and processing machines and ancillary equipment that operate together to create or produce the product or an intermediate or preliminary product that will become an ingredient or component part of the product are not considered a single item of manufacturing equipment.
|The bill clarifies that machinery, equipment, or supplies used to preserve tangible personal property does not qualify for the exemption.
Senate Bill 1321 – Interest on Refunds; Comptroller’s Settlement Authority.
This bill allows the payment of interest on refunds and increases the Comptroller’s ability to settle certain cases. Taxpayers currently pay 12% interest on delinquent taxes, including those assessed during an audit. The Comptroller does not, however, pay interest on refunds. The bill would require interest to be paid on refunds at prime rate plus 1% for all tax periods ending after January 1, 2000 and lower the interest rate on delinquent taxes to the prime rate plus 1%.
The bill allows the Comptroller to settle a claim if the Comptroller determines that the total cost of collection or the total cost of defending a denial of a refund claim would exceed the amount at issue.
Senate Bill 1319 – Managed Audits and Managed Compliance.
The bill authorizes certain taxpayers to: (1) perform managed self audits; (2) report taxes based on a percentage reporting method; and (3) compute and receive credit or refund for overpaid taxes based on a sampling of transactions.
The bill allows the Comptroller to enter into written agreements with taxpayers to authorize managed sales tax audits. The Comptroller will verify all self-audits before they are finalized. The self-audits are limited to examinations of taxes due on: (1) sales of taxable items; (2) purchases of assets; (3) purchases of expense items; (4) direct payment permit purchases; or (5) any other category specified in the agreement. Factors the Comptroller will consider in deciding whether to authorize a managed self-audit include: (1) compliance history; (2) taxpayer resources available to dedicate to the audit; (3) extent and availability of taxpayer records; and (4) ability to pay any expected liability. If the taxpayer complies with the guidelines of the Comptroller, any penalties due on a resulting liability will be waived, and a portion of the interest due may be waived.
The bill allows the Comptroller to allow taxpayers to report taxes based on a percentage reporting method. The percentage used to determine tax liability will be derived from an agreed upon sample of invoices in a specified category or categories of taxable transactions. The authorized percentage will be used for a specified three-year period, unless revoked by the Comptroller upon a finding that it was no longer representative because of a change in law or rule, or the taxpayer’s business operations.
Under the bill, taxpayers may compute and receive credit or refund for overpaid taxes based on a sampling of transactions. The sampling method must comply with generally accepted sampling methods as approved by the Comptroller, and documentation of the sampling and computations must be made available to the Comptroller upon request.
Senate Bill 441.
After much debate, the House and the Senate passed S.B. 441, a comprehensive tax cut bill. The bill provides for a number of significant tax breaks, including:
|Research and Development Credit
A franchise tax credit for certain research and development expenditures. Starting January 1, 2002, the credit cannot be more than 50% of a corporation’s franchise tax before any other credits. The credit equals 5% of the sum of: (1) the excess of qualified research expenses incurred in Texas during the period upon which the tax is based over the base amount for Texas; and (2) the basic research payments determined under § 41(e)(1)(A), Internal Revenue Code, for Texas during the period upon which the tax is based. "Base amount," "basic research payment," and "qualified research expense" have the meanings assigned by § 41, Internal Revenue Code, except that all such payments and expenses must be for research conducted within Texas.
Certain corporations may elect to compute the credit for qualified research expenses incurred in this state in a manner consistent with the alternative incremental credit described in § 41(c)(4), Internal Revenue Code.
Corporations are allowed to double any qualifying research expenses and basic research payments made in a strategic investment area. Strategic investment area is defined as a county in Texas that has above average unemployment and below average per capita income. Strategic investment areas also include areas that are designated urban enterprise or enhanced enterprise communities by the federal government.
While the total research and development credit cannot exceed 50% of a corporation’s franchise tax liability, the credit can be combined with the job creation credit and capital investment credit as long as the combined credits do not exceed 100% of a corporation’s franchise tax.
The credit is scheduled to expire on December 31, 2009, but credits can be carried forward for 20 years regardless of whether the credit expires.
For report periods due before January 1, 2002, the credit equals 4% of the sum of: (1) the excess of qualified research expenses incurred in this state during the period upon which the tax is based over the base amount for this state; and (2) the basic research payments determined under Internal Revenue Code § 41(e)(1)(A). Moreover, expenditures in strategic investment areas are only multiplied by 150% and the total credit cannot exceed 25% of a corporation’s total franchise tax.
Unlike the bill’s job creation credit, there is no specific prohibition against transferring the credit.
