News and Insights

Texas Legislature Adjourns 81st Session; Enacts Property Tax Reforms

Tax Development Jun 08, 2009

The Texas Legislature adjourned its 2009 session on Monday, June 1, after increasing the small business exemption under the Texas Franchise Tax and enacting a package of property tax reforms. Few other tax bills of any note made it through both chambers.

The Legislature agreed to temporarily increase the franchise tax small business exemption to exempt businesses having total revenues of $1 million or less, up from the current exemption capped at $300,000 total revenues. The increase, however, will apply only to tax returns due in 2010 and 2011, and the exemption will then drop to $600,000. The change is being paid for in part with new revenue expected as a result of another tax change involving smokeless tobacco: Effective September 1, 2009, the state tax on smokeless tobacco products will be based on weight rather than list price.

The property tax reform package was championed by State Representative John Otto, who is also a Director in Ryan’s Business Development group, and Senator Tommy Williams. The centerpiece of the package was a resolution authorizing a fall election on a constitutional amendment that would give the state authority to enforce uniform appraisal standards and procedures across all counties. The Otto/Williams package also included:

  • House Bill 3613 created a six-county pilot program for owners of commercial property valued at $1 million or more to appeal local Appraisal Review Board decisions to the State Office of Administrative Hearings. The program is limited to 3,000 appeals statewide. The six participating counties are Harris, Travis, El Paso, Bexar, Cameron, and Tarrant. Dallas County, which had been included in the pilot since the bill was filed, was removed in conference committee at the insistence of Dallas County Chief Appraiser Ken Nolan, who opposed the bill.
  • Senate Bill 771 initiated new restrictions on property value increases the year after a property owner succeeds in lowering the appraised value of a property through protest, court action, or arbitration. The bill bars an increase the following year unless the chief appraiser has substantial evidence to support it.
  • Senate Bill 771 requires the central appraisal districts to take into account all available evidence of value that is specific to a piece of property in determining that property’s market value.
  • Senate Bill 771 increased the penalty applicable to ex parte communications between the Central Appraisal District and members of an Appraisal Review Board.
  • Senate Bill 771 provides guidelines for determining whether property is “comparable” for appraisal purposes. The bill provides that whether a property is comparable to the subject property is required to be determined based on similarities with regard to location, square footage of the lot and improvements, property age, property condition, property access, amenities, views, income, operating expenses, occupancy and the existence of easements, deed restrictions, or other legal burdens affecting marketability. The bill further prohibits the use of property sales that did not occur within 24 months of the date the property is being appraised unless there were not enough sales during that period to constitute a representative sample.
  • House Bill 3613 protects residential homestead property from the requirement that property is valued at its highest and best use. House Bill 3613, which is contingent upon passage next fall of a constitutional amendment, provides that a residential homestead must be valued as a homestead, regardless of its highest and best use. The bill further provides for a property tax exemption for United States military veterans who receive 100 percent compensation for service-related injuries and are rated 100 percent disabled or individually unemployable.

Ryan’s Public Affairs Position:

Ryan’s Public Affairs practice was heavily involved in the passage of both Senate Bill 771 and House Bill 3612. Members of the practice worked with Representative Otto to fine-tune the parameters of the pilot program created by his bill, House Bill 3612, and lobbied to pass the bill. Ryan also drafted major provisions of Senate Bill 771 and worked to negotiate acceptable changes to Senate Bill 771 with interested parties, and lobbied for its passage.

Other tax legislation of interest includes:

Pollution Control Property Tax Exemption

House Bill 3206 modifies the Texas Commission on Environmental Quality’s program for determining property tax exemptions for certain pollution control property. The bill requires the agency to use its own cost analysis procedure when making a use determination for Tier IV equipment listed in Section 11.31(k), Tax Code. It requires the creation of a permanent advisory committee made up of members from industry, appraisal districts, taxing units, and environmental groups, as well as unaffiliated members with technical expertise.

The bill goes into effect September 1, but its provisions apply to use determinations that are not yet final on that date and to applications filed after January 1, 2009.

Local Sales Tax Allocation

A group of cities forced a change to the local sales tax allocation rules but failed in their attempt to create a new right for local jurisdictions to challenge decisions of the Comptroller that result in a loss of local tax dollars.

Lawmakers filed several local tax allocation bills this year in response to a Comptroller decision concerning a retail company that was permitted to source its sales to its warehouse locations and away from the cities in which the retailer had stores.

The adversely affected cities convinced the Legislature to change provisions of the Tax Code addressing where a retail sale is deemed to have been consummated. The change provides that when a retailer has more than one place of business in the state, a sale by the retailer will be deemed to have been consummated at the place of business where the retailer first received the order, provided that the order is placed in person by the purchaser or lessee of the taxable item.

