Hey everybody! Welcome back to another for another edition of Texas Tax Roundup! Hope y’all had a happy Thanksgiving! We got some franchise tax apportionment, some sales and use tax in the oil and gas industry, and some mulling over the age-old question: Is a franchise tax an occupation tax? Let’s dive in!
Court Cases
Franchise Tax
Distinction from Occupation Tax
Swift Transp. Co. of Az., LLC v. Hegar, No. 13-21-00010-CV (Tex. App.—Corpus Christi-Edinburg Nov. 10, 2022)—The Thirteenth Court of Appeals held that the franchise tax wasn’t an occupation tax. Thus, Tex. Transp. Code § 20.001 (Certain Carries Exempt from Gross Receipts Tax), which exempts certain motor carriers from any occupation tax measured by gross receipts, didn’t apply to franchise tax. The court of appeals observed that Texas franchise taxes and occupations tax dated back to at least 1880, that both types of taxes were in existence when Section 20.001 was enacted, and that various statutes implied a distinction between these types of taxes. The court of appeals also distinguished as dicta (and thus nonbinding) insinuations in the case law that the franchise tax was an occupation tax or that that a franchise tax and an occupation was basically the same.[1]
Apportionment
Hegar v. Sirius XM Radio, Inc., No. 03-18-00573-CV (Tex. App.-Austin Nov. 10, 2022)—On remand from the Texas Supreme Court, the Third Court of Appeals affirmed the trial court’s determination that taxpayer’s methodology of apportioning its subscription-based satellite radio gross receipts based on the costs of production and transmission activities inside and outside of Texas was appropriate and rejected the Comptroller’s methodology of apportioning gross receipts based on the location of taxpayer’s customers. (Check out this post for a breakdown of what the Texas Supreme Court said and why it remanded.)
The court of appeals observed that former Comptroller Rule 3.591(e)(26) (Margin: Apportionment) provided that when services are performed in more than one state, the receipts from the services are apportioned as Texas receipts based on the “fair value of the services that are rendered in Texas.” However, the former rule didn’t define “fair value,” the Comptroller didn’t offer the court of appeals any alternative interpretation of the meaning of “fair value”, and in previous guidance the Comptroller had indicated that the cost of performance was an appropriate method for calculating the fair value of services in some contexts.[2]
Notable Additions to the State Tax Automated Research (STAR) System
Sales and Use Tax
Oil and Gas Related Services
Comptroller’s Decision No. 117,809 (2022)—The ALJ determined that a taxpayer that provided oil and gas services did not establish that certain invoices reflecting taxpayer’s sales of personal property were made in connection with taxpayer’s provision of new construction services, because the invoices (which were taxpayer’s only evidence as to the transactions in question) did not contain information that new pipelines or equipment were intended to become permanent improvements to realty. The ALJ further found the taxpayer had failed to establish certain transactions that it billed to a related an entity were nontaxable temporary employment services, that they were unrelated to the repair and remodeling that was being performed for another company (and thus not subject to tax), or that they qualified for the resale exemption.
Comptroller’s Decision No. 117,674 (2022)—The ALJ determined that a taxpayer that owned and operated an independent oil and gas acquisition, development, operator, and production company did not prove that it was entitled to refund of sales and use taxes that it paid on the purchase of oil certain oil soluble chemicals.
The ALJ found that the taxpayer didn’t establish that the chemicals qualified for the resale exemption, because there was no evidence chemicals became an ingredient or component part of the crude oil that taxpayer sold.[3]
For a similar reason, the ALJ determined that taxpayer didn’t establish that the chemicals qualified for the manufacturing exemption as “tangible personal property that will become an ingredient or component part of tangible personal property manufactured, processed or fabricated for ultimate sale.”[4]
The ALJ also found that taxpayer didn’t show that the chemicals qualified for the manufacturing exemption because they were “used or consumed during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale” and were “necessary and essential to prevent the decline, failure, lapse, or deterioration of equipment.”[5]In particular, the ALJ noted that taxpayer didn’t provide evidence that the chemicals were being used to treat tangible personal property rather than minerals in place (i.e., real property) or that the chemicals were and essential to prevent the decline, failure, lapse, or deterioration of equipment used in the actual manufacturing process.
