Recent Developments in Texas Tax Law

<%-- HISTORY 11.5.07: Removed banner ad. To be replaced later during rebranding. 2.23.07: lori.braddick@ryanco.com replaced with lori.johnson@ryanco.com. Posted. 10.18.06: Replaced julie.chronis@ryanco.com with gerard.quinlan@ryanco.com. Distributed for approval. --%> Recent Developments in Texas Tax Law

Agenda

Board of Directors

Recent Developments in Texas Tax Law.

By Mark W. Eidman

I.	Texas School Finance Litigation

	Neely v. West-Orange Grove Consolidated ISD, 176 S.W.3d 746 (Tex. 2005).

	A.	In November 2004, the District Court declared the existing tax scheme for the financing of public schools to be unconstitutional and enjoined the state defendants from continuing to fund public schools under that system. The court stayed the effect of the injunction until October 1, 2005 in order "to give the Legislature a reasonable opportunity to cure the constitutional deficiencies in the finance system."

	B.	The Legislature convened in regular session in January 2005, but did not reach a consensus on a solution to school finance. A special session was called on June 21, 2005, with no better result. A second special session was convened on July 21, 2005, but was also unsuccessful. The injunction continued to be stayed pending the defendants' appeal to the Texas Supreme Court.

	C.	On November 22, 2005, the Texas Supreme Court issued an opinion affirming that under the present school finance system, local ad valorem taxes, which provide more than half the revenue of the public school system, had become an unconstitutional statewide property tax.

	D.	The Court noted that system's constitutional problem could not be corrected by simply removing the tax rate cap, as this would result in an unconstitutionally inefficient financing system. Consequently, the Court held "[t]he constitutional violation cannot be corrected without raising the cap on local tax rates or changing the system."

	E.	The Court concluded by quoting the United States Supreme Court's opinion in San Antonio ISD v. Rodriguez, the case that, over thirty years ago, first challenged the constitutionality of the Texas school finance system: "[t]he need is apparent for reform in tax systems which may well have relied too long and too heavily on the local property tax." The Court then reiterated that "[a]s we have held since Edgewood I, structural changes, not merely increased funding, are needed in the public education system to meet the constitutional challenges that have been raised." To give the Legislature time to "fully consider these structural changes," the Court postponed the effective date of the district's court injunction to June 1, 2006.

II.	Sharp Commission

	A.	On November 4, 2005, in anticipation of the Texas Supreme Court's Neely v. West Orange Grove ISD, decision, Gov. Rick Perry appointed members to the Texas Tax Reform Commission. This bipartisan advisory commission is headed by former Texas Comptroller John Sharp and is popularly known as the "Sharp Commission." The purpose of the commission is to develop proposals to modernize the state tax system and provide "long-term property tax relief as well as sound financing for public schools."

	B.	The Sharp Commission has conducted public hearings in a series of meetings throughout the state. Much of the public testimony reflected ideas that were in various House and Senate bills in the 2005 sessions. In addition, the Sharp Commission appears to be vetting other options, focusing for the most part on revamping the franchise tax. Some of the major approaches under consideration include:

		1.	Eliminating the tax advantages for certain business structures for corporations (such as the "Delaware Sub") and expanding the franchise tax to cover partnerships.

		2.	Replacing the franchise tax with an array of separately structured, industry-specific taxes.

		3.	Replacing the franchise tax with a new "Alternative Margins Tax" that would apply to all businesses (corporations, partnerships, sole proprietorships, etc.). So far, the Alternative Margins Tax is the most discussed proposal.

			a.	Would allow a taxpayer to choose a method of calculating the tax base (or "margin") on which they will pay tax based on their own circumstances.

				(1) Taxpayers could deduct either "compensation expenses" or "cost of goods sold" from its gross revenues.

				(2) The difference, or "margin," would be apportioned using current franchise tax method of "receipts from business done in Texas" and then multiplied by a tax rate to determine the tax due.

			b.	Appears that industries would be grouped into broad categories with different tax rates.

			c.	Concept is still developing. Broad range of items, from definitions for "compensation expenses" and "cost of goods sold" to tax rates themselves, remain fluid.

