Veteran's Day

Quick Start for:
October 2011 TAX POLICY NEWS
a monthly newsletter about Texas tax policy

We Value Your Feedback!

Please help us by completing our quick online survey on electronic reporting and filing of taxes. This survey contains only seven short questions and should take you less than two minutes to complete.

FRANCHISE TAX

Ending Franchise Tax Responsibility for Unincorporated Political Committees

Effective for franchise tax reports originally due on or after Jan. 1, 2012, unincorporated political committees are no longer considered taxable entities. Senate Bill 1, 82nd Legislature, First Called Session, amended the definition of a taxable entity in Tax Code Section 171.0002 by adding an unincorporated political committee organized under the Election Code or under the provisions of the Federal Election Campaign Act of 1971 (2 U.S.C. Section 431 et seq.) to the list of nontaxable entities.

Before the passage of this provision, unincorporated political committees were considered taxable entities and were subject to the franchise tax for report years 2008 through 2011. Incorporated political committees have been, and continue to be, taxable entities.

Unincorporated political committees that have registered with our office and filed franchise tax for report years 2008 through 2011 are required to send a statement to our office before May 15, 2012, to inform us that they are an unincorporated political committee. When the information is received, we will end the franchise tax responsibility for the political committee. No additional filings are required.

Unincorporated political committees that have not registered with our office are also required to send a statement before May 15, 2012, to inform us that they are an unincorporated political committee. To satisfy franchise tax filing requirements for the previous years, the entity must also include a statement that the political committee’s revenue for the 2008 through 2011 franchise tax reports is under the no-tax-due threshold, if applicable, or the entity must file the appropriate franchise tax report for each year.

Form letters to facilitate the filings for unincorporated political committees will be posted on our website and on the Texas Ethics Commission’s website by mid-November.

Use That Print Button!

If you file your franchise tax reports using WebFile or Smart Forms, be sure to take full advantage of the built-in edits.

While the mathematical computations are done for you as you key in the line items, the most helpful edits are applied at the end when it’s time to print or submit your return.

The PRINT button on the Smart Forms and in WebFile contains edits that allow us to check your return and warn you of possible processing problems so you can correct them before filing your return. Note: When you use WebFile, our system will prompt you to print a copy for your records before selecting SUBMIT; you will not be able to print a copy after submission.

Using the print button within the application helps you avoid receiving notices and account status issues by checking:

  • your qualification for the filing method (No Tax Due, E-Z Computation) selected;
  • valid accounting year dates for the report year selected. For combined groups, this validation applies to the affiliates as well;
  • your selection of the appropriate information report for the entity type;
  • the use of positive and negative numbers in certain fields; and
  • completion of all required fields.

These edits only work when you select the PRINT button within the WebFile application and on the Smart Forms. If you print from your Web browser, you bypass these edit checks.

There is no charge for filing your return using WebFile or Smart Forms, so when you file, be sure to use the print button and let the edits work for you!

INSURANCE TAX

Single Nonprofit Trusts

Section 222.002(c)(5) of the Insurance Code exempts from the premium tax base the following:

“...premiums or revenues paid on group health, accident, and life policies or contracts in which the group covered by the policy or contract consists of a single nonprofit trust established to provide coverage primarily for employees of:

(A) a municipality, county, or hospital district in this state; or

(B) a county or municipal hospital, without regard to whether the employees are employees of the county or municipality or of an entity operating the hospital on behalf of the county or municipality;...”

The position of the Comptroller’s office has historically been that the funds in the trust must be used for the sole purpose of paying premiums on an insurance policy for health benefits for employees and their dependents.

In 2009, a Texas county requested an opinion from the Texas Attorney General concerning the Comptroller’s interpretation of the statute for this exemption. The response from the Attorney General was that while the Comptroller’s interpretation that the trust had to be used for a single purpose was reasonable, nothing in the statute limited the use of the trust funds solely to the payment of insurance premiums and the Comptroller had construed the statute too narrowly. See Op. Tex. Att’y Gen. No. GA-0739 (2009). The Attorney General concluded that in trusts created under Section 222.002(c)(5), the Legislature did not intend to limit the statutorily-recognized powers granted to trustees in Texas Property Code Chapters 113 and 114.

These powers include:

  • purchasing insurance of any nature, form or amount to protect the trust property and the trustee;
  • investing and reinvesting in property of any character;
  • employing attorneys (and other agents) reasonably necessary in the administration of trust estate; and
  • reimbursement for the trustee from the trust principal or income or partly from both for expenses incurred while administering or protecting the trust.

