texas sales, use and franchise tax...

Texas Sales, Use and Franchise Tax Update

2012 Spring Accounting Expo

Houston CPA Society

May 22, 2012

Dan Butcher(214) 651-4640

[email protected]

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Overview

• Legislative Changes

– Administrative

– Sales Tax

– Franchise Tax

• Sales Tax Cases, Hearings and Policy Developments

• Franchise Tax Cases, Hearings and Policy Developments

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Legislative Changes

• Administrative

– Records Retention

• 151.025 (sales tax), 152.0063 (MV sales tax), 160.046 (boat sales tax) and 162.0125 (motor fuels tax) requires sellers and purchasers to retain specific records in the form required by the Comptroller

• Texas Tax Code §111.0041 was amended to extend the period during which records must be retained beyond 4 years through any period when tax penalty or interest may be assessed or an administrative hearing or judicial proceeding is pending with respect to the tax penalty or interest

• Records must be contemporaneous and “appropriate.”

• Effective October 1, 2011

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Legislative Changes

• Administrative – Enforcement

• Records required under 151.025 expanded to include records of tax collected.

• Tax amount thresholds for criminal penalties for collected unremitted tax drastically reduced.

– Class C misdemeanor <$50 (down from $10,000)– Class B misdemeanor <$500– Class A misdemeanor <$1,500– A state jail felony $1,500 to $20,000– 3rd degree felony $20,000 to $100,000– 2nd degree felony $100,000 to $200,000– 1st degree felony $200,000 or more

• Series of similar transactions are aggregated.• Criminal penalties added for failure to document resale of certain

alcohol and tobacco products obtained under a resale certificate.

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Legislative Changes

• Administrative

– Prepayments

• August 2013 sales tax (and alcoholic beverages and motor fuels taxes) grossed up by 25%

• September 2013 tax due reduced by credit for tax prepaid in August

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Legislative Changes

• Administrative

– Tax Amnesty

• Comptroller directed to administer a temporary tax amnesty period providing waiver of penalty and interest for voluntary disclosure. Rider to HB1. Ongoing now. Open through August 17, 2012.

– Administrative Provisions

• $50 penalty for failing to file a required report, even if no tax due with report and whether or not report is later filed. SB1 amends for most taxes under Title 2 of the Texas Tax Code (Sales Tax, Franchise Tax, etc….).

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Legislative Changes

• Sales Tax

– Nexus

• Definition of “retailer” expanded to include “anyone who has an agreement with the owner of tangible personal property to sell, lease or rent the property without further action by the owner.” SB1 amendments to Texas Tax Code §§151.008 and 151.107 (effective January 1, 2012).

• Adopt Comptroller position that a retailer is engaged in business in Texas if the retailer owns directly, or indirectly, a 50% or greater interest in (i) a facility in Texas that deliversgoods to customers or (ii) a business location that sells a similar line of products or (iii) a business location used to promote sales or maintain a marketplace. SB1 amendments to 151.107 (effective January 1, 2012).

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Legislative Changes

• Sales Tax – Sale for Resale Exemption Modified

• Combs v. HealthCare Corporation (BCBS) 3rd Ct. of Appeals (March 2011 and July 2011) held that a sale for resale exemption was allowed when taxable goods and services were purchased for use to perform non-taxable administrative services for the federal government.

• Sale for resale exemption modified to limit the sale for resale exemption to goods and services purchased for resale with or as a taxable item. The change overrules holding of BCBS by exempting from sale for resale exemption tangible personal property or taxable service purchased for the purpose of performing a non-taxable service, regardless of whether title transfers to the service provider’s customer, excepting tangible personal property and service resold to the federal government when the cost of the tangible personal property or service is billed to the government as a direct or indirect cost, and certain other requirements are met. (SB1 amendment to Texas Tax Code 151.006 (effective October 1, 2011).

