TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER F. MOTOR VEHICLE SALES TAX

34 TAC §3.74

The Comptroller of Public Accounts proposes amendments to §3.74, concerning seller responsibility. This amendment reorganizes the content of existing §3.74 to be consistent with other sections of this title, amends existing definitions, and adds new definitions. This amendment also implements House Bill 2400, 84th Legislature, 2015; Senate Bill 1, 82nd Legislature, 1st Called Session, 2011; House Bill 2357, 82nd Legislature, 2011; Senate Bill 1235, 81st Legislature, 2009; House Bill 3314, 80th Legislature, 2007; and Senate Bill 1617, 80th Legislature, 2007. The amendment corrects grammatical and typographical errors and memorializes comptroller practice not addressed in the current section.

To make the section clearer, the phrase "motor vehicle tax" is used in place of the word "tax," and the defined term "motor vehicle" is used in place of the word "vehicle." The phrases "tax statement" and "application for certificate of title" are deleted and replaced with the term "Application for Texas Title and/or Registration," which is defined in new subsection (a)(1). The phrase "franchised dealer" is replaced with the more specific term "franchised motor vehicle dealer," which is defined in new subsection (a)(7), and the term "dealer" is used instead of the undefined phrase "selling dealer." For consistency, the word "report" is used throughout the section instead of the word "return."

Thirteen new defined terms are added to subsection (a). Subsequent paragraphs are renumbered accordingly. New paragraph (1) is added to define "Application for Texas Title and/or Registration." The terms "application for certificate of title" and "tax statement" were previously used in this section, but were not defined.

New paragraph (2) defines the term "cash discount." The definition is based, in part, on the meaning assigned to the term "cash discounts" by Black's Law Dictionary 498 (8th ed. 2004), as well as prior comptroller guidance provided in STAR Accession No. 7008L0011C06 (August 20, 1970). The definition also incorporates long standing agency practice that manufacturers' and dealers' rebates passed directly to the customer are cash discounts. See STAR Accession No. 7909L2018E07 (September 7, 1979).

Renumbered paragraph (3), formerly paragraph (1), defining the term "date of sale" is amended by replacing the word "delivery" with the word "possession" to memorialize the comptroller's understanding that the term used in this definition, whether delivery or possession, has the meaning assigned to the term "absolute delivery" by Black's Law Dictionary 461 (8th ed. 2004).

Renumbered paragraph (4), formerly paragraph (2), defining the term "dealer" is amended to use the term "general distinguishing number," which is defined in new paragraph (8), instead of the phrase "license to reflect the wording of Transportation Code, Chapter 503 (Dealer's and Manufacturer's Vehicle License Plates)." In addition, the term "franchised motor vehicle dealer," which is defined in new paragraph (7), is used instead of the phrase "authorized by law and by franchise agreement to offer for sale a new motor vehicle;" and the term "independent motor vehicle dealer," which is defined in new paragraph (9), is used instead of the phrase "authorized by law to offer for sale a motor vehicle other than a new motor vehicle." In addition, a sentence is added to make clear that salvage dealers do not meet the definition of "dealer" for purposes of this section.

New paragraphs (5) through (11) are added to define terms not previously used in this section. New paragraph (5) defines the term "distributor" based on the definition of the term in Occupations Code, §2301.002(11) (Definitions).

New paragraph (6) defines the term "extended warranty or service contract." This term is given the same meaning as the definition in §3.290 of this title (relating to Motor Vehicle Repair and Maintenance; Accessories and Equipment Added to Motor Vehicles; Moveable Specialized Equipment), except that the term "motor vehicle" is used in place of the more generic term "product."

New paragraph (7) defines the term "franchised motor vehicle dealer." The definition is taken from Occupations Code, §2301.002(16) and (17) and Transportation Code, §503.001(8) (Definitions).

New paragraph (8) defines the term "general distinguishing number" and is based on Occupations Code, §2301.002(17).

New paragraph (9) defines "independent motor vehicle dealer." The definition is taken in part from Transportation Code, §503.001(9) and §503.029(6) (Application for Dealer General Distinguishing Number), and Occupations Code, §2301.002(25).

New paragraph (10) defines the term "lease." The definition is based on Tax Code, §152.001(6) (Definitions).

