Texas Tax Roundup | March 2022

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Texas Tax Roundup | March 2022

Huh whuh? . . . Well . . . Well, howdy! Nice, erm, um well . . . Nice to see ya’ll again at or near this nebulous home home on the range of Texas taxability! Welcome back to another tax-packed installment of all things Texas tax!

It’s . . . It’s monthly, y’know. This blog series. I don’t think I’m supposed to say anything. Yeah, I know. February’s not up, no evidence it even existed. Disconcerting. Technical difficulties. It’ll be resolved. Folks reading this in the near future won’t even know what we’re talking about. It’ll be like the Mandela effect or something . . .

OK! So, let’s jump right in and see what’s happened in the month that has most proximately gone by!

Court Cases

Franchise Tax

Sirius XM Radio, Inc. v. Hegar, No. No. 20-0462 (Tex. Mar. 25, 2022)—The Texas Supreme Court held that the location where services are performed for purposes  of franchise tax apportionment is the place where the taxpayer’s “personnel or equipment is physically doing useful work for the customer.” [But what about non-useful work? Why doesn’t anyone ever think about that?] In addition, the Court held that the service that Sirius was performing was the production of content primarily outside of the state rather than the “decryption of radio sets in Texas” alleged by the Comptroller. [See here for a more in-depth scoop.]

Proposed Rules

Sales Tax

Rules 3.282 (Auditing Taxpayer Records), 3.385 (Resale Certificates; Sales for Resale), and 3.287 (Exemption Certificates)—The Comptroller is amending these rules as a result of S.B. 296, 87th Leg., R.S. (2021), which extended the period for submitting resale and exemption certificates after a petition for redetermination had been file from 60 days to 90 days. [Which, yeah, cool, but why even have a cutoff for submitting certificates?]

Notable Additions to the State Automated Research System

General

Amounts Represented to be a Tax

Comptroller’s Decision No. 116,941 (2022)—The ALJ found that a restaurant that, in addition to state and local sales and use tax had charged 4.25% as an “Army Corp Fee,” had tax collected not remitted with regard to this fee, since this fee “could have easily been interpreted as a tax.”

Successor Liability

Comptroller’s Decision No. 116,379, 116380, 116,381 (2022)—The ALJ found that a taxpayer that purchased a restaurant was liable for sales and use tax and mixed beverage taxes owed by the seller when the purchaser did not obtain a no-tax-due certificate or withhold an amount from the purchase price sufficient to cover the amount of taxes due.

Hotel Projects

STAR Accession No. 20201203133737 (Feb. 3, 2022)—In this private letter ruling, the Comptroller found that for purposes determining rebate entitlements for a qualified hotel project set forth in  Texas Tax Code chapter 151, subchapter C, a restaurant, bar, retail establishment, or spa is connected to a qualified hotel or qualified convention center facility if it is joined by a common wall.  The Comptroller intends to add this definition of “connected to” to Rule 3.12 (Hotel Projects, Project Financing Zones, and Qualified Hotel Projects).

Franchise tax

Cost of Goods Sold

Comptroller’s Decision  Nos. 116,326, 116,327, 116,328, 116,329, and 116,330 (2022)—The ALJ found that a retail taxpayer could not include labor costs for go-backs, sales floor organizing, scanning for markdowns, and managing sales floor recovery and markdowns in its cost of goods sold deduction. [Deductible for income tax, not for franchise tax—this could be a hashtag if wasn’t so long and boring.]

Retail Trade or Business

Comptroller’s Decision No. 116,548, 116,620, 116,746, 116,747 (2022)—Relying on the 1987 Standard Industrial Code (SIC) manual, the ALJ found that a taxpayer was not engaged in a retail trade or business when the majority of the taxpayer’s revenue was attributable to the sale of airtime for wireless telecommunication services. [What’s with the franchise tax bias against the service economy?]

Sales Tax

Manufacturing Exemption

Comptroller’s Decision No. 117,324 (2022)—The ALJ, among other things, found that a restaurant’s purchase of pesticides in order to comply with state regulations requiring that areas involved in food production be kept free from pests did not qualify for the manufacturing exemption because these regulations only required that such areas be kept free from pests and did specifically require the use of pesticides. [Disturbing on multiple levels.]

Comptroller’s Decision No. 116,782 (2022)—The ALJ determined that a taxpayer was not a manufacturer in relation to bottles of wine and water for which taxpayer designed and affixed labels when such bottles were delivered to taxpayer physically complete and taxpayer did not modify the wine and water in any way. Therefore, the taxpayer’s purchases of labels did not qualify for the manufacturing exemption.

Security Services

Comptroller’s Decision No. 115,399 (2022)—The ALJ found that that the Department of Homeland Security’s (“DHS’s”) Chemical Facility Anti-Terrorism Standards (“CFATS”) does not expressly deprive SOAH of jurisdiction over the question of whether CFATS preempts state licensing law for security services (the lodestar for determining taxability of such services under the Texas sales and use tax). Rather, the ALJ determined that state law conflicts with CFATS only when it hinder DHS from enforcing its statutes and regulations.

Information Services/Multistate Service Benefit Exemption

Comptroller’s Decision No. 116,654 (2022)—The ALJ determined that a taxpayer that traded financial instruments was purchasing taxable information services when it purchased real-time financial information. The premium price that the taxpayer purportedly for the speed of the information’s delivery did not change the essence of the transaction. In a corrected decision, the ALJ also found that the use of the information services to conduct out-of-state trading in support of the general operation of the taxpayer’s trading, which was managed and directed from an office in Texas, was not used by a separate and identifiable segment.

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OK, so like I promise to be back promptly next month. No joke. Unless something happens.