During its recently adjourned legislative session, the Texas Legislature enacted numerous changes to the Tax Code, as well as a number of bills to create or change economic development incentives. In most instances, the bills are still awaiting action by Governor Rick Perry, who has until June 16, 2013 to veto legislation. The following is a summary of actions on key bills.
Research and Development Incentives: House Bill 800 gives taxpayers the option of taking either a sales tax exemption on certain purchases used in research and development or a tax credit under the franchise tax.
- The sales tax exemption is available for a taxpayer engaged in qualified research, as defined by Section 41 of the IRS Code on depreciable personal property directly used in qualified research.
- The franchise tax credit is available for qualified research and development expenditures in Texas. Again, the franchise tax credit may not be claimed for a period during which the business or a member of its combined group claimed a sales tax exemption on property used in research and development. Franchise tax credits may be carried forward for 20 years.
If signed by the Governor, the bill is effective January 1, 2014. For more details, please see “Texas Legislature Approves Incentives for Research and Development Activities.”
Data Center Incentive: House Bill 1223 provides a state sales tax exemption for property that is necessary and essential to operate a qualified data center. To be eligible, the data center owner, operator, and/or occupant must make a capital investment of at least $200 million over a five-year period and create at least 20 full-time permanent jobs that pay at least 120% of the average weekly wage in the county in which the job is located. The jobs must be maintained for five years. Projects with a capital investment of at least $200 million may qualify for a ten-year state sales tax exemption, while those having a $250 million capital investment may qualify for a 15-year exemption.
An eligible data center has at least 100,000 square feet of space at a single location and is used only by a single occupant. To claim state sales tax exemptions, a data center must be preapproved by the Comptroller and receive a data center registration number from the Comptroller. A qualifying data center cannot enter into an agreement under Tax Code Chapter 313 and claim state sales tax exemptions. The qualifying data center may claim the state sales tax exemption or enter into a Chapter 313 agreement.
The bill is effective September 1, 2013 if signed by the Governor. For a more detailed explanation of the bill, please see “Data Center Incentive Passes in Texas.”
Texas Enterprise Zone Program: Senate Bill 1548 relaxes the definition of a “qualified employee” under the Texas Enterprise Zone Program to include employees who transport the enterprise project’s goods or services. The bill would take effect immediately if signed by the Governor.
Omnibus Franchise Tax Relief Legislation: House Bill 500 (“HB 500”), an omnibus franchise tax reform bill, provides for temporary tax rate reductions and a new method of computing taxable margin, continues the small-business exemption (which was scheduled to be phased-out), allows deductions for certain flow-through funds, addresses issues with cost of goods sold for two industries, and simplifies reporting requirements. Most provisions of the bill are effective for reports due after December 31, 2013. They include:
Temporary Rate Cut
HB 500 temporarily lowers the franchise tax rate for 2014 to 0.975% (from 1%). Qualifying retailers and wholesalers may use 0.4875% (from 0.5%) for 2014. Taxpayers with total revenue of $10 million or less may continue to elect to use the “E-Z” computation and pay the E-Z rate of 0.575%.
If the Comptroller certifies that there is sufficient revenue, qualifying retailers and wholesalers may use a further reduced rate of 0.475% for 2015 tax reports. The 2015 rate for taxpayers will be 0.95%. Taxpayers that qualify for E-Z may elect to use the E-Z rate of 0.575%.
Small Business Exemption
A taxpayer whose total revenue is $1 million or less must file a report but is not required to pay franchise tax. The small business exemption was scheduled to be reduced to $600,000 in 2014. HB 500 repealed the scheduled reduction and continues the exemption for companies with revenue of $1 million or less.
New Option for Determining Taxable Margin
HB 500 allows a taxpayer to compute taxable margin based on:
Flow-Through Funds Excluded from Revenue
- Total revenue minus $1 million,
- Total revenue minus 30%,
- Total revenue less cost of goods sold for qualifying taxpayers, or
- Total revenue less compensation.
HB 500 allows the following industries to subtract certain flow-through funds from revenue:
Cost of Goods Sold Deductions
- A pharmacy network may exclude reimbursements for payments to pharmacies in the pharmacy network;
- An aggregate transportation company may subtract payments to independent contractors hauling aggregates for the transportation company;
- A barite transportation company may subtract payments to subcontractors hauling barite for the transportation company;
- A landman company may exclude payments to subcontractors providing landman services for the company;
- A healthcare provider or other taxpayer who provides vaccinations may exclude amounts paid for the vaccines;
- A marine transportation company that does not use cost of goods sold to compute its taxable margin may exclude direct costs of providing transportation services as provided by Section 171.1012; and
- A carrier registered under Chapter 643, Transportation Code, may exclude from its total revenue flow-through revenue derived from taxes and fees.
Special Deductions and Credits
- A pipeline that gathers, stores, transports, or processes crude oil, petroleum products, natural gas condensate, and natural gas liquids may subtract as a cost of goods sold its depreciation, operations, and maintenance costs related to its services. “Processing” is defined as the physical or mechanical removal, separation, or treatment of crude oil, finished petroleum products, natural gas, condensate, and natural gas liquids, after those materials are produced from the earth. Processing does not include the chemical or biological transformation of those materials.