Data Processing Services
Comptroller’s Decision No. 116,962 (2022)—The ALJ found that a taxpayer that provided software, hardware, and customer payment processing services for health and fitness clubs was providing a taxable data processing service in connection with its billing and collection services. The ALJ observed that the contracts in the record showed that taxpayer obtained data from its customers and entered the data into databases, which was sufficient support the Comptroller’s conclusion that taxpayer was providing taxable data processing.[6] Additionally, the ALJ’s found that certain of taxpayer’s support services were sold as part of the sale of taxable items and therefore also subject to sales or use tax.[7]
Insurance Services
STAR Accession No. 202210014L (Oct. 20, 2022) (superseded by STAR Accession No. 202211002L (Nov. 10, 2022))—In this private letter ruling issued to the Commissioner of Workers’ Compensation at the Texas Department of Insurance, Division of Workers’ Compensation (“DWC”), the Comptroller determined that exams requested by DWC to evaluate injured employees’ medical condition and resolve disputes over workers’ compensation insurance benefits were subject to sales and use tax an insurance service.
An insurance service is defined as “insurance loss or damage appraisal, insurance inspection, insurance investigation, insurance actuarial analysis or research, insurance claims adjustment or claims processing, or insurance loss prevention service.”[8] “Insurance claims adjustment or claims processing” is defined as any activity to supervise, handle, investigate, pay, settle, or adjust claims or losses.[9] The Comptroller found that the exams requested by DWC were activities to handle, investigate, adjust, and/or pay claims or losses and met the definition of insurance claims adjustment or claims processing. Thus, charges for the exams were subject to sales and use tax.
In STAR Accession No. 202211002L, however, the director of the Comptroller Tax Policy Division informed the director the Comptroller Audit Division that the policy set out in STAR Accession No. 202211004L wouldn’t go into effect until October 1, 2023, in order to give DWC and the workers’ compensation industry time to seek a statutory fix during the next legislative session, which begins on January 10, 2023.
Franchise Tax
Statute of Limitations
Comptroller’s Decision No. 118,241 (2022)—The ALJ found that a franchise tax refund claim was filed outside of the four-year state of limitations when the claim was filed on September 15, 2020, in connection with a report that was due on May 15, 2016.[10] The taxpayer did not provide evidence that they had obtained an extension of the due date for filing the report or that any tolling of the limitations period applied.
Apportionment
Comptroller’s Decision Nos. 112,108, 112,109, 112,110, 112,111 (2022)—The ALJ upheld the Comptroller’s determination that a company headquartered in Texas that provided wealth management services to clients across the country didn’t establish that any additional amounts the following revenue streams should be apportioned to locations outside of Texas:
- Funds paid by customers for labor performed by third-party financial officers and the company, where the company provided wealth management advice, verification of the financial advisors’ work, and insurance products from its Texas office and the auditor had already excluded revenue for the financial advisors’ revenue;
- Commissions and payment that the company received for updating its customers master files and commissions when securities were bought and sold; and
- Revenue that the company received from financial advisors for sales of E&O insurance coverage, online research tools, and licenses to its third-party financial advisors.
New Veteran-Owned Businesses
STAR Accession No. 202211001L (Nov. 2, 2022)—In this memo, the Comptroller’s Tax Policy Division opined that a registered series of a limited liability company can’t be classified as a new veteran-owned business (“NVOB”) under Section 171.0005 of the Texas Tax Code, because the series isn’t a separate entity and doesn’t file franchise tax reports separate from its parent. However, if the parent LLC and all existing series qualify as a NVOB, then a new series may also be able to qualify as a NVOB. The catch being, if the new series doesn’t qualify as a NVOB, then the parent LLC and existing series would lose their NVOB status on that date.