– Note – Tax Policy News in September 2011 noted that no prior contract exemptions were included in the enabling legislation for sales tax changes made in the 82nd Legislative Sessions.

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Legislative Developments

• Sales Tax

– Internet Hosting. Legislature clarified that presence in Texas as a userof “Internet hosting” is not engaging in business in Texas. HB 1841 adding Texas Tax Code 151.108.

• Comptroller July 2011 Tax Policy News clarified that:

1. The Internet Hosting provider who owns or leases servers in Texas has nexus and must collect tax from Texas customers on the internet hosting service (as data processing under Section 151.0035 and Comptroller Rule 3.330, subject to the 20% exemption in Section 151.351).

2. Purchasers of internet hosting services for use in Texas from a seller with no Texas nexus must remit use tax on the service.

3. A no-nexus seller to Texas customers doesn’t become responsible for collecting use tax on sales into Texas solely because it uses a Texas internet hosting service.

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Legislative Developments

• Sales Tax Changes

– Volunteer Firefighters and EMS organizations can hold 10 tax-free sales or auctions of up to 72 hours in duration, each year. S1927 (effective June 17, 2011)

– Dairy Farm Buildings. Exempts TPP incorporated into or attached to a free-stall dairy barn or to a dairy structure used solely for maternity purposes located on a commercial dairy farm and used exclusively for milk production – HB 268 and 2810 amend §151.316 effective September 1, 2011.

– Agricultural Use Exemption Tightened. Purchasers claiming the agricultural use exemption for purchases must apply to the Comptroller for a registration number before claiming the exemption. (Apply online at www.GetReadyTexas.org or by completing and mailing to Comptroller an Application for Texas Agriculture and Timber Registration Number (AP-228). Number must be renewed every 4 years. HB268 adding §151.1551 effective September 1, 2011.

• New exemption certificates, new Form 01-924 or Form 01-925 are required from purchasers beginning January 1, 2012. Old blanket certificates not valid beginning January 2, 2012. (TPN September 2011)

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Legislative Changes

• Sales Tax

– Oilfield Portable Units made subject to sales tax, not motor vehicle or hotel occupancy taxes. HB 3182 amended §151.308 effective September 1, 2011. Applies to bunkhouses, trailers, semi-trailers and manufactured housing used exclusively at a well site.

– Export Documentation SB 776 tightened requirements for export documentation required to support a refund of Texas sales or usetax when tangible personal property is exported. Effective September 1, 2011.

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Legislative Changes

• Franchise Tax

– $1 million small business exemption extended through 2013. SB1 (effective September 28, 2011).

– Concert promoters and certain couriers allowed to exclude from revenue, payments to performers and subcontractors. SB1 (effective January 1, 2012).

– Business primarily engaged in apparel rental can use the .5% rate. SB1 (effective January 1, 2012).

– Unincorporated Political Committees are not subject to franchisetax for reports originally due on or after January 1, 2012. §171.0002 amended by SB1.

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Sales Tax Cases, Hearings and Policy Developments

• Cases

– Delta Airlines, Inc. v. Combs 3rd Ct. of Appeals (August, 2010)

• Delta sought a refund of Texas sales tax paid on purchases of janitorial and maintenance services claiming the “sale for resale”exemption applied.

• Delta’s leases for terminal space at DFW and Houston Intercontinental required that it provide janitorial and maintenance services on the occupied space. Delta purchased the services from a third party. The purchased services were taxable as “real property services.”

• Delta argued it purchased the services to resell them to the airports under the leases.

• Held, the airports are not purchasing janitorial and maintenanceservices from Delta. The airports leased space to Delta with requirement that Delta maintain the space it was leasing.