III.	79th Legislature - Third Called Session

	A.	Gov. Perry has indicated that he will call the Legislature back for a special session in the spring of 2006. As of this writing, the exact date for the special session had not yet been determined.

	B.	Focus will be on "reforming the property tax system." As Gov. Perry stated in a February 8, 2006 press release, "I will ask legislatures to start on the challenge the Supreme Court has deemed unconstitutional, and that is our property tax system." Education reform is secondary.

	C.	Read "reforming the property tax system" to mean reforming the state's tax system while providing property tax relief. Gov. Perry notes that "only one in 16 businesses pays the franchise tax," and that "[i]t makes more sense to have a broader tax that captures more of the economy at a low rate." To accomplish this, Gov. Perry suggests comprehensive reform of the franchise tax.

	D.	Target revenue from revamped business tax is nearly $7 billion. Revenue from franchise tax is currently $2.2 billion.

IV.	Recent Texas Tax Legislation

	A.	78th Legislature - Regular Session - 2003

		1.	House Bill 2425 - changed requirements for filing a refund claim.

		2.	Limitations only held open for issues filed.

		3.	Redetermination does not hold refund open.

		4.	Some in agency take position that HB 2425 changes also apply to redeterminations and consider credits filed during redetermination to be separate refund claims with their own statute of limitations.

		5.	Tips

			a.	File any credits during waiver period.

			b.	File a complete claim for credit offsets - specifying issues.

	B.	79th Legislature - Regular Session - 2005

		1.	No significant tax legislation passed, not even the Comptroller's technical correction bill.

	C.	79th Legislature - First Called Session - 2005

		1.	No significant tax legislation passed, not even the Comptroller's technical correction bill.

	D.	79th Legislature - Second Called Session - 2005

		1.	As with the regular session and the first called session, the major objective of the leadership in the second called session was to reduce property taxes. But the sticking point every time has been how to raise taxes to replace the lost property tax revenue.

		2.	House Bill 3 called for an increase in the state sales tax rate in exchange for reduction in property taxes. Many objected to this proposal because it was regressive.

		3.	House Bill 3 also attempted to close the partnership loophole in the Texas franchise tax by expanding the nexus rules. Corporations would be deemed to be doing business in Texas if they directly or indirectly owned general partnership or controlling limited partnership interests in partnerships doing business in Texas.

		4.	House Bill 3 also attempted to recapture management fees, royalties, and interest paid to related parties.

		5.	House Bill 3 also would have given the Comptroller explicit powers to re-characterize income and expenses similar to IRC § 482.

		6.	House Bill 3 was defeated on the House Floor. The failure of these proposals means that there was no significant change to the sales tax base or rate.

		7.	The failure of these proposals also means that corporations can continue to avoid franchise taxes by reorganizing in partnership form, and the Comptroller may be powerless to deal with tax avoidance resulting from the payment of licensing and management fees to nontaxable affiliates.

		8.	The Legislature did, however, approve the purple sage as the official native shrub.

V.	Texas Tax Litigation

	A.	Metromedia Restaurant Services, Inc. v. Strayhorn, No. 03-05-00006-CV, 2006 Tex. App. LEXIS 1126 (Tex. App.-Austin Feb. 10, 2006).

		1.	Case involved the requirements to be a "holder" under the Texas statutes governing unclaimed personal property. The case also addressed whether a civil judgment could be taken against a nonparty based on the theory that the nonparty was a single business enterprise with a named party.

		2.	Reversed trial court judgment assessing over $500,000 in liability for failure to remit unclaimed employee wages entered against Metromedia Services, Inc.; S & A Restaurant Corp.; and Steak & Ale of Texas, Inc.

		3.	Comptroller assessed Metromedia, but not the other parties. Because there is no administrative hearings process for unclaimed property assessments, Metromedia filed a declaratory judgment action. The Comptroller did not join S & A Restaurant Corp. or Steak & Ale of Texas. However, the jury found that Metromedia operated as a "single business enterprise" with the other entities, and the judge entered judgment against all three entities.