New paragraph (11) defines the term "manufacturer" and is based on the definition of the term in Occupations Code, §2301.002(19). The definition lists manufacturers that are excluded from the definition, as provided by Occupations Code, Chapter 2301. See, for example, Occupations Code, §2301.002(1-a) ("'Ambulance manufacturer' means a person other than the manufacturer of a motor vehicle chassis who, before the retail sale of the motor vehicle, performs modifications on the chassis that result in the finished product being classified as an ambulance.")

New paragraph (12) defines "motor vehicle." The definition is based, in part on Tax Code §152.001(3) and (4) and the definition of the term given in §3.80 of this title (relating to Motor Vehicles Transferred as a Gift or for No Consideration).

Renumbered paragraph (13), formerly paragraph (3), defining the term "new motor vehicle" is amended to follow the statutory language more closely.

New paragraph (14) defines "rental" based on Tax Code, §152.001(5) and the definition of the term provided in §3.78 of this title (relating to Motor Vehicle Rentals).

Renumbered paragraph (15), formerly paragraph (4), defining the term "retail sale" is amended to state that the term does not include a sale that is a "sale for resale" - a term that is defined in new paragraph (16). Existing subparagraphs (A) and (B) are deleted because the content of these subparagraphs is now addressed in the new definition of a "sale for resale." Existing subparagraph (C) is relettered as subparagraph (B). In addition, the beginning of the subparagraph is amended to add the following: "a sale for lease, meaning…" The word "immediately" is removed and is replaced with the phrase "seven calendar days," and provides the dealer's purchase is presumed to be a retail purchase and taxable unless the presumption is overcome by showing evidence of intent, as provided in subsection (a) of §3.70 of this title (relating to Motor Vehicle Leases and Sales).

New paragraph (16) is added to define the term "sale for resale." This definition is based on Tax Code, §152.001(2) and incorporates the content of subsection (a)(4)(A) and (B) of the current rule, which identify sales to franchised motor vehicle dealers and independent motor vehicle dealers, respectively, as not being retail sales. This paragraph also includes transactions in which motor vehicles are purchased by a manufacturer or distributor who acquires the motor vehicles either for the exclusive purpose of sale or for purposes allowed under Transportation Code, Chapter 503. This implements House Bill 2400, which enacted Tax Code, §152.001(2)(D) and excludes these transactions from the definition of retail sales. Subparagraph (E) of this paragraph is included to identify uses of motor vehicles that are allowed under Transportation Code, Chapter 503.

Renumbered paragraph (17), formerly paragraph (5), defines the term "seller-financed sale." Subparagraph (A) is amended to use the defined term "total consideration."

New paragraph (18) is added to define the term "seller-financed sales tax report," which appears in this section but is not defined.

Renumbered paragraph (19), formerly paragraph (6), defining the term "total consideration" is expanded to incorporate language from Tax Code, §152.002 (Total Consideration). Subparagraphs are added to make the definition easier to read. New subparagraph (A) follows the language of §152.002(a)(1) - (4). New subparagraph (B) memorializes prior comptroller guidance that "consideration" can be something other than cash. See §3.80 of this title. New subparagraph (C) identifies charges that are not included in total consideration and adds to existing language items that have not previously been addressed in this section, including: examples taken from Tax Code, §152.002(b), such as a full cash or credit refund to a customer of the sales price of a motor vehicle returned to the seller; a fair market value deduction, as provided by § 3.73 of this title (relating to Qualifying for Fair Market Value Deduction and Determination of Fair Market Value for Replaced Vehicles); and a separately stated charge for an extended warranty or service contract, as addressed in STAR Accession No. 201505188L (May 27, 2015).

Subsection (b) addresses tax permits. The subsection's heading is amended to use the phrase "motor vehicle seller-financed sales tax permit," rather than "tax permit," to better identify the subsection. Paragraphs are added to make the subsection easier to read. For consistency, the words "owner" and "entity" are replaced with "dealer" where appropriate within the subsection.

New paragraph (1) addresses how to obtain a permit and provides the address of the comptroller website where taxpayers can find the application. New paragraph (2) provides that a dealer making seller-financed sales at multiple locations is only required to have one Motor Vehicle Seller-Financed Sales Tax Permit. In new paragraph (3), the existing language is amended to delete the phrase, "The permit application will be furnished by the comptroller," as this information is addressed in new paragraph (1).

