Texas Tax Roundup | August 2023 | Seller-Financed Motor Vehicle Sales, Rolling Stock, Seeds!

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TL Fahring focuses on helping individuals and businesses with a wide variety of matters involving state, federal, and international taxation. He has represented clients in all stages of federal and state tax disputes, including audits, administrative appeals, litigation, and collection matters. Mr. Fahring also has used his tax knowledge to assist clients in planning complex domestic and international transactions, including advising as to potential reporting and withholding requirements.

Mr. Fahring received his J.D. from the University of Texas School of Law, where he graduated with high honors and was inducted into the Order of the Coif and Chancellors honors societies. After clerking for a year at the Texas Eleventh Court of Appeals, he attended New York University School of Law, where he received an LL.M. (Master of Laws) in Taxation and served as a student editor on the Tax Law Review.

Howdy folks, and welcome back to the Texas Tax Roundup. This August was a barren wasteland of sun and heat, but the Texas Comptroller still managed to wrangle up some interesting tax issues. Let’s see what they came up with!


Proposed Rules

Battery fees

34 Tex. Admin. Code § 3.711 (48 Tex. Reg. 4379 (Aug. 11, 2023))—The Comptroller proposes amendments to this rule that primarily implement legislative changes which require marketplace providers to collect fees related to the sale of lead-acid batteries.

Notable additions to the State Tax Automated Research (“STAR”) System

Natural Gas Production Tax

Determining Market Value

Comptroller’s Decision No. 118,189 (2023)—The ALJ upheld the Comptroller’s partial denial of a natural gas producer’s refund claim of natural gas production based on the producer’s amended marketing costs that included “hot oil treating, gas meter testing and inspection, electric repair, electrical installation, electrical material, valves and connectors, gas pipeline, ES electrical installation, engineering and patriot supervision, electrical material and automation, and gas flowline and installation.” The natural gas production tax is 7.5% of the market value of gas produced and saved in the state by the producer.[1] The market value of gas is its value at the mount of the well from which it is produced.[2] Market value is determined by subtracting the producer’s actual marketing costs from the producer’s gross receipts from the sale of the gas.[3] Marketing costs include: (1) costs for compressing the gas sold; (2) costs for dehydrating the gas sold; (3) costs for sweetening the gas sold; and (4) costs for delivering the gas to the purchaser.[4] Marketing costs do not include: (1) costs incurred in producing the gas; (2) costs incurred in normal lease separation of the oil or condensate; (3) insurance premiums on the marketing facility.[5] The producer in this hearing did not provide any evidence of which of its claimed costs were allowable as marketing costs.

Motor Vehicle Sales and Use Tax

Seller-Financed Motor Vehicle Sales

Comptroller’s Decision No. 118,179 (2023)—The ALJ upheld an assessment of motor vehicle sales tax against a car dealership engaging in seller-financed motor vehicle sales that registered motor vehicle title more than 60 days after the date of sale. Typically, a dealer making a seller-financed sale must collect and remit motor vehicle sales tax on the total consideration for the motor vehicle at the time the application for Texas title or registration is filed with the county tax assessor collector or remit the motor vehicle tax to the Comptroller as payments are made.[6] If the seller fails to apply for title and registration for a motor vehicle sold in a seller‑financed sale within 60 days after the date the motor vehicle is delivered to the purchaser, the seller is liable for all unpaid tax on the total consideration.[7] In that instance, the dealer must remit all unremitted motor vehicle tax on the first seller-financed sales tax report due no later than the 20th day of the month following the end of the reporting period in which the expiration of the 60 days occurred.[8] In this hearing, there was no dispute that the title transfers for the vehicles were completed after 60 days from the date of sale. Moreover, the ALJ rejected the taxpayer’s argument that it didn’t know about the requirement to register the vehicles within 60 days, because under Texas case law taxpayer are conclusively presumed to know the law and are charged with the responsibility to comply.[9]

Comptroller’s Decision No. 118,078 (2023)—Facts are largely same as in Comptroller’s Decision No. 118,179 (2023). The added wrinkle is that the seller-finance motor vehicle dealer argued that the 60-day deadline for filing for title and registration after the motor vehicles were delivered to the owners was extended to 90 days by Governor Abbott’s 2020 COVID-19 Proclamation allowing the Texas Department of Motor Vehicles to extend the deadline to register motor vehicles and the Comptroller’s corresponding extension of the due date to pay motor vehicle sales tax. However, the Comptroller’s extension specifically didn’t apply to seller-financed motor vehicle sales. The ALJ found that the suspension of motor vehicle registrations did not change the deadline for submitting motor vehicle registrations or alter the Comptroller’s obligation to assess tax if the seller-financed motor vehicle dealer didn’t register title within the statutory 60-day period.

Sales and Use Tax

Rolling Stock Exemption

Comptroller’s Decision No. 118,345 (2023)—The ALJ found that the taxpayer had failed to submit argument or evidence in the hearing to support its claim that further reductions to an assessment were warranted because certain purchases for labor and incorporated materials used in the repair or maintenance of locomotives and rolling stock.[10] The ALJ also rejected the taxpayer’s argument that the assessments on these purchases should be deleted from the audit because a previous audit had not found any error on similar purchases. The ALJ noted that any information received from the auditor wasn’t in the form of a private letter ruling, which is necessary for a claim of detrimental reliance.[11] The ALJ also noted that since the 1980s, notifications of audit results issued by the comptroller had included a disclaimer that an audit result can’t be relied upon as approval of the taxpayer’s reporting system.