- Movie theaters may deduct as cost of goods sold the amounts they pay for the right to exhibit a movie. HB 500 states that this provision is a clarification of existing law. It becomes effective September 1, 2013.
- Taxpayers relocating their home offices to Texas will be permitted to deduct their relocation costs from their apportioned margin. The deduction is not available if the taxpayer did business in Texas before relocating and/or was a part of a unitary group and a member of the group was doing business in Texas. The deduction must be taken on the business’s first franchise tax report. Taxpayers taking the deduction must keep proof of the deducted relocation costs. It becomes effective September 1, 2013.
- A taxpayer may be eligible for a credit for eligible expenses incurred in the rehabilitation of a certified historic structure. The taxpayer must have an ownership interest in the structure and invest $5,000 or more in rehabilitation expenditures. The credit is limited to 25% of the eligible expenses, and unused credits may be carried forward five reports. The credit will take effect January 1, 2015.
- Insurance companies that pay premium taxes are exempt from the franchise tax. HB 500 clarifies that the existing exemption includes out-of-state insurance companies that do not do business in Texas and that pay premium or occupation taxes to other states. As exempt entities, these companies are not included in the combined group of any non-exempt affiliate filing a franchise tax return in Texas.
- Corporations formed by local governments to purchase electricity for the local entities are exempt.
- HB 500 expands the definition of a retailer to include auto-repair shops, companies that sell goods using rental-to-own agreements, and businesses that rent or lease tools, party and event supplies, furniture, or heavy construction equipment. Retailers pay a lower tax rate.
- A receipt from Internet hosting is a receipt for business done in this state if the customer is in Texas.
- A taxpayer that sells electricity must file a separate franchise tax report from affiliates that do not sell electricity.
- Effective with the 2014 report, taxpayers are no longer required to provide information regarding the gross receipts of members of their combined group if the members are not doing business in Texas.
The Legislature also passed several other franchise tax bills, including:
Clean Energy Projects: Under House Bill 2446 (“HB 2446”), a clean energy project is eligible for a franchise tax credit, as calculated and issued by the Comptroller, and a sales tax exemption, as provided in Tax Code Section 151.334. HB 2446 redefines “clean energy project” in the Health and Safety Code and the Natural Resources Code to add natural gas to the list of fuels used by a project to generate electricity. The bill provides that the Comptroller may not issue a franchise tax credit before September 1, 2018. In addition, the bill provides that a qualifying clean energy project has 20 years to carryforward any unused clean energy credit. Further, the project may assign its clean energy credit to other taxable entities. HB 2446 is effective when signed by the Governor.
Crop Dusters: Effective January 1, 2014, House Bill 2451 provides an exclusion from total revenue for the cost of labor, equipment, fuel, and materials for crop dusters.
Flow-Through Funds Mandated by Subcontracts: Under the current law, taxpayers may exclude from revenue certain payments that are mandated by contracts. House Bill 2766 would allow the same treatment for payments mandated by subcontracts. Further, the bill adds remediation to the list of activities for which payments required by contracts or subcontracts may be excluded from total revenue. If signed by the Governor, the bill is effective for reports due after December 31, 2013.
Sales and Use Tax
Telecommunications Tax Rebate: House Bill 1133 allows companies in the business of providing cable television service, Internet access service, or telecommunications services to claim a refund of sales or use tax paid on property directly used or consumed by the provider or a subsidiary in or during the:
- Distribution of a cable TV service;
- Provision of Internet access service; or
- Transmission, routing, or reception of telecommunications services.
It does not matter whether the equipment is purchased, rented, or leased. If signed by the Governor, the bill will be effective September 1, 2013.
The total amount of sales tax the state can refund under this provision is limited to $50 million each calendar year. If the refunds requested exceed $50 million, the state will prorate each provider’s refund. Further, the refund is limited to state sales and use tax. Local sales and use taxes are not eligible for refund under this provision. Property for which a service provider claims a sales tax refund under this provision is not “an eligible investment” under Chapter 313, Tax Code. Refunds are not available for property used to provide data processing or information services.
Property Used in Offshore Spill Containment: House Bill 1712 provides a property and sales and use tax exemption for equipment designed to contain a blowout in more than 5,000 feet of water. To qualify for the exemptions, the equipment cannot be used for exploration of production of oil, gas, or other minerals. The property tax exemption will be effective for the tax year that begins on or after the effective date of the bill. The bill will take effect when signed by the Governor.
Hospital Beds and Intravenous Systems and Supplies Clarified: House Bill 3169 amends Tax Code Section 151.313 to clarify that intravenous (IV) systems and related supplies are exempt whether inserted into a vein, artery, etc. Further, the bill clarifies that the exemption includes IV systems used to diagnose or treat patients. This clarification should result in reduced record-keeping requirements and will protect patient privacy. In addition, the amendment provides that exempt hospital beds include specialized beds, such as infant cribs and bariatric (obesity), pediatric, rotation, and pressure reduction therapeutic beds.
