Hiya folks, and welcome back to another Texas Tax Roundup! March 2023 brought us a lot of administrative action, especially for Texas sales or use tax. Let’s get started!
Rules
Franchise Tax
Apportionment
34 Tex. Admin. Code § 3.591 (Margin: Apportionment)—The Comptroller adopted his amendments outlined in our previous post to implement the Texas Supreme Court’s opinion in Sirius XM Radio, Inc. v. Hegar, No. 20-0462 (Tex. March 25, 2022).[1]
Notable Additions to the State Tax Automated Research System
Franchise Tax
Apportionment
Comptroller’s Decision No. 116,251, 116,252 (2023)— The ALJ upheld assessments of sales tax and franchise tax against an out-of-state corporate taxpayer for periods in which the corporation had only a single employee in Texas. The taxpayer was in the business of selling telecommunication services. The Comptroller had become aware of the taxpayer’s business activities in Texas due to information from the Texas Workforce Commission. The ALJ found that the presence of an employee in Texas created nexus for purposes of both sales and franchise tax.[2] Outside of asserting that Texas lacked jurisdiction to tax, the taxpayer didn’t provide any evidence showing that the assessments were incorrect.
Sales and Use Tax
Flowback Services
Comptroller’s Decision No. 118,208 (2023)—The ALJ ruled that flowback services purchased by a taxpayer were subject to sales or use tax as the rental of tangible personal property. The ALJ noted that the Comptroller had issued an audit memo in 2020 to clarify his policy that the sale of flowback services was the rental of tangible personal property.[3] The ALJ examined invoices and field tickets provided by the taxpayer and found nothing to indicate that any labor charges related to an operator within the meaning of the Comptroller’s rules.[4] The ALJ rejected the taxpayer’s arguments that the essence of the transaction was the purchase of a service or that the flowback services qualified for the manufacturing exemption. Finally, the ALJ held that she was unable to address whether the 2020 audit memo constituted an unconstitutional rule change, stating that such a challenge could only be brought in Travis County district court.[5]
Welding Services
Comptroller’s Decision No. 118,121 (2023)—The ALJ upheld an auditor’s assessment of tax on a taxpayer performing welding services in the oil and gas industry. The ALJ noted that the taxability of welding services is determined by the specific type of work performed, including whether it is performed on an improvement to realty or tangible personal property, and that there is a presumption that welding in the oil field is performed on tangible personal property and thus subject to sales or use tax.[6] The auditor had made adjustments to the assessment based on documentation that the taxpayer had provided showing that certain jobs were for new construction.[7] However, the ALJ found that the taxpayer failed to support his contentions that additional services were nontaxable because provided in connection with new construction, real property maintenance,[8] or industrial and hazardous waste removal,[9] or that the services were eligible for water-related exemptions[10] or the exemption for temporary labor.[11] The taxpayer also did not prove that any items were exempt because shipped out of state.[12]
Local Sales and Use Tax
STAR Accession No. 202202027L (Feb. 10, 2023)—In this private letter ruling, the Comptroller outlined the local sales and use tax collection obligations of a taxpayer that provided rentals and oil well services to various oil and well gas sites. These services included equipment rentals, maintenance of tangible personal property such as repairing damage to rods and tubing within the casing or replacing a bottom hole pump, fishing for rods or tubing, and hot oil treatment of casing, tubing, or flow lines. The taxpayer had an equipment yard, where its salespersons would take orders on their cellphones. The taxpayer would fulfill its orders for equipment rentals and repairs from its equipment yard and would also make deliveries and perform services at well sites. The Comptroller found the following:
- The state sales or use tax rate is 6.25% with certain local taxing jurisdictions able to impose local sales and use taxes up to a maximum local sales and use tax rate of 2 percent.[13]
- The taxpayer should charge its customers the local sales or use tax rate at its equipment yard, because the equipment yard is a place of business where orders were received and, thus, where the sales were consummated.[14]
- When the taxpayer delivers items or repairs tangible personal property in another local taxing jurisdiction, and the local tax rate at that local taxing jurisdiction is greater than the local tax rate at the equipment yard, then the taxpayer also must collect use tax based on the rate of that local taxing jurisdiction.[15]
- The taxpayer’s services to start or stimulate production or to work on the formation are not subject to sales or use tax.[16]
- The taxpayer’s vendors should collect local sales or use tax based on the consummation of the sale rules in Comptroller Rule 3.334(c). The taxpayer is responsible for paying the appropriate local sales or use tax to the state if its vendors don’t collect the tax.