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• Cases – Combs v. HealthCare Services Corporation (BCBS) 3rd Ct. of Appeals

(March 16, 2011 and July 7, 2011) (Discussed above)– Combs v. Home & Garden Party, Ltd. (3rd Ct. of Appeals, November,

2010)• Appeal from a district court holding ordering sales tax be refunded

to taxpayer.• HGP manufactures home decorating products and sells the products

at wholesale to independent retailers.• HGP also purchases items that it repackages prior to sale.• HGP sought exemption under the manufacturing exemption (Texas

Tax Code §151.318) for packaging materials used for both the manufactured products and the repackaged products.

• Held, the manufacturing exemption is not available to HGP’s purchase of materials used to package items HGP did not fabricate, process, alter or assemble.

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• Cases – Chevron USA v. Combs (petition denied)

• Case involved whether scaffolding rentals are taxable rental of tangible personal property or the non-taxable service of scaffolding assembly and disassembly. Also, refund claims cannot be raised for first time in taxpayer’s administrative motion for rehearing. District Court held for taxpayer. Court of Appeals held for Comptroller.

• Texas S.Ct. declined review – taxable, final answer. – Roark Amusement & Vending, LP v. Combs 3rd Ct. of Appeals (January

26, 2011)• Taxpayer purchased, under resale exemption, plush toys to place in

coin operated amusement crane machines.• Comptroller asserted Roark did not always transfer possession of

the toys to a purchaser, but rather was rendering a non-taxable amusement service.

• Held toys were purchased for resale as part of a taxable, but exempt amusement service.

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• Cases

– Texas v. BFI Waste Services of Texas, L.P. (3rd Ct. of Appeals March 23, 2011)

• Successor liability case under Texas Tax Code §111.020

• Successor taxpayer, BFI, questioned whether AG bringing the case in Travis County District Court was proper, arguing that State was required to assess the tax and allow BFI opportunity for an administrative review before the Comptroller.

• District Court agreed with BFI.

• Court of Appeals held suit properly brought in Travis County District Court.

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• Sales Tax Cases

– Southwest Royalties (April, 2011)

• Held, down hole machinery and equipment used in exploration and production of hydrocarbons is exempt under §151.318 as manufacturing equipment.

– Bell Helicopter Textron, Tex. Ct. App., December 29, 2011

• Interprets §151.0231(g) concerning waiver of interest in managed audits and §151.508 concerning offsets.

– Amended rule 3.2 sets out Comptroller position on this.

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• Sales Tax Cases

– Combs v. Chapal Zenray, Inc., Tex. Ct. App., November 18, 2011

• Taxpayer purchased materials from an out-of-state seller, temporarily attached the material to jewelry while in Texas and sent to the company’s out-of-state retail outlets to facilitate sale of jewelry to customers.

• Held exemption in §151.011(f) for “attaching” to other property to be shipped out of state for use outside of Texas, not applicable because “attached” in the statute contemplated attachment as part of a finished product.

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• Sales Tax Cases

– Zimmer v. Combs, Tex. Ct. App., February 9, 2012

• Orthopedic devices are exempt under §151.313(a)(5).

• Comptroller rule 3.284(a)(12) defines “orthopedic devices”for this purpose.

• Devices in question satisfied plain language of Comptroller rule.

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• Hearings

– Comptroller’s Decision 46,579 (June 28, 2010)

– Auto dealers paid an out-of-state corporation to send letters to potential customers in Texas directing them to call a specified lender if they wanted a loan to buy a car.

– Comptroller sought to tax as a sale of the letters to the auto dealers.

– Held, essence of transaction was the non-taxable service of sending the letters. No tax due.

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• Hearings

– Aircraft Purchases

• Proposed decisions on sale for resale exemption make fair marketvalue rental or lease an element of the exemption. This is a newposition for the Comptroller and contrary to at least one prior decision.

• Comptroller Decision 102,730 (December 8, 2010)

– Occasional Sale exemption available on purchase of aircraft from seller that did not make more than two sales of aircraft during past 12 months, did not hold a sales tax permit and did not engage in selling items at retail. Report filed with North Carolina Secretary of State stating seller’s business as “aircraft leasing” did not mean seller held itself out to others as in the business of rental or leasing of tangible personal property.