Subsection (c), addressing collection of motor vehicle tax, is amended to also address remittance of the tax to the appropriate county tax assessor-collector or to the comptroller. The term "remittance" is added to the subsection's heading.

Paragraph (1) addresses the collection of tax on seller-financed sales. To make the paragraph easier to read, subparagraphs are added. New subparagraph (A) states that a dealer making a seller-financed sale must apply for title and registration to the appropriate county tax assessor-collector no later than the 45th day after the date the motor vehicle is delivered to the purchaser. This amendment implements Senate Bill 1235, which amended Tax Code, §152.069(a) (Registration of Motor Vehicles Using Seller-Financing) to add that the dealer who sells a motor vehicle through a seller-financed sale shall apply for title and registration for the motor vehicle in the name of the purchaser no later than the 45th day after the date the motor vehicle is delivered to the purchaser.

New subparagraph (B) amends existing language to implement House Bill 3314, which amended Tax Code, §152.0472(b) (Determination of Whether Loan is Factored, Assigned, or Transferred). The new subparagraph provides that a dealer making seller-financed sales may elect to pay motor vehicle tax on the total consideration for the motor vehicle at the time the Application for Texas Title and/or Registration is presented to the county tax assessor-collector, or may collect and remit the motor vehicle tax to the comptroller as payments are received, as provided in subsection (d). In addition, language is added to provide that the dealer must include its 11-digit seller-financed sales tax permit number on the Application for Texas Title and/or Registration if the dealer intends to remit the tax on a report to the comptroller.

The language in the current rule addressing the fact that the tax is a debt of the purchaser to the seller until paid is moved to new paragraph (4). The current rule language addressing down payments is incorporated into subsection (e) of this section.

Paragraph (2) addresses collection of tax on retail sales other than seller-financed sales. This paragraph is amended by reorganizing the existing information into subparagraphs.

New subparagraph (A) amends existing language to state that a dealer must collect motor vehicle tax on the total consideration for each motor vehicle, unless the sale is exempt. New subparagraph (B) explains the dealer must remit the motor vehicle tax due on the retail sale at the time the Application for Texas Title and/or Registration is presented to the county tax assessor-collector. The sentence in current subsection (c)(2) addressing the fact that the tax is a debt of the purchaser to the dealer until paid is moved to new paragraph (4) of this subsection.

New subparagraph (C) revises the language in current subsection (c)(2), advising dealers they are not required to collect tax on the sale of a motor vehicle with a gross weight in excess of 11,000 pounds. The subparagraph also advises that the Application for Texas Title and/or Registration must be signed by both the dealer and purchaser, as required by Tax Code, §152.062 (Required Statements). The statement "required by Texas Department of Motor Vehicles to apply for title or registration of the motor vehicle in Texas" is added in place of the word "necessary." The amendment also states that the purchaser must remit the tax due to the county tax assessor-collector within 30 calendar days after the date of sale.

New subparagraph (D) restates information currently provided in subsection (d)(2)(B) but is updated to implement House Bill 2357, which amended Transportation Code, §502.040 (Registration Required; General Rule for Title) to change the deadline for applying to register a vehicle to 30 days from the date of purchase or initial occupancy in this state.

New paragraph (3) addresses recordkeeping requirements. This subparagraph is based on Tax Code, §111.0041 (Records; Burden to Produce and Substantiate Claims).

New paragraph (4) incorporates existing language stating that, except as provided in paragraph (2)(C) of this subsection, the tax is a debt of the purchaser to the dealer. Additional language is derived, in part, from §3.286 of this title. The amendment also states the comptroller can proceed against either the dealer or purchaser, or both, until all applicable motor vehicle tax, penalty, and interest is paid.

Subsection (d) is amended to address the remittance of motor vehicle tax on seller-financed sales as payments are received. The heading of the subsection is amended to better identify information the revised subsection now addresses. Because the entire subsection now addresses seller-financed sales, existing paragraph (1) is deleted. Subparagraphs (A) - (G) are renumbered as paragraphs (1) - (7).

The existing language in renumbered paragraph (1), formerly subparagraph (A), is revised to make the paragraph easier to read. The term "owned" is used in place of the term "operated" to make the paragraph more precise. Subparagraph (B) is deleted, as the information is incorporated into new paragraph (2).

