Texas Tax Roundup—January 2022

Hiya folks, and welcome to the inaugural installment of our new series giving you a quick recap of what’s happened in the world of Texas taxes in the month gone by. Let’s get started!

Court Cases

Courts of Appeals

RTU, Inc. v. Hegar, No. 07-20-00301-CV (Tex. App.—Amarillo Jan. 3, 2022)—The Texas Seventh Court of Appeals reversed and rendered judgment in favor of the taxpayer, holding that the taxpayer—a company that produced cash register tapes for sale primarily to grocery stores—was engaged in manufacturing when it printed third-party advertisements on the back of these tapes pursuant to its agreements with these stores. As a result, the equipment that the taxpayer used to print the advertisements was equipment used in manufacturing for purposes of determining whether the taxpayer’s purchases of electricity qualified for the manufacturing exemption under sales and use tax.

Adopted Rules

Sales and Use Tax

Rule 3.322 (Exempt Organizations)—The Comptroller amends the rule in response to the enactment of Texas Tax Code §151.3102 in 2019, relating to an exemption for sales by certain nonprofit organizations at county fairs, and that section’s subsequent amendment in 2021. See H.B. 2684, 86th Leg., R.S. (2019); H.B. 3799, 87th Leg., R.S. (2021). The rule was also amended to reflect Comptroller policy that a religious organization must have a physical location from which worship services are held. See 47 Tex. Reg. 29 (Jan. 7, 2022)(adopting proposed rule amendments without change); 46 Tex. Reg. 7860 (Nov. 19, 2021) (proposing rule amendments).

Notable Additions to the State Tax Automated Research (STAR) System

General

Insolvency Relief

Comptroller’s Decision No. 112,375 (2021)—The ALJ found that a taxpayer had proven by a preponderance of the evidence that it qualified for insolvency relief when the taxpayer provided the required documents and these documents reflected that the taxpayer would be unable to pay off his tax liabilities. The Comptroller’s questions regarding the content and reliability of the financial documents that the taxpayer provided were immaterial to determining whether the taxpayer had met the basic documentation requirements.

Successor Liability/Fraudulent Transfer

Comptroller’s Decision No. 117,298 (2021)—The ALJ found that the Comptroller had established successor liability for mixed beverage taxes when a bar was sold to a former owner and the amount of taxes due were not withheld from the purchase price. However, the ALJ determined that the Comptroller did not establish that the sale of the bar was a fraudulent transfer when there was no evidence that the transfer was between related parties, that the seller and purchaser existed concurrently and operated as a single business entity, that the transaction was concealed, or that the seller was insolvent at the time of sale. The ALJ also observed that a clause in the purchase agreement in which the seller warranted title to all property to be clear of all liens and encumbrances did not prevent the Comptroller from taking collection action against the purchaser, because contracts between private parties are not binding on the Comptroller.

Comptroller’s Decision No. 115,132 (2021)—The ALJ found that the Comptroller had established successor liability regarding the sale of a software and computer consulting business when evidence supported finding that buyer and seller intended for seller to cease operations and for buyer to continue seller’s business with seller’s assets. The ALJ also determined that the sale was a fraudulent transfer when the price at which seller purchased the assets was less than $5,000. However, the ALJ found that interest on the assessment should be waived for the period of 16 months between the date when the Comptroller assigned a hearings attorney until the date that the hearings attorney issued a position letter. 

Sales and Use Tax

Resale Exemption

Comptroller’s Decision No. 117,884 (2021)—The Comptroller found that its staff properly rejected a blanket resale certificate that an electrical subcontractor had accepted from a company that provided telecommunications equipment and services, rejecting the ALJ’s determination to the contrary in the proposal for decision. The auditor had rejected the resale certificate because the auditor believed that the subcontractor had reason to know that its customer did not resell its services. The ALJ initially found that the resale certificate was not properly rejected because the auditor had not attempted to verify the transaction with the customer. In the end, however, the Comptroller overruled the ALJ, determining that the subcontractor had failed to provide contemporaneous evidence supporting its position that the customer resold the services that it had provided.

New Construction/Residential Real Property Repair and Remodeling

Comptroller’s Decision 115,635 (2021)—The ALJ found that a contractor did not provide sufficient evidence to establish that its contracts were separated when the contracts contemplated lump-sum billing and the change orders used to invoice customers contained a single charge, even though the contractor adjusted its billing based on its costs and the parties agreed in advance on the price of labor and materials to complete the job.

Food and Beverage

Comptroller’s Decision No. 116,522 (2021)—The ALJ found that a taxpayer’s evidence to establish taxable purchases used to provide complementary food and drink services was insufficient when this evidence consisted of a summary spreadsheet listing complimentary services for each month, the taxpayer’s cost of goods sold for a single month according to its point-of-sale system, and two recipes. The taxpayer had argued that ingredients should be estimated based on monthly cost of goods sold. The ALJ concluded that taxpayers must report actual costs of ingredients used to provide complimentary services, not estimated costs. 

Manufacturing Exemption

Comptroller’s Decision No. 117,404 (2021)—The ALJ found that a machine shop that cut, grinded, heated, polished, and straightened metal pipes that customers provided per the customers’ specifications was not engaged in manufacturing. In reaching this determination, the ALJ found that the machine shop’s activities did not change the nature of the pipe itself and were closer to cutting and bending rebar or cutting or reshaping pipe, which the Comptroller had previously found not to be manufacturing.

Motor Vehicle Parking and Storage

Comptroller’s Decision No. 118,019 (2021)—The ALJ found that a nonprofit country club that contracted with a third party to provide valet parking services for its members was not reselling those services to its members. The ALJ determined that the country club did not provide evidence that the parking services were integral, as opposed to incidental, to the services that the club provided. In addition, the ALJ rejected the country club’s argument that its purchases of parking services were exempt from tax based on its nonprofit status, because the club did not provide evidence that the services related to the club’s exempt purpose.

Enterprise Projects

Comptroller’s Decision No. 116,999 (2021)—The ALJ found that a taxpayer provided insufficient documentation to show that certain marketing associates performed at least 50% of their work for taxpayer at the qualified business site.

Telecommunications Services

Comptroller’s Decision No. 117,864 (2021)—The ALJ found that federal universal service fund fees and regulatory cost recovery fees that a telecommunications service provider passed on to customers were included in the taxable charge for telecommunications services even before a 2o10 rule amendment included these fees in the tax base. The ALJ determined that the rule amendment “simply clarified Texas law that was already in effect.”

Franchise Tax

Nexus

Comptroller’s Decision No. 114,533 (2021)—The ALJ found that a California corporation had nexus with Texas for purposes of franchise tax in a report year for which the corporation filed a franchise tax return and public information report. The corporation did not provide any evidence showing that these items were filed in error.

Mixed Beverage Tax

Depletion Analysis/Spillage

Comptroller’s Decision Nos. 117,561 and 117,562 (2021)—The ALJ upheld the Comptroller’s audit of a mixed beverage permittee based on a depletion analysis, because the permittee did not provide any additional source records supporting additional allowances for beer spills. The ALJ further found that the fact that the permittee’s reported beer sales matched its point-of-sale reports did not prove that the depletion analysis was erroneous, because the permittee’s argument assumed that the point-of-sale reports were accurate, and the permittee had not presented evidence corroborating that assumption.

Parting Words

Whew! Exciting, right?! Check in next month for more updates on all things Texas taxes! ¡Hasta luego!

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