Hiya folks, and welcome back to another gripping installment of the Texas Tax Roundup. So, let's ditch the small talk and get started!
Court Cases
Sales Tax
Hegar v. RTU, Inc., No. 22-0098 (Apr. 29, 2022)—The Texas Supreme Court denied the Comptroller's petition for review in connection with the decision from the Seventh Court of Appeals that talked about back in January. Just to recap, the Seventh Court of Appeals had held that a company was "manufacturing" for purposes of the Texas sales and use tax when it printed third-party advertisements on the back of cash register tapes that it produced for grocery stores. [Per my dilapidated copy of the Texas Rules of Form (or maybe it's not my copy, it's got someone else's handwriting in it), the denial of a petition for review indicates that the Supreme Court thinks the lower court kinda-sorta got it right but doesn't have time to get into why right now.]
Cheddar's Casual Café, Inc. v. Hegar, No. 03-21-00035-CV (Tex. App.—Austin Apr. 7, 2022, no pet. hist.)— The Texas Third Court of Appeals upheld the trial court's determination that the taxpayer (a casual restaurant chain) wasn't entitled to a refund of sales or use tax under the sale for resale exemption in connection taxes paid on the purchase of dishes, glasses, and utensils (the "smallwares") that it provided diners for use within its restaurants and that it then washed and reused with other diners. The Court determined that: 1) taxpayer didn't transfer possession of the smallwares to customers because the customers weren't permitted to take the smallwares with them after eating and didn't gain superior legal possession of the smallwares; and 2) the provision of the smallwares wasn't a "sale" under Texas Tax Code's definition of that term as including "the furnishing, preparation, or service of food, meals or drinks," because neither the statute nor the common meaning of the word "meal" supported the argument that "meal" included anything other than food. The Court also rejected the taxpayer's argument that Rule 3.293(h)(5) (Food; Food Products; Meals; Food Service), which limits restaurants' sale-for-resale exemption in this context to items transferred to the customer that aren't reusable by the restaurants, was facially invalid.
Personal Liability
Elesawi v. State, No. 07-20-00182-CV (Tex. App.—Amarillo April 20, 2022, no pet. hist.)—The Texas Seventh Court of Appeals upheld a district court's determination that a taxpayer was a "responsible individual" with regards to a corporation that operated a convenience store and that owed the Comptroller a fair bit of sales and use tax. Or at least the Court held that the evidence presented before the district court was legally and factually sufficient to support the district court's determination. Among this evidence, (1) the taxpayer had helped form the corporation, (2) the taxpayer managed the store, (3) the taxpayer participated in the store's day-to-day operations, (4) the taxpayer had access to and sole check-writing authority over the corporation's bank account, (5) the taxpayer signed and filed sales and use tax returns and franchise tax returns with the Comptroller, (6) the taxpayer was the point-of-contact during prior Comptroller audits of the corporation, (7) the taxpayer was the point-of-contact during the Comptroller audit at issue in the case; and (8) the taxpayer held himself out as the store's manager. The Court also upheld the district court's determination that the taxpayer had "willfully failed" to pay the corporation's sales and use tax and engaged in a fraudulent scheme to evade the payment of these taxes.
Final Rules
Sales Tax
Rule 3.589 (Margin: Compensation)—The Comptroller adopts amendments to the rule, previously discussed here, to the calculation of the compensation deduction under the Texas franchise tax. No comments were received regarding the proposed version of the amendments.
Rule 3.276 (Surveying Services)—In this newly adopted rule (previously proposed at 46 Tex. Reg. 6377), the Comptroller implements H.B. 3319, 80th Leg., R.S. (2007), which excludes in relevant part certain surveying services from the definition of taxable real property services in Tex. Tax Code § 151.0048. The rule also consolidates guidance relating to surveying services and provisions currently found in Rule 3.356 (Real Property Services).