Paragraph (2), formerly subparagraph (C), is amended to replace the word "will" with "must" and to use the defined term "seller-financed sales tax report."

New paragraph (3) is added to address electronic filing and remittance. The paragraph is further amended to advise that some dealers must file reports and remit tax electronically, as provided by Tax Code, §111.0625 (Electronic Transfer of Certain Payments) and §111.0626 (Electronic Filing of Certain Reports). A reference to §3.9 of this title (relating to Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers) is also added.

Paragraphs (4) and (5), formerly subparagraphs (D) and (E), are amended to make the paragraphs easier to read.

Paragraph (6), formerly subparagraph (F), is amended to make the paragraph easier to read and to include a reference to paragraph (7).

Paragraph (7), formerly subparagraph (G), is amended to address prepayments of the tax as well as discounts. The heading of the subparagraph is revised accordingly. Existing clauses (i) and (ii) are relettered as subparagraphs (A) and (B) and expanded to include language derived from §3.286 of this title. Subparagraph (B), formerly clause (ii), is divided into five clauses to make it easier to read.

New paragraph (8) is added to address penalties and interest. Paragraph (8)(A) was formerly subsection (d)(1)(G)(iv). The language is revised to make the paragraph easier to read. New paragraph (8)(B) is added to implement Senate Bill 1, which added an additional penalty of $50 for failing to file a timely report. See Tax Code, §152.047(j) (Collection of Tax on Seller-Financed Sale). In addition, the statement describing the calculation of interest assessed on late-filed reports that were due on or before December 31, 1999 is deleted as it is no longer relevant due to the passage of time.

Existing paragraph (2), addressing retail sales other than seller-financed sales, is deleted. The relevant portions of the paragraph are incorporated into subsection (c)(2) of this section. The statement that a copy of the receipt for taxes issued by the county tax assessor-collector may be retained as evidence that the proper amount of tax was submitted by the dealer is deleted because it is no longer relevant, as receipts are no longer routinely issued by county tax assessor-collectors or the Texas Department of Motor Vehicles.

Subsection (e) addresses general principles of seller-financed sales. New paragraph (1), formerly subsection (c)(1), addresses the taxability of a down payment. New paragraph (2), also formerly subsection (c)(1), states that when a finance agreement bears interest, it is presumed that interest accrues and is paid by the purchaser on a straight line basis.

Paragraph (3), formerly paragraph (1), is amended by substituting the term "dealer" for the term "seller" to be consistent with the rest of the section. The paragraph is further amended by adding that the remainder of tax owed is due "on the first seller-financed report due no later than the 20th day of the month following the end of the reporting period," instead of "in the report period."

Renumbered paragraph (4), formerly paragraph (2), is amended to use the defined term "Application for Texas Title and/or Registration" and to make the paragraph easier to read.

Renumbered paragraph (5), formerly paragraph (3), is amended to make the paragraph easier to read. The paragraph is also amended to clarify that unremitted tax is based on the total consideration for the motor vehicle and is due no later than the 20th day of the month following the end of the reporting period in which the expiration of the 60 days occurred.

Renumbered paragraph (6), formerly paragraph (4), is amended by adding the clause "unless excluded from acceleration of tax by paragraph (7) of this subsection" to address tax acceleration when the dealer sells, factors, assigns, or otherwise transfers the right to receive payments to a related finance company. Renumbered paragraph (6) is also amended to clarify that the dealer is liable for all unremitted tax due on the total consideration on the sale of the motor vehicle, and the dealer must report and remit any tax due on the first seller-financed report due no later than the 20th day of the month following the end of the reporting period in which the transfer of the right to receive payments occurred.

New paragraph (7) is added to implement House Bill 3314 and Senate Bill 1617. This paragraph provides that tax acceleration does not occur if the dealer making the seller-financed sale sells, factors, assigns, or otherwise transfers the right to receive payments to a person registered with the comptroller's office as a related finance company, as provided by Tax Code, §152.0475 (Registration of Related Finance Company). Similarly, tax acceleration does not occur when the dealer making a seller-financed sale grants a security interest in a purchaser's account, but retains custody and control of the account and the right to receive payments in the absence of a default under the security agreement.