		4.	The Court of Appeals reversed. The Court held that due process does not allow judgment to be granted in favor of or against a party not named in the lawsuit, and that the Comptroller cannot impose liability via a corporate veil-piercing theory such as "single business enterprise" by a means that ignores due process.

		5.	The Court also held that Metromedia was not a "holder" of the property as required by Chapter 72 of the Texas Property Code. For Metromedia to be found to be a holder, the Comptroller had to show Metromedia was in possession of the retained funds. The entities used a "concentrated account" owned and controlled by S & A Restaurant Corp from which funds were transferred to and from each subsidiary's account. The subsidiary accounts were maintained to show a zero balance at the end of each business day. The Court held evidence that the disputed funds may have passed through Metromedia's account did not prove that Metromedia was currently in possession of the unclaimed funds.

		6.	The Court held that the judgment against S & A Restaurant Corp. and Steak & Ale of Texas was void. The Court also held that because Metromedia was not a holder of the unclaimed property, it could not be held liable.

	B.	Strayhorn v. Willow Creek Resources, Inc., 161 S.W.3d 716 (Tex. App.-Austin 2005, no pet.).

		1.	The processing of a refund claim is an administrative proceeding that tolls the statute of limitations.

		2.	The Comptroller contended that because the processing of a refund claim was not a contested case, it was not an administrative proceeding.

		3.	Good discussion of what constitutes an administrative proceeding.

	C.	Alpine Industries, Inc. v. Strayhorn, Cause No. 03-03-00643-CV (Tex. App.-Austin 2004).

		1.	Alpine marketed its products through a network of independent salespersons and encouraged them to sell Alpine products through cold calls, teaser mailing, and person-to-person approaches, among others. Sales persons and those who recruited the sales persons would receive sales bonuses. Alpine asserted that its sales persons were independent contractors and therefore it was not a direct sales organization that could be treated as a retailer.

		2.	The Court of Appeals held that the Comptroller's treatment of Alpine as a retailer was "necessary for administrative efficiency" and therefore authorized by the Tax Code.

		3.	The Court of Appeals also held that Alpine's network of independent sales persons was sufficient to create nexus in Texas even though Alpine itself had no inventory, real estate, employees, or other assets in the State.

		4.	The case is also notable because Alpine paid only $33,004 under protest, but the Comptroller successfully prosecuted a counterclaim for $2 million in additional taxes.

	D.	Anderson-Clayton Bros. Funeral Home, Inc. et al. v. Rylander, 149 S.W.3d 166 (Tex. App.-Austin 2004, pet. denied).

		1.	This case arose from the taxpayers' franchise tax treatment of investment earnings on its prepaid funeral benefits trusts. The taxpayers deposited proceeds from their sale of prepaid funeral benefits contracts into Texas trusts, and these trusts, in turn, invested those funds and accumulated investment earnings. During the subject period, the investment earnings on the taxpayers' prepaid funeral benefits trusts came from out-of-state corporations.

		2.	The taxpayers took the position that the out-of-state corporations, and not the Texas trusts, were the relevant payors, making the earnings out-of-state receipts and not those from "other business done in this state." The taxpayers apparently based this understanding on the federal income tax treatment of the investment earnings. Under federal income tax law, the investment earnings from the taxpayers' prepaid funeral benefits trusts were properly reportable as income of the taxpayers, as opposed to the trust into which the earnings were paid. In other words, the trusts were simply disregarded and the investment earnings treated as if they flowed directly from the out-of-state investment vehicles to the taxpayers.

		3.	The Court of Appeals held that the legislature left the determination of whether income derived from the trusts "is other business done in this state" in the hands of the Comptroller. As long as the Comptroller's determination is reasonable, the Court would defer to the Comptroller's interpretation. Citing longstanding Texas law that trusts are considered separate entities, the Court held that the Comptroller's application of the location of the payor test to find that the subject receipts came from the Texas-based trusts was not unreasonable and upheld the district court's ruling granting the State's motion for summary judgment. Because the trusts paid the income to the taxpayers and the trusts were based in Texas, the receipts were deemed to be Texas receipts.

