Texas Tax Roundup | June 2022

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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.

Texas Tax Roundup | June 2022

Things have been heating up this summer. Let’s see what’s been cooking with the Texas Comptroller’s office.


U.S. Fifth Circuit Court of Appeals

Texas Entertainment Association (TEA) v. Hegar, 10 F.4th 495 (5th Cir. 2021)—On June 21, 2022, the U.S. Supreme Court denied the Comptroller’s petition for writ of certiorari with respect to the Fifth Circuit’s opinion.

Texas Supreme Court

Hegar v. Health Care Service Corporation, No. 21-0080 (Tex. June 17, 2022)—The Texas Supreme Court held that premiums from Blue Cross Blue Shield’s stop-loss policies sold to employers who self-funded their employee’s health insurance (i.e., the policies indemnified the employers for amounts paid to reimburse healthcare claims over a certain threshold) were subject to insurance premium and maintenance taxes.

Texas Third Court of Appeals

Hegar v. El Paso Electric Company, No. 03-18-00790-CV (Tex. App.—Austin March 5, 2021)—On June 16, 2022, the Texas Supreme Court denied the Comptroller’s petition for review, meaning that it’s basically on board with the Third Court of Appeals’ decision in favor of the taxpayer, an electricity manufacturer.

Notable Additions to the State Automated Tax Research (STAR) System


Personal Liability

Comptroller’s Decision Nos. 117,436, 117,441 (2022)—The administrative law judge dismissed personal liability assessments against a bar owner because the Comptroller had not shown by clear and convincing evidence that the bar owner took an action or participate in a fraudulent scheme or fraudulent plan to evade the payment of the bars mixed beverage taxes. In coming to this conclusion, the administrative law judge relied on findings that the bar owner had no role in calculating the amounts of mixed beverage sales to report to the Comptroller, reporting such amounts to the Comptroller, or making payments of mixed beverage sales tax and mixed beverage gross receipts tax to the Comptroller.

Franchise Tax

Unitary Business

Comptroller’s Decision Nos. 116,584, 117,455, 117,900 (2022)—The administrative law judge found that a taxpayer that was a wholly owned subsidiary of its parent and was acting as a purchasing agent for its parent and its parent’s other subsidiaries was engaged in a unitary business with its parent and these other subsidiaries. In reaching this decision, the administrative law judge noted that the taxpayer’s activities were coordinated by its parent, prices for transactions between the taxpayer and affiliates lacked profit motive, and taxpayer was dependent on other affiliates to carry out specific functions. Moreover, the taxpayer did not dispute that it was affiliated with the other subsidiaries of its parent, and 34 Tex. Admin. Code § 3.590(b)(6)(B) (Margin: Combined Reporting) provides affiliated companies are presumed to be in a unitary business.

Cost of Goods Sold

Comptroller’s Decision Nos. 115,992, 115,993, 115,994, 115,995, 115,996, 115,997 (2022)—The administrative law judge determined that payments made by a cigarette manufacturer pursuant to a master settlement agreement with 46 states relating to claims for past conduct and future conduct related in any way to the use of or exposure to tobacco products were not properly included in cost of goods sold because they were not costs related to the construction, manufacture, development, mining, extraction, creation, raising, or growth of cigarettes.  See Tex. Tax Code § 171.1012(c) (Determination of Cost of Goods Sold). The administrative law judge made a similar determination with respect to quota buyout payments to offset the cost of federal subsidies to tobacco farmers. The administrative law judge also found that both types of payments were not postproduction costs that were includible in cost of goods sold under Tex. Tax Code § 171.1012(d) and rejected the taxpayer’s argument that it had insufficient nexus with Texas to justify taxation, since it was undisputed that the taxpayer had inventory, leased property, and employees located in Texas.

Mixed Beverage Taxes

Complimentary Drinks/Fraud Penalty

Comptroller’s Decision No. 117,273, 117,274 (2022)—The administrative law judge ruled that a taxpayer that operated a bar and claimed an allowance for complimentary drink failed to provide sufficient evidence because the taxpayer did not provide service checks for each individual or party service complimentary alcoholic beverages nor daily summaries including complimentary alcoholic beverages dispensed. See 34 Tex. Admin. Code § 3.1001(l)(2), (k)(1)(E) (Mixed Beverage Gross Receipts Tax). The administrative law judge also upheld the imposition of the 50% fraud penalty against the taxpayer, because the taxpayer’s overall error rate was more than 50% and was thus a gross error (see Tex. Tax Code § 111.205(b) (Exception to Assessment Limitation)) and there was no evidence that the employees that handled the taxpayer’s mixed beverage gross receipts tax returns or mixed beverage sales tax returns during the periods in question were engaged in an independent course of conduct when calculating the sales to be reported or when the fraudulent tax returns were filed (see 34 Tex. Admin. Code § 3.15(b) (Penalty for Fraud, Intent to Evade Tax or the Alteration, Destruction, or Concealment of Records))

Sales and Use Tax

Information Services/Data Processing Services/Nontaxable Services

STAR Accession No. 202206008L (June 10, 2022)—In this private letter ruling, the Comptroller found that an online educational program used to train professional healthcare students was not subject to sales or use tax.  Specifically, the Comptroller determined that the online educational program was not an information service because it was not the sale of general or specialized news or other current information as described by Tex. Tax Code § 151.0038 (“Information Service”) and did not resemble other examples of information services in 34 Tex. Admin. Code § 3.342(a)(6) (Information Services).  Additionally, while the online educational program had elements of data processing in that compiled students’ responses during simulations, generated scores rating performance, and provided responses and scores to professors (see Tex. Tax Code § 151.0035 (“Data Processing Service”); 34 Tex. Admin. Code 3.330 (Data Processing Services)), the Comptroller exercised his exclusive jurisdiction to interpret whether are services are taxable (see Tex. Tax Code § 151.0101(b) (“Taxable Services”)) to determine that the online educational program was not a data processing service and was not taxable.