To buffer the impact of this change on some cities, the bill contains a special section that sets up a five-year exemption from the new allocation rule to cover sales made by a retailer under the terms of an economic development agreement with a city or county that requires the retailer to source sales to that city or county. To qualify, the agreement must have been in effect before January 1, 2009, and the city must disclose its existence to the Comptroller no later than September 1, 2009 and provide the Comptroller information regarding the number of warehouses and other retail outlets affected by it.

Ryan’s Public Affairs Position:

Ryan worked with Representative Senfronia Thompson and Senator Robert Deuell on the local allocation sales tax bills on behalf of its client, an association of state retailers, to assure that the bills affected only allocation related disputes. Ryan opposed Representative Thompson’s bill, House Bill 1377, that would have given local jurisdictions a new right to protest to the State Office of Administrative Hearings decisions of the Comptroller impacting local taxes because the bill was broadly written and appeared to also permit a local jurisdiction to contest a decision involving taxpayer refund claims if the claims resulted in a loss of sales tax revenue to a local jurisdiction.

Manufacturing Zone Credits

Representative Tan Parker’s bill to create new sales tax incentives targeted to the manufacturing industry died. House Bill 4525 would have offered certain manufacturing projects a refund on half of the additional state sales tax revenue that a qualified manufacturing project brought to a region.

Sales Tax Exempt Organizations

Certain religious, educational, and public service organizations that have not applied for exempt status under the sales tax will not be permitted to apply for a refund of taxes paid prior to their applications.

Senate Bill 1199, by Senator Steve Ogden, provides that these organizations are not considered to be exempt until the earlier of their application date or the date of the assessment of tax liability as a result of an audit by the Comptroller. The bill becomes effective September 1, 2009. Under current law, such organizations can seek a refund for taxes paid during the prior four years if the organization would have been exempt had it filed for the exemption during that time.

Retailer Credits for Refunded Sales Tax

Senate Bill 1199 also clarifies that any time a retailer refunds sales tax to a customer in a returned merchandise transaction, the retailer is entitled to a corresponding credit from the state for the refunded tax. This change corrects a glitch in the Tax Code that appeared to permit a credit for the refunded tax, only if the retailer also refunded the entire original purchase price. That created an inequity for retailers that have return policies that reduce the amount of refund of the purchase price when a customer has kept merchandise for an extended period of time before returning it.

Ryan’s Public Affairs Position:

Ryan worked with its client, a national retail department store company, and the Comptroller’s Tax Policy Division to develop statutory language to correct this issue, and it lobbied for its passage.

Expanded Sales Tax Holiday

School supplies will be added to the state’s back-to-school sales tax holiday. House Bill 1801, by Representative Dwayne Bohac, R-Houston, takes effect July 1, 2009—in time for the annual back-to-school sales tax holiday this year.

Expanded Agriculture Exemption

The Legislature expanded the sales tax exemption applicable to agricultural uses. House Bill 3144 clarified and codified existing Comptroller policy regarding the exemption for equipment used on a ranch or farm to build or maintain roads; water facilities; or produce food, grass, feed, or other agricultural products. It clarifies that agricultural aircraft are entitled to the same exemption as other agricultural equipment, and it exempts tangible personal property used or incorporated into a structure that is used for the proper disposal of poultry carcasses under the State Water Code.

Bank Apportionment Issue

House Bill 4611 clarifies the franchise tax apportionment rules applicable to proceeds from the sale of a loan or security by a bank. It takes effect January 1, 2010 and applies to reports due on or after that day.

Currently, Section 171.106(f), Texas Tax Code, provides that the gross proceeds of a sale of a loan or security are considered gross receipts for apportioning margin if the loan or security was treated as inventory by the seller for federal income tax purposes. Otherwise, gross receipts would be the gross proceeds from the sale minus the basis of the loan or security. The bill adds a provision stating that a lending institution may use the gross proceeds of the sale of a loan or security as gross receipts if the loan or security were categorized as "Securities Available for Sale" or "Trading Securities" under Financial Accounting Standard No. 115. It also limits the use of Financial Accounting Standard No. 115 to taxable entities that are lending institutions.

Ryan Public Affairs Position:

On behalf of two state banking associations, Ryan worked with the Comptroller’s Tax Policy Division to develop statutory language to clarify this issue and was heavily involved in the lobbying for its passage.

Motor Fuels Tax Code Clean-Up Legislation

After three unsuccessful attempts in past sessions, the Comptroller’s motor fuels “clean-up” legislation passed. Senate Bill 1495 amended sections of Chapter 162, Tax Code, and sections of the Transportation and Water Codes to clarify administrative and enforcement issues relating to the motor fuels taxes collected by the Comptroller.

