Texas Tax Roundup—May 2022 – Tax Authorities

Hey folks, and welcome to another gripping episode of Texas Tax Roundup, where we discuss all things Texas tax. Nothing on the court side this month, just a lot at the administrative level. Still, it’s captivating all the same. Let’s see what happened!

Proposed rules

General

34 Text. Admin. Code § 3.9 (Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers) (proposed at 47 Tex. Reg. 3106 (May 27, 2022))—The Texas Comptroller has proposed changes to this rule to accommodate reporting requirements for distributors of certain off-road vehicles that were added as a result of SB 586, 87th Legislature, RS (2021). Before SB 586, Texas Tax Code § 151.482 (Manufacturers’ and Distributors’ reports) only required the manufacturers of these vehicles to file reports with the Comptroller. See HB 1543, 86th Legislature, RS (2019).

Notable additions to the automated state search system

General

Fraudulent transfers

Controller Decisions No. 116,910, 116,911 and 116,912 (2022)—The administrative law judge concluded that a purchaser who, free of charge, had acquired business assets that had been abandoned by a trustee in bankruptcy at the end of bankruptcy proceedings succeeded to the subjection to the state tax of the former owner of these assets. Although the sale of assets by a trustee in bankruptcy is not considered a sale of assets by the former owner (see 34 Text. Admin. Code § 3.7(h) (Liability of successor: liability incurred by the purchase of a business)), under the federal bankruptcy code, all assets abandoned by the trustee are retained by the former owner (citing 11 USC § 554(c) (Abandonment of estate assets)). Therefore, the buyer acquired the assets of the business from the previous owner – an entity with unpaid tax debts – for no consideration.

The administrative law judge further concluded that there was an intention to hinder, delay or prevent the collection of the former owner’s tax debts in that: 1) the former owner and the buyer belonged to the same person; 2) the purchaser was incorporated the day after the former owner filed for bankruptcy; 3) the buyer immediately began operating at the same location as the previous owner; 4) the buyer offered the same goods and services as the previous owner; and 5) the acquirer, although newly trained, declared to have 25 years of experience in his field.

As such, the administrative law judge determined that the purchase of the company’s assets met the definition of a fraudulent conveyance or sham transaction, meaning that the purchaser was liable for any taxes. of State, penalty and interest owed by the former owner. See Texas Tax Code § 111.024(a), (b)(2) (Liability for Fraudulent Transfers).

Franchise tax

Combined groups

STAR accession number 202204015L (April 4, 2022)— In this private letter ruling, the Texas Comptroller determined that a subsidiary’s temporary credit for business loss carryforward was not transferred to the combined group of which it was originally a part when the subsidiary was sold to the combined group of a third-party buyer. See 34 Text. Admin. Code 3.594(c)(3) (Margin: Temporary credit for business losses carried forward). In this regard, the Comptroller found that nothing in the Texas Franchise Tax requires Texas to recognize federal tax elections under 26 USC § 336(e) (Gain or loss recognized on property distributed in full liquidation).

Controller Decisions No. 116701, 116702, 116703 and 116704 (2022)—The administrative judge determined that the costs of retirement benefits paid by a member of a combined group after that member had ceased to acquire or produce goods could not be included in the cost of goods sold by the group combined, although other members continued to be involved in the acquisition and production of goods.

Tax on the sale, rental and use of motor vehicles

Standard presumed value

Controller Decision No. 116,846 (2022)—The administrative law judge found that a taxpayer who operated a used car dealership that was entitled to pay vendor-financed motor vehicle sales tax owed tax on the sale of vehicles with a lump sum value presumed to be higher than the price at which the vehicles would have been sold. While the standard deemed value is defined as the transactional value of a motor vehicle between individuals, as determined by the Texas Department of Motor Vehicles (see 34 Text. Admin. Code § 3.79(a)(9) (Presumed standard value)), the administrative law judge held that the presumed standard value could also be used when, as in the present hearing, the taxpayer had not kept or provided complete documents, in particular sales contracts indicating the selling prices and trade-in values. The Administrative Law Judge also upheld the Comptroller’s assertion of the 50% fraud penalty against the taxpayer when the overall error rate was greater than 48% and the taxpayer did not provide an explanation for the under-reporting.

Sales and use tax

Software/Hardware

Controller’s Decision No. 117 239 (2022)—The administrative law judge determined that a taxpayer who provided information technology management services to certain clients, which included maintaining and upgrading hardware and software, providing advice on needs of the business with respect to its IT environment and advice on technological changes, sold taxable items to these customers. These taxable items included:

In addition, the administrative judge found that the fees for consulting services provided in connection with the sale of these taxable items were included in the sale price of the taxable items and therefore subject to the sales or use tax themselves. same. See Texas Tax Code § 151.007(b) (“Sales Price” or “Receipts”) (“The total amount for which a taxable item is sold, leased, or leased includes any service that is part of the sale and the amount of credit extended to the buyer by the seller.”)

[Activities involving software, software-as-a-service (SaaS),
and basically anything involving information technology is a
potential minefield under the Texas sales or use tax. Watch your
step!]

Information services

Controller Decision No. 116 293 (2022)—The administrative law judge found that a national retailer with seven physical stores in Texas purchased a taxable information service when it purchased mailing lists from another company containing the national addresses of potential customers that it used to send advertisements and coupons. Thus, the comptroller correctly assessed the tax on the Texas address portion of the mailing lists. See 34 Text. Admin. Code § 3.342(a)(6)(C) (Information Services) (including mailing lists as a taxable information service, but stating that only “the percentage that represents the names of persons located in Texas is taxable”).

Manufacturing exemption

Controller’s Decision No. 117,668 (2022)—The administrative law judge determined that the Comptroller correctly denied a claim by an oil and gas operator for materials incorporated into separators and heat treatment devices, which the operator claimed were exempt manufacturing equipment . The administrative judge held that the operator had not demonstrated by clear and convincing evidence that the separators and the heat treatment devices were exempt manufacturing equipment or that the materials were components of this equipment. See, for example, Southwest Airlines Co. v. Bullock784 SW2d 563, 569 (Tex. App.—Austin, 1990, no writ) (defining a component as “reasonably essential” to the operation of other equipment).

[This illustrates another problem area under the sales and use
tax: claiming the manufacturing exemption in connection with oil
field equipment.]

Data processing

STAR accession number 202204028L (April 29, 2022)—In this private letter ruling, the Texas Comptroller determined that a taxpayer who offered customers the ability to manage and personalize debit and prepaid cards by contracting with and working with issuing banks and payment card networks to authorize, process and settle its customers’ card transactions provided a tax-free payment processing service. See Texas Tax Code § 151.0035(b)(3)(D) (“Data Processing Service”) (excluding from the definition of a “data processing service” the settlement of an electronic payment transaction by a person who has entered into a sponsorship agreement with a federally insured financial institution for the purpose of settling electronic payment transactions electronic payment of this institution through a network of payment cards); SB 153, 87th Legislature, RS (2021)(amending section 151.0035 to exclude service payment processing services from the definition of a data processing service).

[The issue here was that data processing has such a broad (i.e.,
vague) definition that it could basically apply to
anything involving the compilation and manipulation of data, such
as for instance processing of electronic payments. See,
e.g.
, Comptroller’s Decision No. 35,785 (1997) (“The
processing of credit card transactions is taxable data processing .
. . .”). As such, the Legislature last session thought it wise
to clarify that data processing generally shouldn’t be
considered to include payment processing.]

Welp, that’s it folks. Until next month, ¡hasta luego!

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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