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• Hearings

– Aircraft Purchases


– Purchase of aircraft held by seller as inventory not exempt under occasional sale provision exempting sale of entire “operating assets” of a business.


– Purchase for use in flight instruction not exempt under 151.328(a)(2) when purchaser did not hold a sales tax permit.

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• Hearings – Officer personal liability in case of fraud. Hearing No. 103,918 (January 11, 2011)

• LLC owning a convenience store was audited.• No records were produced so Comptroller auditor assessed based on

estimation• 10 percent penalty, plus 50% fraud penalty were added to assessment• LLC owner also assessed personal liability under Texas Tax Code §111.0611

for “participating in a fraudulent scheme or fraudulent plan to evadepayment of taxes.” (§111.0611 became effective July 15, 2007. This is the first hearing under that provision.)

• This hearing involves the personal liability issue.• Comptroller bore burden of proof to establish prima facie case of fraud by

owner of company.• Texas Tax Code §111.0611(b) lists actions that indicate tax evasion or fraud to

include:– Intentionally failing to file a report– Filing a report that understates tax due by 25% or more

• Held, Comptroller’s burden of proof not met in this case.

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• Hearings

– Litigation Support – Data Processing Services. Hearing No. 103,099 (December 28, 2010, released March 2011).

• Charges for document coding, eDiscovery, web hosting and image services were taxable data processing services.

• Arizona company provided its customers with secure repository hosting services and online access for document management and sharing.

• To the extent used in Texas, these services are taxable data processing under Texas Tax Code §151.0101.

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• Hearings

– Nexus. Comptroller Decision 100,984 (December 9, 2010, March 2011).

• Illinois corporation sells tangible personal property.

• BART investigation lead to nexus determination

• Facts relied on included

1. 1099’s issued to Texas entities engaged in sales of tangible personal property like that taxpayer sells.

2. Petitioner’s website instructed customers to return product to the retail store in Texas where they purchased the product to get warranty service.

• Held these facts supported a prima facie case for nexus and taxpayer bore burden to prove that it did not have nexus.

• That burden not met by taxpayer.

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• Hearings

– Lead Generation. Taxpayer’s business was “online lead generation” for dating service clients. Charges were not taxable as information service because the information was compiled on behalf of a particular client, was proprietary to that client and could not be sold to others. Comptroller’s Decision 104, 366, July 21, 2011.

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• Hearings

– Fraud. Comptroller did not meet “clear and convincing evidence” standard that president, secretary and director of company operating a liquor store understood the company’s business well enough to have engaged in fraud. Comptroller’s Decision 105,397, October 28, 2011.

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• Hearings

– Contribution to Capital. Aircraft contributed to corporation for no consideration is not taxable. Comptroller’s Decision 104,123, January 26, 2012.

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• Rule Changes

– 34 TAC §3.326 adopted to implement 2009 legislation creating a sales and use tax exemption for certain components of tangible personal property installed in connection with an advanced cleanenergy project.

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• Policy Developments

– Contact Lens Solution. Letter 201004828L (April 6, 2009)Contact lens solution is a “device” rather than a drug or medicine according to the FDA, so it is only exempt from sales tax if sold under a doctor’s prescription.

– Diagnostic Imaging Equipment Repairs. Letter 201009943L (September 21, 2010, released January 2011) Repair, remodeling, maintenance or restoration of certain diagnostic imaging or therapeutic equipment in order to protect the environment qualifies for the environmental/energy conservation exemption provided by Texas Tax Code 151.338.

– Internet Sales, Telling Customers Seller will pay the tax. Letter 201101944L (January 1, 2011) Texas Tax Code 151.704 provides a criminal penalty where a retailer “directly or indirectly advertises, holds out, or states to a customer or to the public that the retailer…will absorb or refund as part of the tax, or will not add the tax to the sales price of a taxable item sold, leased, or rented.”Comptroller disagrees with taxpayer argument that this violates taxpayer’s Constitutional right to “free speech.”