Motor Fuels Tax Power Take-off Exemption

An effort to exempt diesel fuel used to operate power take-off and auxiliary equipment failed. The House amended the exemption language onto Senate Bill 1495, the motor fuels tax clean-up bill. But the Senate refused to concur in the amendment, which was subsequently removed in a conference committee appointed to resolve the differences between the House and Senate versions of the bill. Texas historically exempted diesel fuel used to power such equipment until 2003 when the exemption was inadvertently deleted from the Tax Code.

Ryan Public Affairs Position:

At the request of Ryan and others, Senator Tommy Williams this year filed Senate Bill 757 to restore the exemption. However, the Senate Finance Committee did not schedule Senate Bill 757 for a hearing because of the bill’s $8 million per year fiscal note. Ryan led the drive that resulted in a unanimous vote on the House floor to amend Williams’ bill language onto Senate Bill 1495. Ryan also negotiated alternative language with the Comptroller’s Office that would have reduced the fiscal impact by one-third. Despite these changes, the language was stripped in conference due to budget concerns by key senators.

Local Option Motor Fuels Tax

Driven mainly by Dallas-Fort Worth local government leaders facing tremendous challenges to fund transportation and mobility infrastructure projects, a group of local leaders worked through the previous interim and 81st Legislative Session to create new funding tools. Senate Bill 855 in its various iterations provided for the imposition of a county motor fuels tax with voter approval. The local motor fuels tax would have been limited to funding mobility improvement projects in the approving counties or in counties that were wholly or partly located in the boundaries of the same metropolitan planning organization depending upon the various versions of the bill. The local motor fuels tax would have been collected and administered by the Comptroller’s Office and, depending upon the various versions, would have had a rate ranging 2 to 10 cents per gallon.

Ultimately, Senate Bill 855 and similar local motor fuels tax provisions that were attached to other bills failed to pass the 81st Legislature. While the concept of a local motor fuels tax did not pass this session, one should expect to see this idea again during the 82nd Legislative Session.

Ryan Public Affairs Position:

Representing the State Principal Trade Association for convenience store companies and petroleum marketers, Ryan reviewed the statutory language and practical administrative issues to develop suggested changes in the proposed statutory language.

Motor Vehicle Tax

The Legislature clarified when the transfer of the title to a motor vehicle qualifies as a “gift.” House Bill 2654 allows a $10 gift tax for a motor vehicle only if a person receives a vehicle as a gift from a spouse, parent, stepparent, grandparent, child, stepchild, sibling, grandchild, guardian, an estate, or a not for profit organization recognized under federal law. The bill also requires a notarized statement confirming that the motor vehicle is a gift and confirming the relationship of the two parties to qualify for the gift tax on motor vehicles.

Motor Vehicles Tax Bad Debt Credit

Unlike the sales tax, the state’s motor vehicle tax does not provide for relief when a seller of a vehicle prepays the tax to the state but does not collect it due to the purchaser’s default on an auto loan. Representative Mike Villarreal sought unsuccessfully to change that with House Bill 4201, which would have created a limited right to a refund of the tax.

Ryan’s Public Affairs Position:

Representative Villarreal filed House Bill 4201 at Ryan’s request on behalf of its client, one of the nation's leading automobile manufacturing companies. The language limited the refund to motor vehicle sales made by dealers and financed through a finance company captive to the automobile manufacturer. The House Ways and Means Committee recommended passage of the bill, but the bill died in the House on the deadline date for bills to pass their House of origin.

Texas Enterprise Zone Program

Governor Rick Perry has signed into law House Bill 271, which expands the number of projects that local communities can nominate to participate in the Texas Enterprise Zone Program.

Cities with a population of more than 250,000 may nominate nine projects per biennium, up from six projects under current law. Cities with a population of less than 250,000 may nominate six, up from four. The change becomes effective September 1, 2009.

The bill also clarified that all projects at qualified business sites qualify for an additional concurrent designation, as long as there are additional new capital investments being made and a commitment to additional new or retained jobs.

Ryan Public Affairs Position:

Ryan’s Public Affairs and Credits and Incentives practices jointly supported House Bill 271, working both with the bill’s author, Representative Solomon Ortiz, Jr., and the Governor’s Office of Economic Development. As originally filed, the bill did not contain clarifying language concerning concurrent designations, but Ryan worked with Ortiz to amend the bill and lobbied for its passage.

Texas Economic Development Act

With House Bill 3676, the Legislature extended the life of the Act for three more years, which permits school boards to enter into certain tax abatement agreements. The bill does put in place some new requirements and restrictions on the agreements.