Thus, as long as the trustee’s powers are generally recognized powers of a trustee and are used to further the single purpose of providing benefits to employees and their dependents, they are not contrary to the limitations placed on a trust created under Section 222.002(c)(5).

Further, the termination or dissolution provisions of the trust must state that the disposition of any funds in the trust at the time of dissolution are to be used for the single purpose for which the trust was established and do not inure to the trustees or the employer for profit in any manner.

A trust that complies with these provisions will meet the requirements for premium exemption under the Insurance Code.

MIXED BEVERAGE GROSS RECEIPTS TAX

Documenting Returned Drinks on a POS System

In STAR document 201102205L, a tax consultant asked how a client should record alcoholic drinks that had been returned by customers. Upon return of a drink, the client would void it on the point-of-sale (POS) system, and then list the returned drink on the spillage report after pouring it out. The client has since been told a returned drink should be shown as a “return” so the POS system maintains the proper reporting and accounting figures.

A mixed drink that is returned by a customer can either be poured out or given away. If poured out, the drink is documented as spillage in the mixed beverage permit holder’s records; if given to another patron, the drink is documented as complimentary and use tax is due on the drink’s taxable ingredients.

Alcoholic beverages that are lost due to spillage are included in the daily summaries of the mixed beverage permit holder. The summary should show the number of containers lost by size, brand and class or type of drink and size. A written report documenting the spillage is made at the time of loss. See Rule 3.1001(l)(5) for more information.

Documentation from a POS system may be used if the system accounts for returned drinks such that returned drinks are not part of gross receipts. The POS system must document the type and cost of each returned drink by date and provide the number of returned drinks and total cost of returned drinks on a daily basis. Returned drinks that are given away instead of being poured out must be recorded as complimentary, either on the POS system or by separate record, with the appropriate use tax reported and paid on taxable ingredients.

A POS system’s returned drink documentation can be used if it accounts for returned drinks as described above.

SALES TAX

Firearms Sold by Out-of-State Dealers: Transfer Fees Charged by Texas Dealers

When a gun is purchased from out of state by an individual in Texas, federal law provides that the out-of-state seller must ship the gun to a Texas dealer for transfer to the individual.

Frequently, the Texas dealer will charge the purchaser a transfer fee to cover the costs of paperwork and handling. Because the gun was not purchased from the Texas dealer, the transfer fee does not represent a sale. Therefore, the transfer fee is not taxable.

For example, assume an individual paid $1,500 to an out-of-state seller for a gun. The out-of-state seller shipped the gun to a Texas gun dealer. The customer picked up the gun at the Texas dealer’s place of business and was charged a $25 transfer fee by the dealer. The $25 transfer fee is not subject to sales tax because it is not considered a sale for Texas sales and use tax purposes.

SALES TAX

’Tis the Season – Holiday Goods and Services

The holiday season is here! From buying mistletoe to renting a room for a banquet, this article outlines the taxability of some typical goods and services related to the holidays. Event planners and caterers should refer to STAR document 200703903L for guidance on the application of Texas sales and use tax to their specific services.

Holiday Decorations

Holiday Trees, Greenery and Flowers
In general, sales tax is due on sales of Christmas trees, mistletoe, holly, poinsettias and other greenery.

Tax is not due, however, on trees, greenery and flowers sold during a tax-free sale by a tax-exempt organization.

For more information on sales by exempt organizations, see Exempt Organizations: Sales and Purchases (Pub. 96-122) (PDF, 407KB) and Rule 3.322.

Renting Decorations
If a decorator uses his or her own decorations, the rental charge and installation are taxable as the rental of tangible personal property.

Tree Decorating
When the customer provides the decorations, the charge to decorate a tree is not taxable. When a decorator both sells or rents the decorations to the customer and decorates the tree, the total charge is taxable.

Home Decorating
Charges to decorate a residence are not taxable when the customer provides the materials. If a decorator sells or rents the materials to the customer and provides the decorating service, the total charge for the materials and labor is taxable.

Decorating an Office or Other Nonresidential Structure
The labor charge to remodel nonresidential real property is taxable. “Remodeling” includes activities such as painting, running cables and installing permanent fixtures in real property. So when a decorator installs permanent hangers or other fixtures as part of the decorating service, the charge is taxable. When a decorator sells or rents the decorations to the customer and installs the decorations, the total charge is taxable.

If a decorator uses decorations provided by the customer and merely installs the decorations in the building without remodeling it, the charge is not taxable.