	E.	INOVA Diagnostics, Inc. v. Strayhorn, 166 S.W.3d 394 (Tex. App.-Austin 2005, pet. denied).

		1.	The taxable capital component of the Texas franchise tax is not a tax measured by net income, and therefore the protections of Public Law 86-272 do not apply.

		2.	The nexus standards of Quill Corp. v. North Dakota, 386 U.S. 753 (1967) apply to the Texas franchise tax.

		3.	Texas resident spending seven to ten days per month soliciting orders in Texas was not de minimis.

	F.	Local Neon Company, Inc. v. Strayhorn, Cause No. 03-04-00261-CV (Tex. App.-Austin 2005).

		1.	Taxpayer filed a protest payment without the accompanying protest letter setting forth the grounds of recovery. The statute conferring jurisdiction to the court required a protest letter providing this information. Consequently, the district court dismissed the taxpayer's suit to recover the protested taxes.

		2.	Taxpayer had also sought a declaratory judgment regarding the constitutional validity of a Comptroller rule. A taxpayer may raise constitutional challenges for the first time in a tax refund suit. The case was remanded to the trial court to allow the taxpayer to pursue the declaratory judgment action.

	G.	Alon USA v. State, Cause No. 03-03-00431-CV (Tex. App.-Austin 2005).

		1.	Court affirmed that a third party may be liable as a statutory trustee for motor fuel taxes that were collected but never remitted to the Comptroller.

		2.	Under Texas law, "[a]ny person who receives or collects a tax or any money represented to be a tax from another person" is individually liable.

		3.	In this case, a third-party supplier collected credit card payments for a subsequently dissolved gas station. The Court determined that third-party supplier was responsible to pay the Comptroller the funds it had collected from the gas station's customers.

		4.	The Court did not "set off" or otherwise reduce liability based on the amounts the dissolved gas station owed to the taxpayer.

	H.	Dorinco Reinsurance Co. v. Strayhorn, Cause No. GN203924 in the Travis County District Court (2004).

		1.	An insurance carrier certificated in Texas but without physical presence in the State was not subject to the Texas insurance premium tax even though it insured Texas risks.

		2.	This is the flip side of the Dow Chemical case, which held that the State could not tax an insured (as opposed to the insurer) if the insurance was negotiated and paid for entirely outside the State.

		3.	The Comptroller did not appeal.

VI.	Cases to Watch

	A.	Chevron Pipeline Co. v. Strayhorn, Cause No. 03-05-00449-CV in the Third Court of Appeals, Austin, Texas (2005).

		1.	Suit for tax refund to recover sales tax paid for excavation and backfilling services and installation of cathodic protection on pipelines.

		2.	First issue is whether excavation and backfilling services provided in connection with pipeline recoating operations constitutes nontaxable "unrelated services."

		3.	Second issue is whether installation of cathodic protection on the pipelines, which was installed by digging trenches or drilling wellbores and inserting anodes which were connected to the pipelines by wire, constituted taxable repair and remodeling or nontaxable new construction.

		4.	After a bench trial, the district court upheld the taxability of the transactions. Taxpayer has appealed to the Third Court of Appeals.

	B.	El Paso Natural Gas Co. v. Strayhorn, Cause No. 06-05-00059-CV in the Sixth Court of Appeals, Texarkana, Texas (2005).

		1.	Taxpayer filed franchise tax refund claims. At issue is whether the district court lacked jurisdiction over the refund claims if the Comptroller denied leave to amend in one proceeding and then refused to consider the claims in a second proceeding because such claims were denied in the first proceeding.

	C.	Ethicon v. Strayhorn, Cause No. GN304779 in Travis County District Court (2003).

		1.	Taxpayer paid sales and use tax on a leased gas generation system and related equipment used at the taxpayer's plant. The equipment was permanently plumbed into the facility.

		2.	The Comptroller has consistently treated the installation of equipment at chemical plants as real property for sales tax purposes. The taxpayer sought a refund, contending the gas generation system, a component part of the taxpayer's chemical plant, was nontaxable real property.