Renumbered paragraph (8), formerly paragraph (5), is amended to update the cross-reference.

Subsection (f) addresses resale certificates and exemption documentation. Paragraphs (1) and (2), addressing the resale exemption and the exemption for use out-of-state, respectively, are amended to provide the address of the comptroller website where taxpayers can find the resale certificates. The paragraphs are also amended to use the form numbers for the resale and exemption certificates.

Paragraph (3), addressing exemption certificates, is amended to make the paragraph easier to read.

Subsection (g), addressing unremitted tax paid to the seller, contains minor amendments intended to make the subsection easier to read. In addition, paragraphs (1), (2), and (3) are amended to use the defined term "Application for Texas Title and/or Registration."

Tom Currah, Chief Revenue Estimator, has determined that for the first five-year period the rule will be in effect, there will be no significant revenue impact on the state or units of local government.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be by conforming the rule to current statutes and agency policy. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposal may be submitted to Teresa G. Bostick, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528. Comments must be received no later than 30 days from the date of publication of the proposal in the Texas Register.

This amendment is proposed under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

This amendment implements Tax Code, §§152.001 (Definitions), 152.002 (Total Consideration) 152.0411 (Collection by Sellers), 152.047 (Collection of Tax on Seller-Financed Sale), and 152.0472 (Determination of Whether Loan is Factor, Assigned, or Transferred).

§3.74.Seller Responsibility.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Application for Texas Title and/or Registration--Form 130-U, its electronic equivalent, or a successor form, promulgated jointly by the comptroller and the Texas Department of Motor Vehicles, used to apply for a motor vehicle title and registration and to pay any motor vehicle sales or use tax due. The Application for Texas Title and/or Registration is available at comptroller.texas.gov.

(2) Cash discount--An actual reduction of the price required to be paid by the purchaser to the dealer. The term includes, but is not limited to, separately stated manufacturers' rebates, dealers' rebates, and cash rebates passed directly to the purchaser at the time of sale, and discounts allowed for payment within a specified time.

(3) [(1)] Date of sale--The day the purchaser takes possession of a motor vehicle [is delivered to the purchaser] unless otherwise specified by written agreement.

(4) [(2)] Dealer--A person who holds a general distinguishing number or operates under similar regulatory requirements of another state or jurisdiction [license issued pursuant to Transportation Code, Chapter 503]. The term includes a franchised motor vehicle dealer and [authorized by law and by franchise agreement to offer for sale a new motor vehicle. The term also includes] an independent motor vehicle dealer. The term does not include a salvage vehicle dealer licensed under Occupations Code, chapter 2302 (Salvage Vehicle Dealers). [ authorized by law to offer for sale a motor vehicle other than a new motor vehicle]

(5) Distributor--A person, other than a manufacturer, who:

(A) distributes or sells new motor vehicles to a franchised motor vehicle dealer; or

(B) enters into franchise agreements with franchised motor vehicle dealers, on behalf of the manufacturer.

(6) Extended warranty or service contract--A policy sold to the purchaser of a motor vehicle for an additional amount, the provisions of which become effective after the manufacturer's warranty expires.

(7) Franchised motor vehicle dealer--A dealer who:

(A) holds a franchised motor vehicle license issued under Occupations Code, Chapter 2301 (Sale or Lease of Motor Vehicles); and

(B) is engaged in the business of buying, selling, or exchanging new motor vehicles at an established and permanent place of business under a franchise agreement with a manufacturer or distributor; or

(C) is licensed under similar regulatory requirements of another state or jurisdiction.

(8) General distinguishing number--A dealer license issued by the Texas Department of Motor Vehicles under Transportation Code, Chapter 503 (Dealer's and Manufacturer's Vehicle License Plates).

(9) Independent motor vehicle dealer--A dealer who is not a franchised motor vehicle dealer, an independent mobility motor vehicle dealer, or a wholesale motor vehicle dealer.

(10) Lease--An agreement other than a rental, by an owner of a motor vehicle to give for longer than 180 days exclusive use of a motor vehicle to another for consideration. For more information on motor vehicle leases, see §3.70 of this title (relating to Motor Vehicle Leases and Sales).