Newspapers – Average Price Requirement Now $3: Current law exempts sales of newspapers from the sales tax if the newspaper has an average sales price of $1.50 or less over a 30-day period. House Bill 3169 amends Tax Code § 151.319 to change the required “average price” to $3 effective September 1, 2013.
Destination Management Companies: Destination management companies provide nontaxable services and pay tax on goods and taxable services used in their service. House Bill 3169 expands the definition of destination management services.
Single-Size Servings of “Snacks” Taxable: Senate Bill 1151 adds “snack items” to the definition of nontaxable food. Snack items are taxable if sold through a vending machine or if sold in individual-sized portions. Individual-sized portions are packages labeled as one serving or that contain less than 2.5 ounces if the package does not indicate the number of servings.
Snack items include:
- Breakfast bars, granola bars, nutrition bars, sports bars, protein bars, or yogurt bars (that are not labeled and marketed as candy);
- Snack mix or trail mix;
- Nuts (candy-coated nuts are candy and taxable regardless of size or if purchased with food stamps);
- Popcorn; and
- Chips, crackers, or hard pretzels.
If signed by the Governor, the bill is effective September 1, 2013.
Gold and Silver: There is an exemption from sales tax (but not use tax) for sales of precious metals and collectible coins if the total sales price is at least $1,000. If signed by the Governor, effective October 1, 2013, House Bill 78 provides an exemption from sales and use tax for sales of the gold, silver, or collectible coins or platinum, gold, or silver bullion regardless of the sales price.
Local Tax Place of Business – Purchasing Company Defined: Senate Bill 1533 clarifies that a purchasing company is a place of business for local tax collection purposes if the purchasing company provides significant business services, including logistics management, purchasing, and inventory control at the place of business. This bill is effective when signed by the Governor.
Mixed Beverage Tax
Taxpayers Allowed to Combine Sales Tax and Mixed Beverage Tax on Check: House Bill 3572 decreases the current mixed beverage gross receipts tax from 14% to 6.7% and creates an 8.25% mixed beverage sales tax. The bill also allows taxpayers to separately state mixed beverage taxes on checks or tickets to customers without further explanation. In addition, taxpayers may combine mixed beverage taxes with regular sales on a sales check.
Motor Fuels Tax
Option to Pay Tax on Diesel Regardless of Mixture: The motor fuels law provides exemptions from tax on diesel fuel based on the volume of water, fuel ethanol, renewable diesel, and biodiesel blended with diesel if the fuel meets certain labeling requirements. Because the taxation labeling and reporting requirements needed to maintain this exemption create additional costs, House Bill 3086 allows taxpayers to forgo both the exemption on the non-diesel fuel components in the product and labeling requirements. Diesel fuel on which tax had been paid under the provisions of the bill is considered taxable diesel fuel. This bill, if signed, takes effect September 1, 2013.
CNG and LNG No Longer Taxed as LPG – December 31, 2013 Refund Deadline: House Bill 2148 amends Chapter 162, on motor fuels tax, to impose tax on compressed natural gas (CNG) and liquefied natural gas (LNG) at 15 cents per each equivalent of a diesel gallon or a gasoline gallon. If signed by the Governor, effective September 1, 2013, the state will no longer issue liquefied gas decals (prepaid tax) for purchases of CNG and LNG. The state will continue to sell prepaid LPG tax decals. A person who has a prepaid tax decal purchased for CNG or LNG that is valid after August 31, 2013 must request a pro-rata refund of the unused portion of prepaid taxes before January 1, 2014.
Diesel Fuel Tax Credit for Fuel Used if Power Take-Off Equipment Fails: House Bill 1288 and Senate Bill 145 would have allowed a tax credit or refund of tax paid on diesel fuel used in diesel-powered auxiliary equipment. Both bills died due to a fiscal note of more than $4.2 million for the biennium.
Captive Insurance Companies: Senate Bill 734 authorizes the formation of captive insurance companies in Texas. Captive insurance companies will be required to pay a 0.5% premium tax, with a minimum premium tax of $7,500 and a maximum of $200,000 each year. Captive companies are also subject to maintenance taxes. The Insurance Commissioner can postpone or waive the imposition of any insurance fees or taxes for up to two years for any captive insurance company relocating to Texas. This bill will take effect if (or when) the Governor signs it.
Managing Underwriter Responsibility for Surplus Lines Tax: House Bill 1405 provides that a managing underwriter should collect surplus lines taxes imposed by Chapter 225, Insurance Code. The bill allows the surplus lines agent to collect and remit, if the managing underwriter and the surplus lines agent enter into a written agreement regarding the collection and remittance of the tax. The agreement may not be retroactive. If signed by the Governor, the bill is effective January 1, 2014.
Exemption on Coverage for Baled Cotton: House Bill 2972 provides an exemption for ocean marine surplus line coverage purchased for baled cotton for export. The bill is effective January 1, 2014.
TECHNICAL INFORMATION CONTACT:
Susan Traylor Bittick