		3.	The Comptroller disagreed. Taxpayer has appealed to the district court.

	D.	Southwestern Bell Telephone, L.P. v. Strayhorn, Cause No. GN402300 in Travis County District Court (2004).

		1.	Suit for tax refund to recover sales tax paid on the purchases of equipment and electricity used to convert, transmit, and reproduce sound and information multiple times, route it through different media, and ultimately deliver it to the desired party in a reproduction of the original form.

		2.	Taxpayer contends that the equipment purchases qualify for the manufacturing and processing exemption because taxpayer uses the equipment to process tangible personal property for ultimate sale. The Texas Tax Code defines tangible personal property as personal property that is perceptible to the senses in any manner. In addition, the equipment processes personal property in the form of electricity, which also qualifies as tangible personal property for sale and use tax purposes.

		3.	Taxpayer also contends that its purchases of electricity qualify for the sale for resale exemption both because the electricity was resold as an integral part of the other tangible personal property sold by taxpayer and because Plaintiff used the electricity to perform taxable telecommunications services and transferred the care, custody and control of the electricity to its customers.

	E.	Stantrans Partners, L.P. v. Strayhorn, Cause No. GN502648 in Travis County District Court (2005).

		1.	Taxpayer filed request for redetermination and request for refund to recover sales and use tax paid on tangible personal property. Taxpayer contends that the tangible personal property was exempt from sales or use tax under the manufacturing exemption. Taxpayer also contends that its purchase of gas and electricity were exempt because the taxpayer used the gas and electricity to power equipment exempt under Tax Code § 151.318.

	F.	Laredo Coca-Cola Bottling Co. v. Strayhorn, Cause No. GN300575 in Travis County District Court (2003).

		1.	Suit for tax refund to recover sales tax paid on the purchases of fountain drink machines and related parts.

		2.	Taxpayer contends these purchases are exempt from sales tax both because they were purchased for resale and because the machines were purchased by a manufacturer and used in the manufacturing of tangible personal property.

		3.	Taxpayer filed for summary judgment in April 2005.

	G.	Reynolds Metal Co. v. Strayhorn, Cause No. GN401468 in Travis County District Court (2004).

		1.	Suit for tax refund to recover sales and use tax paid on the purchase of repair services and replacement parts for ship unloaders, conveyors, and weigh-ometer belts.

		2.	Taxpayer produced and manufactured aluminum oxide at its Texas plant. Because the dust created by ground bauxite ore may contain volatile organic compounds, taxpayer's industry is heavily regulated by state and federal environmental agencies.

		3.	In order to comply with various regulations, taxpayer used conveyors and weigh-ometers adapted to control dust emissions. Because the equipment was essential for taxpayer to manufacture its product, taxpayer contends that the replacement parts purchased are exempt under the manufacturing exemption.

		4.	Taxpayer also contends that the replacement parts purchased are exempt purchases of pollution control equipment or exempt purchases of environmental repairs.

		5.	Lastly, taxpayer contends that its purchases of replacement parts for its ship unloaders, which traveled on parallel tracks, are exempt purchases of rolling stock.

	H.	Southwestern Bell Telephone Co. v. Strayhorn, Cause No. GN204559 in Travis County District Court (2004).

		1.	Case involves interstate access revenues taxpayer received for commencement or completion of interstate long distance calls on its local network. For the period at issue, the Comptroller included these interstate access revenues in taxpayer's Texas receipts for franchise tax apportionment purposes.

		2.	Taxpayer contends these receipts are not Texas receipts because they are revenues from interstate calls. Taxpayer further contends that the Comptroller's conclusion to the contrary violates its own rules, violates constitutional standards of due process and equal protection, and constitutes an arbitrary and capricious interpretation of the tax laws.

	I.	Chevron USA, Inc. v. Strayhorn, Cause No. GN403978 in Travis County District Court (2004).

		1.	Suit for tax refund to recover sales and use tax paid on charges by contractors for erecting, maintaining, and dismantling scaffolding.

		2.	Taxpayer contends that these charges were for services that are not taxable under the Texas Tax Code, and to the extent the Comptroller has by its rules purported to tax those services, those rules are invalid. The taxpayer also contends that the charges were not for the sale of tangible personal property.