Notable Additions to the State Automated Research System
Insurance Tax
Comptroller's Decision Nos. 117,378, 117,379 (2022)—The ALJ found that a taxpayer's receipts from travel assistance services were subject to insurance premium tax. The ALJ disregarded the argument that Tex. Ins. Code § 3504.0004 (enacted by H.B. 2587, 86th R.S. (2019)) should change this result, because this section didn't exist during the periods under audit and didn't apply retroactively.
Franchise Tax
Apportionment/Cost of Goods Sold
Comptroller's Decision Nos. 116,254, 116,255, 116,879 (2022)—The ALJ determined that a taxpayer that entered into commodity contracts to mitigate certain business risks didn't hold these contracts as inventory and therefore the gross proceeds from the sale of such contracts couldn't be used for purposes of apportionment. See also 34 Tex. Admin. Code § 3.591(e)(17).
STAR Accession No. 202204004L (Apr. 21, 2022)—In this memo, Policy advised Audit regarding a 2014 change in Comptroller policy on the franchise taxation of printers. According to the 2014 policy, printers are considered to own and produce goods for purposes of the cost of goods sold ("COGS") when they custom-manufacture and sell tangible personal property to customers. The memo also provides guidance on the apportionment of certain charges by printers.
Motor Vehicle Sales, Use and Rental Tax
Taxable Sales
Comptroller's Decision No. 117,051 (2022)—The ALJ found that a car dealership owed motor vehicle sales tax on vehicles it sold even when those vehicles were subsequently repossessed.
Interstate Motor Vehicles
Comptroller's Decision No. 117,067 (2022)—The ALJ found that a provider of oil well services that purchased a trailer with plates in Texas hadn't provided sufficient evidence that the trailer qualified for exemption from motor vehicles sales and use tax as an interstate motor vehicle. The documents that the taxpayer submitted showed that it was an interstate carrier but didn't address the trailer at issue or show that the trailer was operated with a truck that was registered as an apportioned vehicle.
Sales and Use Tax
Resale Exemption
Comptroller's Decision No. 116,111 (2022)—The ALJ determined that a professional baseball team couldn't claim the resale exemption in connection with promotional items that it purchased to transfer to customers, finding that sales of tangible personal property to persons that make gifts of the property are taxable. The ALJ also concluded that the team couldn't claim the resale exemption for security services, audiovisual equipment, cleaning services, and motor vehicle parking services when it didn't provide any evidence that these services were transferred to customers.
Sales Price
Comptroller's Decision No. 117,750 (2022)—The ALJ found that a taxpayer that was a lessor of amusement redemption machines that entered into both equipment lease agreements and management consulting agreements with its customers was required to collect sales tax on its receipts in connection with the management consulting agreements. The ALJ noted that the sales price of a taxable item includes services that are part of the sale, citing Tex. Tax Code § 151.007(b). The ALJ determined that the taxpayer didn't show that its customers that entered into an equipment lease agreement with it weren't also obligated enter into a management consulting agreement with it.
Enterprise Zone Act
Comptroller Decision No. 117,164 (2022)—The ALJ upheld the adjustment to a taxpayer's refund claim under the Texas Enterprise Zone Act. The ALJ found that the taxpayer did not establish that its project was a Triple Jumbo Enterprise Project under Tex. Tax Code § 151.429(b)(6), because the auditor was only able to verify the creation of 470 jobs rather than the 500 jobs required for such designation. The fact that the Governor's office preliminarily approved the project as a Triple Jumbo Enterprise Project was not enough for the taxpayer to be entitled to the refund associated with such designation in the absence of proof that the designations' requirements were met in a given year.
Cigarette Tax
Comptroller's Decision No. 118,542, 118,543 (2022)—The ALJ found that there was no evidence that a tobacco retail store whose employees illegally sold tobacco products to minor was itself criminally negligent in failing to provide supervision and training that would have prevent these illegal sales from occurring. Therefore, the taxpayer didn't show that the store wasn't subject to fines under Tex. Tax Code 154.1142 (which section was repealed in 2021).
See y'all in a couple weeks!
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