Texas Governor Signs Tax Bills

The recently concluded 80th legislative session effected several major tax bills signed by Texas Governor Rick Perry prior to the June 17, 2007 constitutional deadline for gubernatorial action on legislation adopted during session.

The bills signed by Governor Perry include: House Bill 3928, the Margin Tax Technical Corrections bill; House Bill 3694, which revised and expanded the state’s Enterprise Zone Program; House Bill 3319, the Comptroller’s Sales Tax bill; House Bill 3314, the Comptroller’s Tax Enforcement bill; House Bill 735, which eliminates the state’s telecommunications infrastructure fee; and Senate Bill 242, which transfers administrative law judges who hear tax cases from the Comptroller’s office to the State Office of Administrative Hearings.

Additionally, Governor Perry signed the following:

Insurance Tax Legislation (House Bill 3315)

The centerpiece of House Bill 3315 is a new chapter added to the Insurance Code to permit the Comptroller to enter into reciprocal agreements, cooperative agreements, or compacts with other states for the enforcement of premium taxes imposed on surplus lines, unauthorized, and independently procured insurance.

The bill was proposed by the Comptroller. The new chapter gives the Comptroller broad flexibility with regard to the parameters of the agreements with other states. For example, it expressly approves agreements that:

• Establish a standardized premium allocation formula for allocating insurance premiums on a multistate basis;
• Adopt uniform terms and definitions, requirements for tax reporting on a multistate basis, and audit and refund claim procedures;
• Set audit assessment and refund claim limitation periods; and
• Provide for a procedure for one state to collect taxes due to another participating state, and a procedure for a state to verify a refund claim and for collecting refunds from the jurisdiction owing it.

The bill also permits the Comptroller to share information with other participating states and to notify a state when Texas conducts an audit of an insurer, agent, or other person, which indicates that insurance premium taxes are owed to the other participating state. It permits the Comptroller to use an audit conducted by another participating state as the basis for issuing an assessment of insurance premium taxes in Texas, and provides that the assessment is prima facie evidence that the amount shown as due is correct.

House Bill 3315 also made changes to various other premium tax provisions of the Insurance Code, including:

• Repeal of the administrative services fee imposed under Article 4.11A, which had not been enforced since 1991.
• Changes to the imposition of the retaliatory tax, including:
  • Exempting issuers of children’s health benefit plans approved under Section 1502.951 from the retaliatory tax with respect to money received for coverage provided under the plan; and
  • Giving the Comptroller rulemaking authority to enter into reciprocity agreements with other states to set aside retaliatory provisions in situations in which the states determine that retaliation is not the preferred approach to protect domestic insurers from excessive taxation or other financial obligations.
• Clarification that in calculating taxable premium receipts, the insurer is required to include total gross amounts of premiums, membership fees, assessments, dues, revenues, and any other consideration for insurance written by the insurer in a calendar year on property or risk located in the state. This provision also adds “home warranty insurance” to the types of insurance covered by the statute.
• Giving the Comptroller rule-making authority, with regard to taxes on surplus lines, unauthorized, and independently procured insurance, to establish that premiums are considered to be on risks located in the state if the insured’s home office or state of domicile or residence is located in the state, or to accommodate changes in federal statute or regulations that would otherwise limit the state’s ability to directly collect its insurance taxes.
• Giving the Comptroller rule-making authority to change the accrued tax amount that triggers prepayment of the surplus lines insurance tax, and the prepayment deadlines. Currently, prepayment is required when the amount of accrued tax is at least $70,000; the surplus lines agent currently is required to make the payment before the 15th day of the following month.
• Raising the annual rural fire protection assessment from a total of $15 million a calendar year to $30 million a calendar year. The money goes to fund volunteer fire department assistance. The assessment applies to insurers licensed in the state that insure homeowners insurance, fire insurance, farm and ranch owners insurance, private passenger automobile physical damage insurance, commercial automobile physical damage insurance, and commercial multiple peril insurance. The change does not apply to assessments made on or before September 1, 2007.

Sourcing Rule Changed for Mass Transit Authority Sales and Use Taxes (House Bill 142)

Governor Perry also signed House Bill 142, which repeals the destination sourcing rule applicable to local sales and use taxes imposed by the state’s ten mass transit authority districts on sales of goods for transport out of the district.

The bill means that those sales will be sourced to the origin of the sale and will be subject to the MTA tax applicable at the origin site. House Bill 142 was sponsored by Representative Jim Jackson, R-Carrollton, and Senator John Carona, R-Dallas. Representative Jackson said he filed the bill in response to complaints from small businesses who found destination sourcing of the tax to be too complicated and overly burdensome.

The bill is effective on September 1, 2007 and applies prospectively.