	J.	Mars, Inc. v. Strayhorn, Cause No. GN401349 in Travis County District Court (2004).

		1.	Suit for tax refund to recover sales and use tax paid for purchases of equipment and related items used to manufacture candy for sale.

		2.	Taxpayer's Texas manufacturing plant utilizes sophisticated, complex, and integrated machinery. The equipment and related items at issue include wire ways, cable trays, pipes, conveyors, and cleaning-in-place equipment that form the components of the large, integrated machines essential for the manufacture of candy for sale. Taxpayer contends that the purchased equipment is exempt pursuant to the manufacturing exemption.

		3.	Taxpayer contends the cleaning-in-place equipment is also exempt from sales tax because it constitutes pollution control equipment used in manufacturing.

		4.	Lastly, taxpayer contends that the purchase of installation labor is exempt as nontaxable stand-alone installation services.

	K.	Sabine Mining Co. v. Strayhorn, Cause No. GN401382 in Travis County District Court (2004).

		1.	This case involves whether replacement parts and repair services purchased for draglines used in taxpayer's coalmining operations are exempt under the manufacturing exemption. Taxpayer contends that because the draglines fracture the lignite formations, it causes physical changes to the formation as required for the manufacturing exemption to apply. Similarly, the dragline causes other desirable physical changes to the formation by removing the overburden and allowing the formation to be exposed to atmospheric conditions.

	L.	Target Corp. v. Strayhorn, Cause No. GN502440 in Travis County District Court (2005).

		1.	The transactions at issue involve the installation of security systems, telephone and store paging systems, and computer networks for newly constructed retail stores. Other disputed transactions include services purchased for the installation of parking lot poles, truck clearance bars and a concrete docking pad. Taxpayer contends that the charges for labor under segregated contracts and the charges under lump-sum contracts constitute non-taxable new construction.

		2.	Taxpayer further contends the assembly and installation of display items constitute non-taxable third party installation services.

		3.	Lastly, taxpayer contends that components purchased outside Texas and assembled outside of Texas into computer systems, gift registry kiosks, network servers, and point-of-sale stands were not subject to tax.

	M.	SC Kiosks, Inc. v. Strayhorn, Cause No. GN500795 in Travis County District Court (2005).

		1.	Taxpayer purchased telephones and transferred them to customers when the customers contracted for telephone service with a carrier associated with taxpayer.

		2.	Taxpayer contends that its purchases of the telephones qualify for the Texas Tax Code's sale for resale exemption.

	N.	Office Depot, Inc. v. Strayhorn, Cause No. GN503442 in Travis County District Court (2005) & Cause No. GN600041 in Travis County District Court (2006).

		1.	Comptroller conducted a sample audit of taxpayer, assuming all transactions in which customer identities were unavailable were 100% taxable.

		2.	Taxpayer contends that Comptroller's assumption was in error. The issue is one of missing information requested to verify certificates, not an issue of uncollected or missing certificates. Taxpayer contends that the transactions in question should have been taxed and projected at the same error rate as the transactions for which the customer information was available.

		3.	Taxpayer further contends that Comptroller's assumption runs counter to generally accepted sampling techniques and creates a one-sided, punitive bias to the audit.

		4.	In addition, taxpayer contends that Comptroller improperly extrapolated payments associated with copier lease payments over a contrived, arbitrary, and grossly under-valued population base.

VII.	Texas Comptroller Decisions

	A.	Hearing No. 42,532 (2004)

		1.	The taxpayer processed transactions, made backup tapes of the transactions, and delivered them to an off-site storage facility. Although the taxpayer collected sales tax on the data processing services, it did not charge sales tax on the tape storage charges. An audit scheduled the tape storage charges as part of the data processing services

		2.	The Comptroller found that that the tape storage charges were unrelated to the data processing services and not subject to tax pursuant to Rule 3.330(d). The rule provides that charges for services directly related to and incurred while providing a taxable service are taxable, but that a service will be considered nontaxable if it is not itself a data processing service or other taxable service and if it is commonly provided on a stand-alone basis

	B.	Hearing No. 44,668 (2004)

		1.	The taxpayer argued that the computer programs were not taxable because they were specifically created for the taxpayer, who had exclusive rights and use of them. The taxpayer's claim apparently also relied on Rule 3.308(b)(4), which provides, in part, that charges to create a computer program are not taxable.