Investment Tax Credit
The investment tax credit is a franchise tax credit for certain capital investments made by qualified businesses in strategic investment areas. Qualified business has the same meaning as used in the job creation credit. To qualify for the credit, a qualified business must: (1) pay an average weekly wage, at the location with respect to which the credit is claimed, that is at least 110% of the county average weekly wage; (2) offer coverage to all full-time employees at the location with respect to which the credit is claimed by a group health benefit plan, as defined by § 171.751, for which the business pays at least 80% of the premiums or other charges assessed under the plan for the employees; and (3) make a minimum $500,000 qualified capital investment.
"Qualified capital investment" means tangible personal property first placed in service in a strategic investment area, or first placed in service in a county with a population of less than 50,000 by a corporation primarily engaged in agricultural processing, and that is described in § 1245(a), Internal Revenue Code, such as engines, machinery, tools, and implements used in a trade or business or held for investment and subject to an allowance for depreciation, cost recovery under the accelerated cost recovery system, or amortization. The term does not include real property or buildings and their structural components. Property that is leased under a capitalized lease is considered a "qualified capital investment," but property that is leased under an operating lease is not considered a "qualified capital investment." Property expensed under § 179, Internal Revenue Code, is not considered a "qualified capital investment."
The credit is equal to 7.5% of a corporation’s qualified capital investment. The credit is claimed in five equal installments of one-fifth the credit amount over the five consecutive reports beginning with the report based upon the period during which the qualified capital investment was made. The total credit claimed, including the amount of any carryforward credit, may not exceed 50% of the amount of franchise tax due for the report before any other applicable tax credits.
The total franchise tax credits claimed under the bill may not exceed the amount of franchise tax due for the report after any other applicable tax credits. However, a corporation that establishes its eligibility for the credit is not eligible to claim a franchise tax reduction authorized under § 171.1015 – Reduction of Taxable Capital for Investment in an Enterprise Zone.
Excess credits can be carried over for five years.
The credit may not be transferred except in the context of the sale of all the corporation’s assets.
The credit expires and the corporation may not take any remaining installment of the credit if in one of the five years in which the installment of a credit accrues, the qualified business: (1) disposes of the qualified capital investment; (2) takes the qualified capital investment out of service; (3) moves the qualified capital investment out of this state; or (4) fails to pay an average weekly wage.
Job Creation Credit
The job creation credit is a franchise tax credit for certain job creation activities. A corporation is eligible for exemption if the corporation: (1) is a qualified business; (2) creates a minimum of 10 qualifying jobs; and (3) pays an average weekly wage for the year in which credits are claimed, of at least 110% of the county average weekly wage for the county where the qualifying jobs are located.
"Qualifying job" means a new permanent full-time job that: (A) is located in: (i) a strategic investment area; or (ii) a county within this state with a population of less than 50,000, if the job is created by a business primarily engaged in agricultural processing; (B) requires at least 1,600 hours of work a year; (C) pays at least 110% of the county average weekly wage for the county where the job is located; (D) is covered by a group health benefit plan for which the business pays at least 80% of the premiums or other charges assessed under the plan for the employee; (E) is not transferred from one area in this state to another area in this state; and (F) is not created to replace a previous employee.
"Qualified business" means an establishment primarily engaged in agricultural processing, central administrative offices, distribution, data processing, manufacturing, research and development, or warehousing. Each of these terms are specifically defined in the bill.
The credit is equal to 25% of the total wages and salaries paid by the corporation for qualifying jobs but the total credit including any carryforward credit may not exceed 50% of the amount of franchise tax due for the report before any other applicable tax credits. The credit is taken over five years in equal installments. The credit can be carried over for five years but not transferred outside the context of the sale of the entire corporation.
The total credit, including other credits, may not exceed the amount of franchise tax. A corporation that establishes its eligibility for the credit is not eligible to establish a credit for research and development activities.
Data Processing and Information Services
The bill provides for a 20% reduction in the amount of data processing and information services subject to sales or use tax.
Day Care Credit
The day care credit is a franchise tax credit for the creation of day-care centers or purchasing child-care services. The credit is limited to the lesser of: (1) $50,000; (2) 50% of the corporation's qualifying expenditures, which are specifically defined in the bill; or (3) 90% of the amount of tax due for the report. The assignment of the credit is restricted in all cases except where the credit is transferred along with all of the assets of the corporation.
Drugs and Medicine
A sales and use tax exemption for drugs or medicine, without regard to whether it is prescribed or dispensed by a licensed practitioner of the healing arts, that is labeled with a national drug code issued by the Federal Food and Drug Administration. The bill also specifically exempts blood glucose monitoring test strips.