Motor Vehicle Sales, Use, and Rental Taxes
Agricultural Exemption
Comptroller’s Decision Nos. 118,094, 118,095 (2022)—The ALJ upheld the Comptroller’s disallowance of certain exempt sales claimed by a taxpayer that was a seller of equipment because the taxpayer didn’t not secure adequate agricultural exemption certificates.
One agricultural exemption certificate that the taxpayer had accepted in lieu of charging tax was rejected, even though the certificate had a valid agricultural and timber registration number (“Ag/Timber Number”), because the taxpayer’s sale was made to a purchaser that did not have Ag/Timber Number and no evidence was presented that the purchaser was authorized to make purchases on behalf of the person to whom the Ag/Timber Number was issued. Also, because the purchaser on the exemption certificate was different from the person to whom the Ag/Timber Number was issued, the taxpayer couldn’t have accepted the certificate in good faith.[11]
Two other agricultural exemption certificates were rejected because incomplete in that it didn’t contain the name and address of the seller.[12]
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[1] The taxpayer in this case cited to United Servs. Auto. Ass’n v. Strayhorn, 124 S.W.3d 722, 728 (Tex. App.—Austin 2003, pet. denied) (describing the franchise tax as “a type of occupation tax”) and In re Nestle USA, Inc., 387 S.W.3d 610, 619–21 (Tex. 2012) (orig. proceeding) (observing that Black’s Law Dictionary defined an franchise tax and an occupation tax in the same way, as a “tax imposed [for or on] the privilege of carrying on a business[.]’”).
[2] As the court of appeals notes, the Comptroller subsequently amended Rule 3.591(e)(26) to state:
If services are performed both inside and outside Texas for a single charge, then receipts from the services are Texas gross receipts on the basis of the fair value of the services that are performed in Texas. In determining fair value, the relative value of each service provided on a stand-alone basis may be considered. Units of service, such as hours worked, may also be considered. The cost of performing a service does not necessarily represent its value. If costs are considered, costs should be limited to costs directly related to the service and not overhead costs.
See here for the current version.
[3] See 34 Tex. Admin. Code § 3.324(h)(1) (Oil, Gas, and Related Well Service).
[4] See Tex. Tax Code § 151.318(a)(1) (Property Used in Manufacturing).
[5] See id. § 151.318(a)(6).
[6] See 34 Tex. Admin. Code § 3.330 (Data Processing Services) (defining “data processing” as “the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information. It specifically includes word processing, payroll and business accounting, and computerized data and information storage or manipulation.”).
[7] See Tex. Tax Code § 151.007(b) (“Sales Price” or “Receipts”) (“The total amount for which a taxable item is sold, leased, or rented includes a service that is a part of the sale and the amount of credit given to the purchaser by the seller.”).
[8] Texas Tax Code § 151.0039 (“Insurance Service”).
[9] 34 Tex. Admin. Code § 3.355(a)(8) (Insurance Services).
[10] See Tex. Tax Code § 111.104 (Refunds), 111.201 (Assessment Limitation).
[11] See 34 Tex. Tax Code § 3.287(d)(2) (Exemption Certificates):
A seller does not owe tax on a sale, lease, or rental of a taxable item if the seller accepts a properly completed exemption certificate in good faith. An exemption certificate is deemed to be accepted in good faith if:
(A) the exemption certificate is accepted at or before the time of the transaction;
(B) the exemption certificate is properly completed, meaning that all of the information required . . . is legible; and
(C) the seller does not know, and does not have reason to know, that the sale is not exempt. It is the seller’s responsibility to be familiar with Texas sales tax law as it applies to the seller’s business and to be familiar with the exemptions that are available for the items the seller sells.
[12] See id. § 3.287(d)(2)(B), (f)(5) (“An exemption certificate must show . . . the name and address of the seller.”).
