Transaction tax

Texas Tax Overview | March 2022 | law of the free man

What? . . . Well . . . Well, hi! Well, uh, uh well. . . Nice to see you again at or near this nebulous home on Texas Tax Beach! Welcome back to another tax-filled episode of all Texas taxes!

His . . . It’s monthly, you know. This series of blogs. I don’t think I’m supposed to say anything. Yeah, I know. February is not over, no proof that it even existed. Confusing. Technical difficulties. It will be resolved. People reading this in the near future won’t even know what we’re talking about. It will be like the Mandela effect or something like that. . .

OKAY! So, let’s go and see what happened in the longest month!

Court cases

Franchise tax

Sirius XM Radio, Inc. v. Hegar, No. 20-0462 (Tex. Mar. 25, 2022)— The Texas Supreme Court has held that the place where services are provided for purposes of franchise tax apportionment is where “the taxpayer’s personnel or equipment are physically performing work useful to the customer.” [But what about non-useful work? Why doesn’t anyone ever think about that?] Further, the Court held that the service Sirius performed was the production of content primarily out of state rather than the “decryption of radio sets in Texas” alleged by the Controller. [See here for a more in-depth scoop.]

Proposed Rules

Sales tax

Rules 3.282 (Taxpayer Records Check), 3.385 (Resale Certificates; Sales for Resale) and 3.287 (Exemption Certificates)—Controller amends these rules as a result of SB 296, 87and Leg., RS (2021), which extended the deadline for submitting resale and exemption certificates after filing a petition for review from 60 days to 90 days. [Which, yeah, cool, but why even have a cutoff for submitting certificates?]

Notable additions to the automated state search system


Amounts Represented as Tax

Controller Decision No. 116,941 (2022)-The ALJ found that a restaurant that, in addition to local and state sales and use tax, charged 4.25% as an “army corps fee”, collected the unremitted tax in respect of such charges, as such charges “could easily have been construed as a tax.

Liability of successor

Controller Decision No. 116 379, 116 380, 116 381 (2022)—The ALJ found that a taxpayer who purchased a restaurant was liable for sales and use tax and mixed drink taxes owed by the vendor when the purchaser failed to obtain a certificate of exemption from tax or withholding a sufficient amount from the purchase price to cover the amount of taxes due.

Hotel projects

STAR access number 20201203133737 (February 3, 2022)– In this private letter ruling, the Comptroller found that for purposes of determining reimbursement rights for a qualifying hotel project set forth in Chapter 151, Subchapter C of the Texas Tax Code, a restaurant, bar, retail establishment or spa is linked to a qualified hotel or qualified convention center if it is connected by a party wall. The controller intends to add this definition of “connected to” to Rule 3.12 (Hotel Projects, Project Funding Zones, and Qualifying Hotel Projects).

Franchise tax

Cost of Goods Sold

Controller Decisions Nos. 116326, 116327, 116328, 116329 and 116330 (2022)—ALJ found that a retail taxpayer could not include labor costs for returns, arranging the sales floor, finding markdowns, and managing floor retrieval sales and markdowns in its deduction from the cost of goods sold. [Deductible for income tax, not for franchise tax—this could be a hashtag if wasn’t so long and boring.]

Retail or business

Controller Decision No. 116 548, 116 620, 116 746, 116 747 (2022)—Relying on the Standard Industrial Code (SIC) Handbook of 1987, the ALJ concluded that a taxpayer was not engaged in a retail trade or business where the majority of the taxpayer’s income was attributable to the sale of airtime for wireless telecommunications services. [What’s with the franchise tax bias against the service economy?]

Sales tax

Manufacturing exemption

Controller’s Decision No. 117 324 (2022)—The ALJ, among others, found that a restaurant’s purchase of pesticides to comply with state regulations requiring areas involved in food production to be pest-free did not qualify for the manufacturing exemption as these regulations only required that these areas be free of pests and specifically required the use of pesticides. [Disturbing on multiple levels.]

Controller’s Decision No. 116,782 (2022)– The ALJ determined that a taxpayer was not a manufacturer with respect to bottles of wine and water for which the taxpayer designed and affixed labels when those bottles were delivered to the taxpayer physically complete and that the taxpayer did not alter the wine and water in any way. Therefore, the taxpayer’s label purchases did not qualify for the manufacturing exemption.

Security Services

Controller Decision No. 115 399 (2022)—The ALJ concluded that the Department of Homeland Security’s (“DHS”) Chemical Facility Anti-Terrorism Standards (“CFATS”) do not expressly deprive SOAH of jurisdiction over whether the CFATS overrides the law on state licensing for security services (the lodestar to determine the taxability of such services under Texas sales and use tax). Rather, the ALJ has determined that state law only conflicts with the CFATS when it prevents DHS from enforcing its statutes and regulations.

Information Services / Waiver of Benefits for Multi-State Services

Controller Decision No. 116,654 (2022)—The ALJ determined that a taxpayer who trades financial instruments purchases taxable information services when purchasing real-time financial information. The increased price allegedly paid by the taxpayer for the speed of delivery of the information did not change the essence of the transaction. In a corrected decision, the ALJ also found that the use of information services to conduct out-of-state transactions in support of the taxpayer’s overall transactions operation, which was managed and directed from an office in Texas, was not used by a distinct and identifiable segment.


OK, so I promise to be back soon next month. No kidding. Unless something happens.

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