Research and Development
STAR Accession No. 202302017L (Feb. 22, 2023)— In this private letter ruling, the Comptroller determined that a subsidiary could not use its parent’s qualified research registration number or its research activities to qualify for the research and development sales tax exemption to make its purchases tax-free.
Exempt Entities
STAR Accession No. 202301028L (Jan. 30, 2023)—In this private letter ruling, the Comptroller determined that a taxpayer that was a tax exempt entity under section 501(c)(3) of the Internal Revenue Code and that entered into an agreement with a for-profit entity to promote and produce concerts would not have to charge sales and use tax on admissions to the concerts. Significant in this determination was that: (i) the taxpayer would hold itself out as the exclusive provider of the concert in its agreement with the for-profit entity and on tickets and promotional materials, (ii) the for-profit entity was specifically identified as an independent contractor of the taxpayer, and (iii) the taxpayer wouldn’t be sharing any losses with the for-profit entity (and thus wasn’t in a joint venture with that entity).
STAR Accession No. 202302009L (Feb. 14, 2023)—In this private letter ruling, the Comptroller determined that journal subscriptions, access to a learning system (in both physical and digital formats), and membership dues of an organization exempted under section 501(c)(3) of the Internal Revenue Code that was formed for the advancement of science and medicine weren’t subject to sales or use tax. Both the journal and the learning system qualified for exemption from sales and use tax as periodicals and writings published and distributed by a nonprofit charitable, historical, scientific, or other similar organization.[17] The Comptroller also found that the membership dues, which provided access to clinical guidelines and recommendations, were partially for nontaxable information services and partially for items that wouldn’t be subject to sales or use tax on a standalone basis.[18]
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[1] 48 Tex. Reg. 1450 (Mar. 10, 2023).
[2] See 34 Tex. Admin. Code §§ 3.286(a)(4)(B) (Seller’s and Purchaser’s Responsibilities) (a seller is engaged in business in the state of Texas if the seller “has any representative, agent, salesperson, canvasser, or solicitor who operates under the authority of the seller to conduct business in this state, including selling, delivering, or taking orders for taxable items . . . .”, 3.586(c), (d)(3) (Margin: Nexus) (providing that a taxable entity is subject to Texas franchise tax to the limits of the U.S. Constitution and that having employees or representatives in the state is sufficient to subject a taxable entity to Texas franchise tax).
[3] See STAR Accession No. 202009002L (Sept. 21, 2020).
[4] See 34 Tex. Admin. Code § 3.294(c) (Rental and Lease of Tangible Personal Property).
[5] Tex. Gov’t Code § 2001.038(b) (Declaratory Judgment).
[6] Citing STAR Accession No. 201203389L (March 2012).
[7] See Tex. Tax Code §§ 151.0047(a) (“Real Property Repair and Remodeling”), 151.010 (Taxable Item), 151.0101(a)(13) (“Taxable Services”); 34 Tex. Admin. Code § 3.291(b)(3) (Contractors).
[8] See 34 Tex. Admin. Code § 3.357(c) (Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance (Tax Code, §§151.0047, 151.0101, 151.056, 151.058, 151.311, 151.350, 151.429)).
[9] See 34 Tex. Admin. Code § 3.356(a)(3), (b) (Real Property Service).
[10] See Tex. Tax Code § 151.355 (Water-Related Exemptions).
[11] See Tex. Tax Code § 151.3503 (Services by Employees).
[12] See Tex. Tax Code § 151.330(a) (Interstate Shipments, Common Carriers, and Services Across State Lines).
[13] See Tex. Tax Code §§ 151.051(b) (Sales Tax Imposed), 151.101(b) (Use Tax Imposed); 34 Tex. Admin. Code § 3.334(a)(24) (Local Sales and Use Tax).
[14] 34 Tex. Admin. Code § 3.334(a)(16), (b)(1), (b)(4), (c)(1)(B)(i), (i)(1).
[15] 34 Tex. Admin. Code § 3.334(d), (i)(1), (k)(9).
[16] 34 Tex. Admin. Code § 3.324(a)(3) (Oil, Gas, and Related Well Service).
[17] Tex. Tax Code § 151.312 (Periodicals and Writings of Religious, Philanthropic, Charitable, Historical, Scientific, and Similar Organizations).
[18] See 34 Tex. Admin. Code § 3.342(a)(5)(B) (Information Services) (defining nontaxable information services as including sale of information primarily derived from laboratory, medical, or exploratory testing or experimentation or any similar method of direct scientific observation of physical phenomena).
