United States: Texas Enacts Several Sales And Use Tax Exemptions And Refunds For R & D, Telecommunications And Technology Concerns

On June 14, Governor Rick Perry signed into law several new sales and use tax exemptions and refunds in bills passed in the recently concluded 2013 regular legislative session. Effective January 1, 2014, Texas will have a sales and use tax exemption for property used in qualified research and development, but taxpayers will need to choose between taking that exemption or a credit for qualifying research and development on their franchise tax return for that year.1 Texas also enacted a sales and use tax refund provision for providers of cable television, internet access, and telecommunications services on sales and use tax paid on property used in providing the services.2 Texas will now also have a sales and use tax exemption for certain property used in qualifying data centers.3 These new exemptions or refunds are in addition to any sale for resale exemptions.

H.B. 800 - Research and Development Exemption

Effective January 1, 2014, taxpayers engaged in "qualified research" in Texas, as such term is defined under Internal Revenue Code (IRC) Section 41, will be able to claim a sales and use tax exemption for the purchase, lease, or rental of depreciable tangible personal property used in qualified research.4 The depreciable property must have a useful life exceeding one year and must be subject to depreciation either under generally accepted accounting principles (GAAP) or under IRC Section 167 or Section 168.5 Taxpayers may not claim the sales and use tax exemption if they will be claiming the new Revised Texas Franchise Tax (RTFT) credit allowed for research and development also contained in H.B. 800.6

The Texas Comptroller must provide estimates to the Texas legislature of the number of entities claiming the exemptions and amounts of tax exempted.7 Taxpayers claiming the exemptions will have to complete forms providing the Comptroller the required information.8 The exemption is scheduled to expire on December 31, 2026.9

H.B. 1133 - Refunds for Cable TV, Internet Access, and Telecommunications Services Providers

Effective September 1, 2013, providers of cable television, internet access, or telecommunications services or their affiliates will be able to obtain a refund of state sales and use tax paid on the purchase, lease, or rental of tangible personal property directly used or consumed in providing these services.10 Property directly used or consumed in providing data processing or information services is excluded from the refund.11 Local sales and use tax is not eligible for the refund.12 Providers who claim a sales and use tax refund on tangible personal property are excluded from claiming special property tax benefits for economic development on that same property under Chapter 313 of the Texas Tax Code.13 The legislation caps the total refunds to all claimants each year at $50 million, and if claims for refunds exceed the $50 million cap, each claimant will receive a pro rata share of the $50 million.14

H.B 1223 - Temporary Exemption for Qualifying Data Centers

Effective September 1, 2013, an owner, operator and/or occupant of a data center being specifically constructed or refurbished in Texas to be used primarily to house servers and related equipment for processing, storage, or distribution of data may apply to the Comptroller for certification as a qualifying data center that can claim a state sales and use tax exemption for certain taxable items.15 The exemption does not apply to local sales and use tax.16 The data center cannot be used primarily to deliver telecommunications services. A qualifying data center must have at least 100,000 square feet in a single building or portion of a building, be used by a single occupant, and have an uninterruptible power source, back-up generators, sophisticated fire suppression and enhanced physical security.17 For certification by the Comptroller, the applicant or applicants must agree to make a capital investment of $200 million or more over a five-year period from the date of certification and to create at least 20 permanent, full-time qualifying jobs in the county where the data center is located, and unrelated to moving jobs from another Texas county.18 To be a qualifying job, the job must pay at least 120 percent of the county average weekly wage in the county in which the job is based.19 Data centers with agreements to limit the appraised value of property for property tax do not qualify for this exemption.20 Upon certification of the data center, the Comptroller will issue a registration number to a qualifying owner, operator, and/or occupant.21 Registrants will be able to give exemption certificates with their registration numbers to claim exemption on their purchases of exempted items.22

The exemption includes necessary and essential items that are installed at, incorporated into, or used in the data center, including:

  • Electricity;
  • Electrical and cooling systems and emergency generators;
  • Computer hardware and software including servers, data storage devices, network connectivity equipment, and related equipment such as peripheral components or systems, racks, cabinets, and raised floor systems;
  • Mechanical, electrical or plumbing systems and other equipment or fixture necessary to operate the above qualifying property; and
  • Component parts for the above qualifying property.23

The exemption does not include:

  • Office equipment or supplies;
  • Maintenance or janitorial equipment or supplies;
  • Equipment or supplies used primarily in sales or transportation activities;
  • Property to which purchaser has claimed an enterprise project refund;24 " Property incorporated into realty not otherwise exempted;
  • Tangible personal property rented or leased for a term of one year or less; and
  • Taxable services including services normally exempted when performed on exempt tangible personal property.25

The exemption is temporary and expires depending on the level of capital investment. Data centers with investments of at least $200 million, but less than $250 million, receive these sales and use tax exemptions for a 10-year period.26 Data centers with investments of $250 million or more have 15 years before the exemption expires.27

The Comptroller is authorized to promulgate rules for implementation of the exemption and for reporting requirements.28 The Comptroller is authorized to revoke the registration of a data center that does not meet the requirements.29 Upon revocation, registrants are liable for tax, penalty, and interest from the date of purchase for which exemption was claimed, including any purchases made before the revocation.30

Commentary

Texas has expanded its sales and use tax exemptions with the above legislation to attract new businesses to the state beyond those it has traditionally attracted with manufacturing sales tax exemptions. The Texas legislature appears cognizant of the competition by other states for businesses involved in research and development and those providing cable television, internet access, and telecommunications services and those seeking to set up new data centers. Texas is taking a cautious approach with limited refunds of $50 million for providers of cable television, internet access, and telecommunications services and the temporary and targeted exemption for qualifying data centers. The navigation of these new sales and use tax exemptions or refunds and the choice each year of claiming sales and use tax exemptions for property used in qualified research and development as opposed to taking an RTFT credit will present important decisions for taxpayers to consider.

Footnotes

1 H.B. 800, Laws 2013, Regular Session.

2 H.B. 1133, Laws 2013, Regular Session.

3 H.B. 1223, Laws 2013, Regular Session.

4 TEX. TAX CODE ANN. § 151.3182(a)(3), (b).

5 TEX. TAX CODE ANN. § 151.3182(a)(1).

6 TEX. TAX CODE ANN. §§ 151.3182(b)(2); 171.651 et al. We address the RTFT credit for research and development (and other RTFT developments) in GT SALT Alert: Texas Enacts Franchise Tax Reform Legislation Temporarily Lowering Tax Rates, Excluding Items from Tax Base and Enacting Research Credit.

7 TEX. TAX CODE ANN. § 151.3182(c).

8 TEX. TAX CODE ANN. § 151.3182(d).

9 TEX. TAX CODE ANN. § 151.3182(f).

10 TEX. TAX CODE ANN. § 151.3186.

11 TEX. TAX CODE ANN. § 151.3186(c).

12 TEX. TAX CODE ANN. § 151.3186(e).

13 TEX. TAX CODE ANN. § 313.021(2)(C)(ii).

14 TEX. TAX CODE ANN. § 151.3186(d).

15 TEX. TAX CODE ANN. § 151.359.

16 TEX. TAX CODE ANN. § 151.359(j).

17 TEX. TAX CODE ANN. § 151.359(a)(2).

18 TEX. TAX CODE ANN. § 151.359(d)(2).

19 TEX. TAX CODE ANN. § 151.359(a)(5).

20 TEX. TAX CODE ANN. § 313.010.

21 TEX. TAX CODE ANN. § 151.359(g).

22 Id.

23 TEX. TAX CODE ANN. § 151.359(b)(1)-(13).

24 Pursuant to TEX. TAX CODE ANN. § 151.429.

25 TEX. TAX CODE ANN. § 151.359(c)(1)-(7).

26 TEX. TAX CODE ANN. § 151.359(f)(1).

27 TEX. TAX CODE ANN. § 151.359(f)(2).

28 TEX. TAX CODE ANN. § 151.359(i).

29 TEX. TAX CODE ANN. § 151.359(h).

30 Id.

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