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– Early Termination Fee Subject to Tax. Fee charged to a customer by a retail electric provider for changing providers mid-contract is subject to sales tax as part of the charge for providing electricity. Ruling treats this like a charge imposed for early termination of a lease of tangible personal property whichis taxable under 34 TAC §3.294(d)(5).

– Surveying Services. Letter 201104034L (April 19, 2011) Surveying services performed for a title company are subject to sales tax. Purchase of these services by a contractor is not subject to sales tax. Texas Tax Code §151.0048(b).

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– Computer Monitor Disposal Fees. Letter 201105050L (May 18, 2011). After May 2006, the EPA no longer considers computer monitors to be “hazardous waste.” Therefore, disposal fees are taxable as a waste disposal service. 34 TAC §3.356(a)(3).

– American Red Cross. Letter 201106066L (June 10, 2011)The American National Red Cross and its chapters are instrumentalities of the federal government and as such, cannot be required to collect Texas sales or use tax. Purchasers from the American Red Cross or its chapters generally owe use tax on those purchases if stored, used or consumed in Texas.

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– Well Plug and Abandon Services. Letter 201106057L (June 8, 2011). Generally charges to repair, restore, remodel or maintain tangible personal property or improvements to real property are taxable. However, 34 TAC §3.324 provides that labor or services directly related to plugging and abandoning a well are not taxable. A welder’s charges to cut casing to remove the well head as part of plugging and abandoning a well are not taxable if the welder’s invoice clearly states purpose of the service is to plug and abandon a specific well (lease number) and the service is not repair or remodeling of the well.

– Wildfire Repair Sales Tax Relief. Under §151.350 taxpayers who have property damaged by a wildfire since May 13, 2011, or within a county included in disaster declarations issued between December 21, 2010 and May 13, 2011 may claim an exemption from sales tax on labor charges to repair the damage. Materials remain taxable. Use Form 01-339/back to claim the exemption. TPN September 2011.

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• Policy Developments– Automobile Parts – Core Charges. Core charges are taxable. Tax can be

refunded when the core charge is refunded. Letter Ruling 201110226L, October 6, 2011.

– Oil and Gas Data. Member fees to a facility that maintains data, including maps, specific to the oil and gas industry are subject to sales tax on information services. Letter Ruling 201108234L, August 18, 2011.

– Technology Aids for Blind Persons. Hardware and software needed to adapt a computer for a legally blind person. If computer comes equipped with the software, it is not exempt. The software must be purchased separately to qualify for exemption. Letter Ruling 201108233L, August 23, 2011.

– Alcohol Reporting. Sellers of alcoholic beverages to Texas retailers must file electronic reports of those sales with the Comptroller. Comptroller Notice on Alcohol Reporting, November 1, 2011 provides detailed instructions.

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– Chiropractic Practices. Letter Ruling 201106201L, released September 2011.

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• Dietary supplements/vitamins meeting certain requirements

•Certain prescribed or dispensed analgesic creams

•Items purchased for resale as part of a separate line of business for the chiropractor

• Purchases of therapeutic pillows dispensed as part of chiropractic service.

Not TaxableTaxable

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– Veterinary Practices. Letter Ruling 201107187L, July 15, 2011.

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• Charges for vet’s medical services

•Animal boarding

•Pet sitting

•Drugs and medicine prescribed or dispensed by the vet

•Prescribed food

•Wound care dressings

•Hypodermic needles and syringes

•Dental devices

• Supplies

•Materials and equipment used to provide the vet’s services if not otherwise exempt

•Non-medical grooming services

•Sales of animals not for human consumption

•Microchip devices

•IV systems

•Braces (non-dental)

•Casting supplies

•Ileostomy, colostomy and ileal bladder devices

•Therapeutic appliances

Not TaxableTaxable

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– Draft Rule on Rulings. Comptroller considering a rule change to allow only non-binding general information letters unless taxpayer provides a lot of specific information, including identity of taxpayer.