		2.	The Administrative Law Judge sustained the Comptroller's denial of the taxpayer's refund claim. The contract between taxpayer and vendor clearly provided that vendor retained all right, title, and interest in the custom software. Thus, the vendor did not perform a nontaxable service but rather sold tangible personal property.

	C.	Hearing No. 44,450 (2004)

		1.	Taxpayer argued that she had detrimentally relied on information from the Comptroller, which caused her failure to timely file a claim for the period in issue.

		2.	Elements to qualify for relief under the detrimental reliance policy: (1) the taxpayer provided sufficient information to have led the employee to provide correct advice; (2) the substance of the information or advice is satisfactorily established and the advice is shown to have been directly communicated to the taxpayer (usually the advice must be in writing to establish exactly what advice was given); (3) the taxpayer followed the advice; and (4) the taxpayer will suffer harm unless the Comptroller adheres to the advice.

		3.	Finding that the taxpayer did not meet the elements to qualify for detrimental reliance, the Administrative Law Judge upheld the denial of the taxpayer's refund claim, noting that, even if she had, detrimental reliance cannot serve as an estoppel to the pleading of the statute of limitations.

	D.	Hearing No. 43,799 (2004)

		1.	The taxpayer, a motor vehicle repair shop, paid sales tax to its vendors when buying parts and materials and did not have a Texas sales and use tax permit. The taxpayer invoiced customers a lump sum for materials and labor as well as an additional 8.25 percent, the sum of the state and local sales tax rates. The invoice labeled the additional charge "Sales Tax," but the taxpayer did not remit any sales tax to the Comptroller's office.

		2.	The taxpayer posted a sign on its premises advising customers that the 8.25 percent was a miscellaneous material charge, not sales tax.

		3.	Charges for the repair or maintenance of a motor vehicle are not taxable. A repair shop that charges customers a lump sum for materials and labor is considered the consumer and thus must pay tax when buying all supplies, tools, parts and materials used. The shop may not collect tax from customers on any portion of the lump-sum charge.

		4.	However, under Texas Tax Code Section 111.016(a), any person who receives or collects a tax, or any money represented to be a tax, holds the amount in trust for the state. The Comptroller found that because the taxpayer's invoices represented the amounts as sales tax, Section 111.016(a) applied despite any sign on the premises declaring otherwise.

	E.	Hearing 40,947 (2004)

		1.	During a Comptroller audit, a taxpayer provided exemption certificates that it asserted it had accepted in "good faith" as evidence that some of its sales were tax-exempt.

		2.	The Administrative Law Judge noted that because the certificates were substantially incomplete, they were invalid under the terms of rules 3.285 (g) and 3.287(a). Because the certificates did not provide all the required information, the taxpayer could not rely upon them in "good faith." Since the certificates lacked the information necessary to be verified, the Comptroller denied the taxpayer's claim.

	F.	Letter Ruling 200408781L (2004)

		1.	Taxpayer "A" is a manufacturer located in Texas that sells and ships products to distributors located both out of the state and out of the country. Taxpayer "A" has employees living in and traveling to other states for the solicitation of sales orders. Taxpayer "A" is the survivor of a merger and is now owned 100 percent by Taxpayer "B." Taxpayer "B" has locations in several other states besides Texas. Taxpayer "B" also purchases products from Taxpayer "A" and resells the products to the ultimate buyer.

		2.	As Texas is a separate entity state, common ownership does not extend the nexus of Taxpayer "B" to Taxpayer "A." If Taxpayer "A's" only contact with another state is the activities of Taxpayer "B" who resells the products, Taxpayer "A" does not have nexus in the other state for purposes of the throwback rule in the apportionment of earned surplus. Sales by Taxpayer "A" shipped from Texas into that state would be subject to throwback and would be Texas receipts.