Adds Internet access services to the list of taxable services in Texas Tax Code § 151.0101 but exempts the first $25 of such access from the sales tax. The exemption applies without regard to whether the Internet access service is bundled with another taxable or nontaxable service. Internet access services are defined as services that enable users to access content, information, electronic mail, or other services offered over the Internet and may also include access to proprietary content, information, and other services as part of a package of services offered to consumers. Telecommunications services are specifically designed to exclude Internet access services.
"Internet" is defined as "collectively the myriad of computer and telecommunications facilities, including equipment and operating software, that comprise the interconnected worldwide network of networks that employ the transmission control protocol/Internet protocol, or any predecessor or successor protocols to the protocol, to communicate information of all kinds by wire or radio."
Small Business Franchise Tax
Eliminates franchise tax against corporations that have less than $150,000 in gross receipts.
Sales Tax Holiday – Clothing
This provision exempts certain purchases of clothing and footwear that is designed to be worn on or about the human body if:
(1) the sales price of the article is less than $100; and
(2) the sale takes place during a period beginning at 12:01 a.m. on the first Friday in August and ending at 12 midnight on the following Sunday.
Excluded from the exemption is
(1) any special clothing or footwear that is primarily designed for athletic activity or protective use and that is not normally worn except when used for the athletic activity or protective use for which it is designed;
(2) accessories, including jewelry, handbags, luggage, umbrellas, wallets, watches, and similar items carried on or about the human body, without regard to whether worn on the body in a manner characteristic of clothing; and
(3) the rental of clothing or footwear.
Local taxing authorities are allowed to repeal the clothing exemption after January 1, 2000.
Before and After School Program Credit
A franchise tax credit for contributions to certain before and after school programs. The credit cannot exceed 50% of corporation’s franchise tax liability. The credit is based on 30% of a corporation’s qualifying expenditures.
"Qualifying expenditures" include: (1) constructing, renovating, or remodeling a facility or structure to be used by the program; (2) purchasing necessary equipment, supplies, or food to be used in the program; or (3) operating the program, including administrative and staff costs.
House Bill 2574 – New Allocation Method for Corporate Aircraft.
This bill provides a presumption for the allocation method used when apportioning the value of corporate aircraft used both within and outside Texas. Under the bill, it is presumed that the portion of the value of a business aircraft allocable to Texas is determined by multiplying the total value by a fraction, the numerator of which is the number of departures from a location in Texas during the year preceding the tax year and the denominator of which is the total number of departures from all locations during that year.
The bill also specifically requires the appraisal office to appraise business aircraft to fairly reflect the aircraft’s use in Texas and prohibits the appraisal office from allocating to Texas a portion of the value that reflects its use outside Texas.
Senate Bills 779 and 1209 - Electronic Payment and Filing of Certain Property Tax Forms.
S.B. 779 allows taxpayers to electronically pay their property taxes. Taxpayers will first have to enter into an agreement with the county assessor to pay property taxes electronically. The agreement must be in writing and specify the type of electronic fund medium to be used.
S.B. 1209 allows taxpayers to send and receive filings from the appraisal district by electronic means. The taxpayer and local property tax officials must agree in writing and specify the form of electronic medium to be used. Filings that can be electronically filed include notices, renditions, application forms, and completed applications. Delivery of filings by electronic means are effective when received by a chief appraiser, property owner, or their designee.
Senate Bill 1359 - Modifies the Property Tax Appeal Procedures.
S.B. 1359 makes a number of minor changes with regard to a taxpayer’s appeal rights. Property tax agents must swear that a rendition is true and accurate to the best of agent's knowledge and belief as opposed to swearing that the rendition is true and accurate.
The bill removes the current prohibition against using information requested by a chief appraiser and not provided at least 14 days before a hearing. The bill requires affidavits filed in an appeal to identify the property and to state the action or determination that is the subject of the appeal.
House Bill 3549 - Successor Liability, Personal Property Tax.
This bill provides that a person who purchases a business, an interest in a business, or the inventory of a business from another person who is liable for delinquent taxes must withhold from the purchase price an amount sufficient to pay the taxes on the business personal property, plus any penalties and interest incurred. Moreover, the purchaser is liable for the taxes, penalties, and interest, if the seller fails to provide the purchaser with a receipt for taxes, penalties, and interest paid, or a tax certificate stating that no taxes, penalties, or interest is due.
Senate Bill 1464 - Separate Appraisal of Furniture and Fixtures.
This bill provides that if real property is appraised by a method that includes the value of furniture, fixtures, and equipment, then the furniture, fixtures, or equipment may not also be appraised as personal property.