Proof of Tax Collection

Comptroller’s Decision No. 118,559 (2023)—The ALJ rejected the taxpayer’s argument that two vendors had collected sales and use tax on certain of its purchases and that therefore taxpayer wasn’t liable for sales or use tax on those transactions. The taxpayer had provided letters from these two vendors to the effect that all applicable sales and use tax had been paid.

The first vendor’s letter stated that its invoices included all applicable sales and use tax. That vendor’s invoices were examined during audit, and the auditor found that the invoices didn’t separately state the amount of sales or use tax and didn’t include a written statement that the stated price included sales or use tax. This vendor also didn’t provide the auditor with the vendor’s taxpayer identification number that was used to report the tax. During the hearing, the taxpayer didn’t provide any invoices from this vendor or other evidence to show that this vendor paid Texas sales and use tax to the Comptroller.

The second vendor’s letter stated that the invoices that it issued the taxpayer included all sales and use tax charged to that vendor by its subcontractors and vendors. No invoices were provided, and the Comptroller noted that the invoices were for lump-sum nonresidential repair and remodeling and were taxable regardless to taxpayer in full regardless of how the lump-sum amount was calculated.

As such, the ALJ found that the taxpayer had provided insufficient evidence that its vendors had collected sales and use tax on these transactions.

Successor Liability / Fraudulent Transfers

Comptroller’s Decision No. 118,078 (2023)—The ALJ found that an individual who acquired the assets of a business for no consideration was the recipient of a fraudulent transfer and was therefore liable for the sales and use tax assessed against the business.[12] The ALJ also noted that numerous factors, such as the individual being the spouse of the managing member of the business and that the business had been apprised that the Comptroller was about to take collection action just before the transfer, indicated that the individual acquired the assets of the business with the intent to evade tax—another basis for the transfer to be considered a fraudulent transfer.[13]

Gift Certificates

STAR Accession No. 202307011L (July 21, 2023)—In this private letter ruling, the Comptroller ruled that a taxpayer who won a “merchandise coupon/certificate” donated by a department store to a non-profit charity auction would have to pay sales or use taxes for items purchased with this certificate. The use of the certificate wouldn’t qualify for the exemption applicable to exempt organization for annual one-day tax-free sales because the department store was not an exempt organization.[14] The certificate also wasn’t a coupon that reduced the sales price of taxable items (thereby reducing the tax due on the taxable items) but rather a gift certificate that is treated as consideration on its exchange for a taxable item (with tax computed based on the sales price of the taxable item at the time of the exchange).[15]

Agricultural Exemption

STAR Accession No. 202307012L (July 21, 2023)—The Comptroller in this private letter ruling determined a taxpayer’s sale of seeds that could be used to provide food for wildlife and livestock qualified for exemption as the sale of seeds and annual plants the products of which are used to produce feed for farm and ranch animals.[16] The taxpayer wasn’t required to obtain an exemption certificate when selling its seeds to customers, although the taxpayer was required to obtain a sales tax permit.

[1] Tex. Tax Code §§ 201.051, 201.052.

[2] Id. § 201.101(a).

[3] Id. § 201.101(a).

[4] Id. §201.101(b).

[5] Id. §201.101(c).

[6] 34 Tex. Admin. Code § 3.74(c)(1)(B)(i), (ii).

[7] Tex. Tax Code § 152.047(f); 34 Tex. Admin. Code § 3.74(e)(5).

[8] 34 Tex. Admin. Code § 3.74(e)(5).

[9] Greater Houston Transportation v. Phillips, 801 S.W.2d 523, 525 (Tex. 1990) (“In Texas, the law recognizes that there is no duty to inform others of the law because all persons are presumed to know the law.”); Comptroller’s Decision No. 107,751 (2014).

[10] See 34 Tex. Admin. Code § 3.297(e)(3).

[11] See 34 Tex. Admin. Code § 3.10(c).

[12] See Tex. Tax Code § 111.024(b)(1) (“A transfer of a business or the assets of a business is considered to be a fraudulent transfer or a sham transaction if the taxpayer made the transfer or undertook the transaction . . . without receiving a reasonably equivalent value in exchange for the business or business assets subject to the transfer or transaction.”).

[13] See id. § 111.024(b)(2) (“A transfer of a business or the assets of a business is considered to be a fraudulent transfer or a sham transaction if the taxpayer made the transfer or undertook the transaction . . . with intent to evade, hinder, delay, or prevent the collection of any tax, penalty, or interest owed under this title . . . .”).

[14] See 34 Tex. Administrative Code § 3.322(h)(2).

[15] See STAR Accession Nos. 200904303L (April 24, 2009) (“Because the coupons reduce the price charged to the customer, the retailer should collect tax on the net  price, after subtracting the value of the coupon.”); STAR Accession No. 200702942L (Feb. 7, 2007) (“The actual sale or give-away of gift cards is not subject to Texas sales or use tax  . . . since the  card represents an intangible – the ‘right’ to a future purchase. Instead, tax is calculated when a card is redeemed.”).

[16] See 34 Tex. Admin. Code § 3.296(a)(3).