– Rule 3.325 amended in July 2011 to require a lot of specific information for a refund claim to be deemed valid.

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Franchise Tax Cases, Hearings and Policy Developments

• Cases

– Tqylor & Hill, Inc. v. Combs, et al, Cause No. D-1-GN-10-004429

• Taxpayer is a professional and engineering staffing firm that temporarily assigns its employees to its oil and gas clients to supplement the clients’ workforces.

• Taxpayer deducted payments to the assigned workers as COGS. Comptroller denied the deduction.

• Court allowed taxpayer to exclude from revenue payments from its clients under §171.1011(k) as a “staff leasing company” and to deduct compensation (as required by §171.101(b)).

[How squared with Hearings on COGS/Comp. election?]

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• Cases– TGS – NOPEC Geophysical v. Combs (Tex. S.Ct., May 27, 2011)– Texas Supreme Court held that receipts of a Delaware corporation from

licensing its geophysical and seismic data to Texas customers are not receipts from use of a license in Texas. The receipts are treated as from sale of an intangible and sourced to the location of the payor.

– Texas Tax Code 171.103(a)(4) provides that Texas receipts include receipts from “the use of a patent, copyright, trademark, franchise or license in this state.”

– Texas Supreme Court held that the word “license” above does not include the mechanism of “licensing” which would apply to all intangible assets (noting that other intangibles were separatelyenumerated in the statute). It refers to use of a license which is itself a revenue producing asset.

– Under the general rule, receipts from sale of an intangible are sourced to the location of the payor. 34 TAC §3.549(e)(30)(B).

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• Cases

– Allcat Claims Service, LP v. Combs (Tx. S.Ct., pending)

– Filed July 29, 2011

– Taxpayer asserted

1. Tax on partnerships violates Bullock Amendment

2. Violation of “equal and uniform” requirement of Texas constitution as contractors can deduct independent contractor payments while Allcat cannot.

– Texas Supreme Court rules November 28, 2011

• Tax is imposed on the partnership entity, not on the partners.

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• Cases

– Widner Product Finishing Company v. Southwood Door Company, Tex. Ct. App., March 1, 2012.

• §171.255(a) makes officers and directors liable for debts of a corporation that has its corporate privileges forfeited for failure to file a report or pay a tax.

• Foreign corporation that should have but did not qualify to do business in Texas cannot be treated as though it lost privileges it never had.

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• Cases

– Nestle, et al v. Comb, Tex. S. Ct., February 10, 2012

• Challenge to margin tax based on Texas Constitutional requirement that taxation be “equal and uniform.”

• Dismissal for “want of jurisdiction.”

• The provision giving Texas Supreme Court original jurisdiction over constitutional challenges to the tax did not override requirement that taxpayer first seek a refund of the tax under the regular refund procedures.

• Distinguish from Allcat.

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• Franchise Tax Cases

– Manager of an LLC liable under §171.255 for debts of LLC following forfeiture of LLC charters in same way a corporate director would be. Bruce v. Freeman Decorating Services, Tex. Ct. App., 14th Dist. 8/16/2011.

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• Hearings

– COGS election. Comptroller Decision 103,450 (August 18, 2010)

– Taxpayer originally filed using the E-Z Computation rate method.

– Taxpayer amended the return to claim COGS deduction.

– Held, Texas Tax Code 171.101(d) and 34 TAC 3.584 preclude changing to the COGS deduction after the due date of the report. Reports may be amended after the due date to change to 70% of total margin or, if eligible, EZ Computation, but not to change to COGS or compensation deduction method.