(11) Manufacturer--A person who manufactures or assembles new motor vehicles and holds a manufacturer's license issued under Occupations Code, §2301.259 (Application for Manufacturer's License). The term does not include a person operating only as an ambulance manufacturer, chassis manufacturer, fire-fighting vehicle manufacturer, motor home manufacturer, or a converter as those terms are defined in Occupations Code, §2301.002 (Definitions).

(12) Motor vehicle--A vehicle described by Tax Code, §152.001(3) (Definitions). In general, a motor vehicle includes a self-propelled vehicle designed to transport persons or property upon the public highway and a vehicle designed to be towed by a self-propelled vehicle while carrying property. The term includes, but is not limited to: automobiles; buses; vans; motor homes; motorcycles; trucks and truck tractors; truck cab and chassis; semitrailers; trailers and travel trailers, as defined by §3.72 of this title (relating to Trailers, Farm Machines, and Timber Machines); trailers sold unassembled in a kit; dollies; jeeps; stingers; auxiliary axles; converter gears; and park models, as defined by §3.481 of this title (relating to Imposition and Collection of Manufactured Housing Tax). The term does not include a vehicle to which the certificate of title has been surrendered in exchange for a salvage vehicle title or a nonrepairable vehicle title issued under Transportation Code, Chapter 501 (Certificate of Title Act).

(13) [(3)] New motor vehicle--A motor vehicle that, without regard to mileage, has not been the subject of a retail tax [sale].

(14) Rental--An agreement:

(A) by the owner of a motor vehicle to give exclusive use of that motor vehicle to another for consideration, for a period of time not to exceed 180 days under any one agreement;

(B) by an original manufacturer of a motor vehicle to give exclusive use of the motor vehicle to another for consideration; or

(C) by the owner of a motor vehicle to give exclusive use of the motor vehicle to another for re-rental purposes, regardless of the period of time covered by the agreement.

(15) [(4)] Retail sale--A sale of a motor vehicle other than:

(A) a sale for resale; or [of a new motor vehicle in which the purchaser is a franchised dealer who is authorized by law and by franchise agreement to offer the vehicle for sale as a new motor vehicle and who acquires the vehicle to sell in a manner provided by law or for purposes allowed under Transportation Code, Chapter 503;]

[(B) a sale of a vehicle other than a new motor vehicle in which the purchaser is a dealer who holds a dealer's license issued under Transportation Code, Chapter 503, and who acquires the vehicle either for the exclusive purpose of resale in the manner provided by law or for purposes allowed under Transportation Code, Chapter 503; or]

(B) [(C)] a sale for lease, meaning a sale to a franchised motor vehicle dealer of a new motor vehicle removed from the franchised motor vehicle dealer's inventory for the purpose of entering into a contract to lease the motor vehicle to another person if, within seven days of [immediately after] executing the lease contract, the franchised motor vehicle dealer transfers title of the motor vehicle and assigns the lease contract to the lessor of the motor vehicle. If the title is not transferred and the lease assigned within seven calendar days, the dealer's purchase and use will be presumed to be a retail purchase and taxable. The presumption may be overcome by showing evidence of intent.

(16) Sale for resale--The sale of a motor vehicle to a purchaser who acquires the motor vehicle either for the exclusive purpose of sale in a manner provided by law, or for purposes allowed by the Texas Department of Motor Vehicles under Transportation Code, Chapter 503, when the purchaser is:

(A) a distributor;

(B) a manufacturer;

(C) a franchised motor vehicle dealer who is authorized by law and by a franchise agreement to offer a motor vehicle for sale as a new motor vehicle; or

(D) an independent motor vehicle dealer who is authorized by law to offer a motor vehicle for sale as a used motor vehicle.

(E) The following are examples of uses allowed under Transportation Code, Chapter 503, that do not disqualify a purchase as a sale for resale:

(i) when a dealer uses the motor vehicle on public highways with a metal dealer's plate issued under Transportation Code, §503.061 (Dealer's License Plates);

(ii) when a manufacturer or distributor removes a motor vehicle from its inventory and tests the motor vehicle on public highways with a manufacturer's plate issued under Transportation Code, §503.064 (Manufacturer's License Plates); and

(iii) when a manufacturer or distributor loans the motor vehicle to a consumer for a purpose described by Occupations Code, §2301.605 (Rebuttable Presumption--Reasonable Number of Attempts).