	G.	Hearing 43,530 (2005)

		1.	The issue in this hearing was whether the taxpayer, who operated a voice messaging service, was a telecommunications utility subject to a Telecommunications Infrastructure Fund assessment.

		2.	Parties agreed that taxpayer was not a public utility, but disagreed as to whether taxpayer was a "reseller of communications" or a "communication carrier."

		3.	Both terms had acquired a technical and particular meaning within the telecommunications industry, but neither was defined by the Utility Code. The ALJ noted that within the industry, "carrier" means a company that "provides communication circuits," and that "reseller" means a company that sells numbers, minutes, or lines in the form acquired to its customers.

		4.	Taxpayer did not provide communication circuits or sell numbers, minutes, or lines to its customers. It simply provided a service using telecommunications lines. Consequently, the ALJ held that taxpayer was not a telecommunications utility subject to TIF and dismissed the audit liability.

	H.	Hearing 42,981 (2003)

		1.	At issue was whether equipment replacement and adjustment charges constituted taxable repair and remodeling services or nontaxable maintenance services.

		2.	Taxpayer entered into elevator maintenance agreements with its customers. Pursuant to taxpayer's computerized scheduling system, which took into account a variety of factors to "plan maintenance activities in advance," taxpayer would replace and adjust ropes as necessary to ensure compliance with safety code requirements.

		3.	While noting that replacing the ropes only when needed would constitute taxable repair, the ALJ held that taxpayer had established that it scheduled and budgeted rope replacement at periodic intervals based on its ability to predict when such replacement will be needed. Consequently, the ALJ held that the rope replacement and adjustment charges constituted nontaxable maintenance.

	I.	Hearing Nos. 44,466; 44,467; 44,469; 44, 470; 44,471; 44,547; and 44,548 (2005)

		1.	Manufacturing exemption does not apply to purchases of networking equipment used by providers of cellular and data telecommunication services.

		2.	Comptroller's position is that processing a customer's telecommunication signals does not qualify as processing for the purposes of the manufacturing exemption.

		3.	As discussed earlier, cases involving this issue are pending in Travis County District Court.

	J.	Hearing No. 44,820 (2005)

		1.	Manufacturing exemption does not apply to amusement park's purchase of equipment used to manufacture tickets.

		2.	The ALJ noted that under the essence of the transaction doctrine, the amusement park was selling amusement services, not tickets. Because the manufacturing exemption applies to equipment used to manufacture items for sale, the exemption did not apply.

	K.	Hearing No. 43,879 (2005)

		1.	The ALJ narrowly construed new construction to hold that initial finish out work on a portion of a building's floor was taxable real property repair and remodeling if a portion of the same floor had been finished out earlier.

	L.	Hearing No. 43,300 (2005)

		1.	In another new construction case, the ALJ held that in order for removal and replacement of an in-ground swimming pool to constitute nontaxable new construction, the existing improvement must be removed "down-to-the-dirt."

		2.	This is in contrast to the Comptroller's policy regarding above-ground improvements, which must only be removed "down-to-the-slab" to qualify for the exemption.

VIII.	Texas Rule Amendments

	A.	Rule 3.285 - Resale Certificate; Sales for Resale

		1.	Rule 3.285 was amended to reflect provisions under Tax Code, Section 151.152, which allow the Comptroller to authorize the use of electronic signatures on resale certificates.

	B.	Rule 3.286 - Minimum Age

		1.	Rule 3.286 was amended to establish 18 as the minimum age for a person to obtain a sales and use tax permit, unless an exception is allowed by the Comptroller.

	C.	Rule 3.303 - Transportation and Delivery Charges

		1.	Rule 3.303 was amended to clarify that separately stated postage charges are not subject to sales and use tax when incurred by the seller at the request of a client to distribute both taxable tangible personal property and taxable services to third party recipients as designated by the client.

Dallas/Fort Worth State Tax Association / P.O. Box 803463 / Dallas, Texas 75380.3643
Telephone: 972.934.0022 / Fax: 972.960.0613
E-mail: gerard.quinlan@dfwsta.org or lori.johnson@dfwsta.org