– Comptroller Decision 103,807 (November 12, 2010, released March 2011) held that amending return to deduct compensation rather than use of 70% method is similarly not allowed.

– To same effect, Comptroller Decisions 104,062 December 1, 2011 and 105,037 November 15, 2011.

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• Hearings

– Nexus. Comptroller Decision 102,402 (September 21, 2010)

• Taxpayer is a Colorado company. Two or three employees of taxpayer lived in Texas and performed some work from Texas to perform service contracts taxpayer had with its customers.

• Held – These contacts created nexus.

– Sale of Internet Domain Names not “Retail”. Comptroller Decision 103,824 (April 7, 2011, released June 2011).

• SIC Code 5045 does not include sale of domain names. Taxpayer failed to carry burden to prove its business activities were classified in Division F of 1987 SIC Manual.

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• Hearings

– Wind Farms. Solar energy device exemption not available to entity that designed and installed wind farms because the entityconstructed roads, fences and buildings to facilitate building the wind farms and the exemption is available only to taxpayers solely engaged in manufacturing, selling and installing wind energy devices. Comptroller’s Decision 102,945, October 17, 2011.

– No COGS for Transportation Company. Transportation company provided a service and did not sell tangible personal property allowed a COGS deduction or a compensation deduction for payments to independent contractor drivers. Comptroller’s Decision 105,360, November 18, 2011.

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• Hearings

– Apportionment. Oregon Athletic footwear company argued that its shipments to Texas should be treated as non-Texas because the carriers shipping the product were controlled by the buyers.Held taxpayer did not meet its burden of proof. Comptroller’s Decision 103,121, December 8, 2011.

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• Hearings

– Rate. Seller of meat products for restaurants not eligible for .5% rate because more than 50% of the meat came from animals the taxpayer produced. Comptroller’s Decision 104,871, September 12, 2011.

– Rate. Seller and installer of prefabricated windows and doors was entitled to the .5% rate. Maintenance of a showroom was an activity to attract the general public to purchase replacements windows. This indicated a retail activity for SIC purposes. Installation was a subordinate activity. Comptroller’s Decision 103,625, September 29, 2011.

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• Hearings

– Apportionment. Gross, rather than net receipts from sale of receivables should have been used to determine apportionment. The receivables were inventory held for sale, not investments orcapital assets. Comptroller’s Decision 102,877, December 12, 2011.

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– MTC apportionment formula cannot be used in Texas. Texas franchise tax is apportioned using single factor gross receipts formula. Texas Tax Code §171.105. MTC apportionment formula contained in Texas Tax Code Chapter 141 may not be used. Tax Policy News (July 1, 2010). This policy was upheld in Comptroller Decisions 104,752, 2011 and 105,941, January 19, 2012.

– COGS – Property Taxes. Letter 201002890L (February 2, 2010, issued October 13, 2010). Real estate taxes related to a building in which manufacturing takes place can be included in COGS deduction calculation.

– COGS – Depletion. A pass-through entity may include depletion as part of its COGS calculation. The owners of the pass-through entity may not include that depletion in their COGS. Tax Policy News (November 11, 2010).

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– Reporting Requirements for Passive Entities. Beginning with reports originally due on or after January 1, 2011, a passive entity that is required to be registered with the Comptroller or the Texas Secretary of State must file a No Tax Due Information Report each year. 34 TAC 3.582 will be amended to reflect this change. Tax Policy News (December 1, 2010).

– Lending Institution? Letter 201101133L (January 6, 2011). Taxpayer manufactures, sells, leases and finances heavy construction equipment. Taxpayer is licensed by the Texas office of Consumer Credit Commissioner. Held, even though taxpayer meets the definition of a lending institution under Texas Tax Code §171.0001(10), it does not offer loans “to the public” and therefore may not deduct interest as part of COGS under Texas Tax Code §171.1012(k).

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– Social Networking Access Fees and Online Advertising. Letter 201102989L.