Window Painting
Charges to paint holiday pictures and messages on nonresidential windows are taxable as the taxable remodeling of a nonresidential structure. The paint used to perform the service can be purchased tax free by issuing a properly completed resale certificate (PDF, 57KB) since the paint is transferred to the care, custody and control of the purchaser in the course of performing the taxable service.

Painting residential windows is the nontaxable repair or remodeling of residential real property; as such, the incorporated materials are taxable, but labor is not. The type of contract (lump-sum or separated) between the contractor and the customer determines how tax is handled on materials. See Rule 3.291.

Separated Contract - Contractors working under a separated contract make separate charges for materials and for labor. Under a separated contract, the contractor is considered the seller of the incorporated materials (such as paint), and tax is due on the separately stated charge for materials. No tax is due on the separately stated charge for labor.

Lump-sum Contract - A lump-sum contract is a contract in which the agreed-upon contract price is one lump-sum amount and in which the charges for incorporated materials are not separately stated from labor charges. Under a lump-sum contract for residential window painting, the contractor is considered the consumer of all materials and must pay tax to suppliers at the time of purchase, based on the tax rate in effect at the supplier’s place of business. The contractor does not collect sales tax on the charge to the customer.

Holiday Foods

Bakery Products
Bread, rolls, cakes, cookies and other bakery products are not taxable unless they are sold with plates or eating utensils.

Prepared Meat
Prepared meat (such as turkey and ham) kept hot and ready to eat is taxable whether sold whole or cut into pieces.

A smoked turkey or ham that is not kept hot is taxable only if sold with eating utensils.

A charge to a customer to smoke a turkey or ham owned by the customer is not subject to tax.

Prepared Holiday Meals
A complete holiday meal (such as turkey with all the trimmings) that is sold hot and ready to eat is taxable. If the meal needs further preparation or heating, it is not taxable.

Other Holiday Items and Services

Firewood
The sale of firewood is taxable.

Chopping down a tree or cutting up a fallen tree (other than in a disaster area) is a taxable real property service.

Charges for stacking wood after a tree has been cut, and charges to remove a tree or debris, are also taxable.

Gift Wrapping
When the store that sold a taxable item also wraps the item for the customer, the gift wrapping charge is taxable as the sale of a service in conjunction with the sale of a taxable item.

Gift wrapping is not a taxable service when an item is purchased at one store and the customer takes it to another store or to a gift wrapping service to be wrapped.

Please note that sellers may not purchase packaging and wrapping supplies tax free for resale, even if the seller separately states a charge to customers for those supplies. Sales tax is due on the purchase price of gift wrapping supplies used by persons providing gift wrapping services, regardless of whether the person who provides the service must collect tax on the gift wrapping charge. See Rule 3.314(d).

Layaways
A handling fee charged by a retailer to put an item on layaway is not subject to sales tax. Similarly, a cancellation fee charged by a retailer on a canceled layaway purchase is not taxable. A restocking fee is not taxable.

Facility Rentals

Renting a hall, ballroom, pavilion, patio or similar facility for holding a party, banquet or other event is not taxable if:

  • the facility is not located in a building that has sleeping accommodations;
  • the rental is not connected to the sale of a taxable item such as prepared food; or
  • the rental does not include or constitute access to an amusement service.

For example, renting a room in a museum is not taxable if the museum does not provide food or drinks for the event, and if the rental does not allow event attendees access to the museum exhibits.

Facility Rentals When Food or Amusement Services Are Provided

Renting a hall, room or similar facility that is not located in a building that has sleeping accommodations is subject to sales tax if the rental is connected to the sale of prepared food or an amusement service.

If food is prepared and served or otherwise provided by the facility hosting the event, sales tax is due on the entire charge to the customer, including charges for items such as entertainment, decorations, linens, parking, security or transportation, even if separately stated. For example, sales tax is due on the rental of a restaurant party room if the restaurant provides food for the event. See Rule 3.293 for more information.

Sales of amusement services are subject to sales tax. This includes admissions to live or recorded performances, spectator sports, participatory sports and games, party boat excursions and similar activities. It also includes facility rentals that allow access to amusements, such as a swimming pool, skating rink, or a court or field to participate in a sport. For example, sales tax is due when renting a movie theatre for screening a film or renting an ice skating rink for a party. See Rule 3.298.

Facility Rentals in a Building with Sleeping Accommodations

Hotel occupancy tax is due when renting a room in a building that has sleeping accommodations, even if the venue serves food or provides access to an amusement service with the room rental. For example, the rental of a party room in a hotel which allows guests access to the hotel’s water park is subject to hotel occupancy tax, even if the hotel caters the party. If the hotel charges one price for food and room rental, hotel occupancy tax is due on the entire charge. See Rule 3.293(j).

Resale Exemption Not Allowed
When a third-party caterer (i.e. outside caterer hired by the person throwing the party) rents a hotel banquet room for a client’s event, the caterer must pay hotel tax on the room rental and cannot issue a resale certificate. Sales tax is then due on the entire amount charged to the caterer’s client, including a charge by the caterer for reimbursement of hotel tax. See Rule 3.293(k).

Facility Rentals - Miscellaneous Fees and Charges

Furniture and Equipment Rentals
Generally, the rental of tangible personal property (such as tables, chairs and similar items) is subject to sales tax. When a contract for the lease or rental of nontaxable real property includes the lease or rental of furniture or equipment, no sales tax is due on the amount charged to the tenant for the lease or rental of the tangible personal property, even if separately stated. Sales tax is due, however, at the time such tangible personal property is acquired by the owner or manager of the real estate.

The rental or lease of tangible personal property, which is separate and distinct from a contract for the rental or lease of real property, is subject to sales tax. For example, renting tables and chairs, or a moonwalk from a party supply company is taxable. A person who is required to collect tax on the lease or rental of tangible personal property may buy such property tax free for resale.

See Rule 3.294 for more information.

Cleaning Charges
Generally, cleaning and janitorial services are taxable real property services. A cleaning fee charged in connection with the rental or lease of a party room or other facility (other than a hotel) is subject to sales tax, even if the facility rental is not taxable.

A charge by a hotel to clean a hotel room, however, is a charge to clean and ready a room for occupancy, and hotel tax is due on the cleaning charge. See Rules 3.356 and 3.162, respectively.

Set-Up Fees
Sales tax is due on a set-up fee charged in connection with the sale of prepared food. For example, a caterer or hotel should collect sales tax on a set-up fee when providing meals. See Tax Code Section 151.007. When not providing food, a hotel should collect hotel occupancy tax for a set-up fee on the rental of a hotel room. See Rule 3.162.

For bar set-up fees, the mixed beverage permittee owes mixed beverage gross receipts tax on the fee. See Rule 3.1001(c)(7).

Bartender and Corkage Fees
Bartender and corkage fees are subject to either sales tax or mixed beverage gross receipts tax, depending on the type of alcohol permit held by the person providing the alcoholic beverages.

For instance, if the provider holds a wine and beer retailer’s permit, then sales tax is due on the bartender or corkage fee. If the provider has a mixed beverage permit, the provider owes mixed beverage tax on the bartender or corkage fee. See Rule 3.1001(c)(7).

Service Charges and Gratuities
A voluntary tip or gratuity is not taxable.

A mandatory gratuity or service charge, however, may or may not be taxable. A mandatory gratuity is not taxable only when clearly identified as such, is no more than 20 percent of the sales price and is disbursed to qualified employees.

For more information on the taxability of gratuities, see Rules 3.337 and 3.1001.

Entertainment/DJ
A fee charged by a singer, band, clown, DJ or similar entertainer to perform at an event is not taxable. A fee charged for admission to the event, however, is taxable. See Rule 3.298.

Limousines and Shuttles
Separately stated charges for limousine or shuttle service are not taxable if the primary purpose is to provide transportation from one location to another. Limousine rental is taxable if the primary intent is to provide a tour of points of interest along a route. A lump-sum charge to a customer for a package including banquet facility rental with food and limousine service is taxable.

ABOUT THE NEWSLETTER

The Comptroller’s office publishes this newsletter to keep you informed about state taxes. Tax questions can be complicated, so please use these summaries as guidelines only.

For a Copy of a Proposed Rule

For a copy of a proposed rule or information about a proposed rule, write to Bryant Lomax, Tax Policy Division, 1700 North Congress Avenue, Austin, Texas, 78701-1436, or submit a request via Texas Tax Help.

For Publications, Rules or Other Tax Information

For a wealth of tax information sorted by tax type or by subject matter, please visit the Texas Taxes section of our website.

Contributors to This Month’s Issue

Robin Corrigan, Lisa Davis, Don Dillard, Carol McAnnally, Karen Ortosky, Lindey Osborne, Jerry Oxford, Jo Anne Meyerson, Viki Smith, Karen Snyder, Jennifer Specchio and Steve White

Required Plug-ins