• Website access fees paid to a social networking company are sourced to the location of the payor.

• Fees paid to the company for advertising on its website are apportioned to the location of the service that provides the link to the customer to purchase the item from the seller.

– Apportionment – Lending Institution. Letter 201103010L. A lending institution’s gross proceeds from sale of a loan or security are included in gross receipts when properly characterized under FASB #115 as“Securities Available for Sale” or “Trading Securities.” Texas Tax Code §171.106(f-l). Same treatment applies to gross proceeds from a maturity or call of securities.

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– Margin Calculation Method Required of a Group Combined on Audit. Letter 201105045L (May 13, 2011).

• Multiple entities file separate returns, electing different methods of calculating margin.

• On audit the entities are combined.

• The resulting group can use any method used by any of the combining members.

– COGS Updates TPN, November 12, 2011

• Manufacturers. Direct labor costs for COGS do not include supervisory labor.

• Restaurants and Bars. Mixed Beverage Tax not allowed as a COGS.

– IRS Forms Change and 2012 Franchise Tax Reports [See TPN March 2012].

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– Tax Policy News Industry Focus Reports

Available, but only as to parts, not labor

1%•Automotive Repair

Parts and supplies sold as part of automotive repair are not considered retail sales. Tax Policy News – January 1, 2010. Hearing No. 103,786 (May 10, 2011) reaches same conclusion.

Available. TPN lists examples of costs that are COGS and costs that are not.

.5%•Restaurants

Generally treated as retail. Exclusion for products manufactured by retailer not applicable to restaurants. Tax Policy News – October 1, 2010

Available. TPN lists examples of costs that are COGS and costs that are not.

.5%•Retail

Total Revenue from activities in retail trade is greater than total revenue from its other activities and <50% of retail revenue is from sale of product it or an affiliate manufactures. Tax Policy News – January 1, 2011

COGSRateIndustry

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Generally available, but not for payments excluded from revenue. Texas Tax Code §171.1012(i) allows labor and materials costs to contractors.

1%•Construction

Exclusions allowed for subcontractor payments for actual or proposed design construction, remodeling or repair of improvements to real property. Contract with customer must specify that contractor will subcontract out a specified portionof the work. Tax Policy News August 1, 2010.

Not available.1%•Transportation

Only receipts from transportation services in intrastate commerce are apportioned to Texas. For companies with $10M or less in revenue that use 1099 contractors, EZ Computation rate of .575% may be best. Tax Policy News September 1, 2010.

COGSRateIndustry

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Available if cattle feeder owns the cattle; otherwise, not. Cost of feed, medicine and other tangible personal property sold may be deducted . If some cattle owned and some not, a percentage of costs may be deducted.

1%•Cattle Feedlot

Tax Policy News March 1, 2011

COGSRateIndustry

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• Developments

– Insurance companies, part of an affiliated group, engaged in a unitary business must be included in combined report. Paying gross receipts tax to state other than Texas not exempt under §171.052. Letter Ruling 201109204L, September 30, 2011.

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• Developments

– COGS

• License of software to a retailer or an end user is treated as a sale entitling the licensor to a COGS deduction. Letter Ruling 201108166L, August 1, 2011.

• Construction Industry. Direct labor costs for COGS only include labor of those that physically produce a good, acquire a good ormake a physical change to real property. Supervisory labor is not a direct cost and is subject to limit on indirect and administrative overhead costs. Letter Ruling 201108182L, August 30, 2011.

– Series LLC’s

• A “Series LLC” is not a separate taxable entity. The Series LLC as a whole must file a single report. Letter Ruling 2010091846, released September 2011.

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***Disclaimer***

Information contained in this document is not intended to provide legal, tax, or other advice as to any specific matter or factualsituation, and should not be relied upon without consultation with qualified professional advisors.

Any tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under applicable tax laws, or (ii)promoting, marketing, or recommending to another party any transaction or tax-related matter.

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