(17) [(5)] Seller-financed sale--A retail sale of a motor vehicle by a dealer in which the selling dealer collects all or part of the total consideration in periodic payments and retains a lien on the motor vehicle until all payments have been received. The term does not include a:

(A) retail sale of a motor vehicle in which a person other than the seller provides the total consideration for the sale and retains a lien on the motor vehicle as collateral;

(B) lease; or

(C) rental.

(18) Seller-financed sales tax report--The Texas Motor Vehicle Seller-Financed Sales Tax Report, Form 14-117, its electronic equivalent, or a successor form, promulgated by the comptroller. The seller-financed sales tax report is available at comptroller.texas.gov.

(19) [(6)] Total consideration--

(A) The amount paid or to be paid for a motor vehicle and its accessories attached on or before the sale, without deducting:[.]

(i) the cost of the motor vehicle;

(ii) the cost of material, labor or service, interest paid, loss, or any other expense;

(iii) the cost of transportation of the motor vehicle before its sale; or

(iv) the amount of manufacturers' or importers' excise tax imposed on the motor vehicle by the United States.

(B) The amount paid or to be paid includes anything of monetary value, such as cash or the equivalent; a book entry reflecting cash received or paid; the forgiveness or assumption of debt; book entries reflecting accounts receivable or accounts payable for an item; the performance of a service; or real or tangible personal property.

(C) The term does not include:

(i) separately stated cash discounts;

(ii) a full cash or credit refund to a customer of the sales price of, meaning the amount paid for, a motor vehicle that the customer returns to the seller;

(iii) the amount charged for labor or service rendered in installing, applying, remodeling, or repairing the motor vehicle sold;

(iv) separately stated finance or interest charges on credit extended under a conditional sale or other deferred payment contract; [, or]

(v) the value of a motor vehicle taken by a seller as all or a part of the consideration for sale of another motor vehicle;[.]

(vi) the fair market value of a motor vehicle titled in Texas in the name of a dealer or a person who is in the business of renting or leasing motor vehicles, as provided by §3.73 of this title (relating to Qualifying for Fair Market Value Deduction and Determination of Fair Market Value for Replaced Vehicles);

(vii) a charge for transportation of the motor vehicle after the sale of the motor vehicle;

(viii) motor vehicle inventory tax; or

(ix) separately stated charges for the sale of an extended warranty or service contract.

(b) Motor vehicle seller-financed sales tax [Tax] permit. Every dealer making seller-financed sales must apply to the comptroller and obtain a Motor Vehicle Seller-Financed Sales Tax Permit [for a tax permit].

(1) To obtain a permit, the dealer must complete a Texas Application for Motor Vehicle Seller-Financed Sales Tax Permit, Form AP-169, its electronic equivalent, or its successor, promulgated by the comptroller. The application is available at comptroller.texas.gov.

(2) A separate permit is not required for each location. The comptroller issues one Motor Vehicle Seller-Financed Sales Tax Permit to each dealer making seller-financed sales, regardless of the number of locations or dealerships the dealer operates.

(3) Each dealer [entity] (corporation, partnership, sole proprietor, etc.) must apply for its own permit. [The permit application will be furnished by the comptroller.] The permit cannot be transferred from one dealer [owner] to another.

(c) Collection and remittance of motor vehicle [the] tax.

(1) Seller-financed sales.

(A) A dealer who makes a seller-financed sale must apply to the appropriate county tax assessor-collector to title and register the motor vehicle by filing an Application for Texas Title and/or Registration no later than the 45th day after the date the motor vehicle is delivered to the purchaser.

(B) A [The selling] dealer making a seller-financed sale must also:

(i) collect and remit motor vehicle tax on the total consideration for the motor vehicle at the time the Application for Texas Title and/or Registration is presented to the county tax assessor-collector; or

(ii) collect and remit the motor vehicle tax to the comptroller [paid] as the payments are received, as explained in subsection (d) of this section. A dealer making a seller-financed sale must include its 11-digit Seller-Financed Sales Tax Permit Number on the Application for Texas Title and/or Registration if the dealer intends to remit the motor vehicle tax on a report to the comptroller instead of remitting the motor vehicle tax at the time the Application for Texas Title and/or Registration is presented to the county tax assessor-collector. [. The tax is a debt of the purchaser to the seller until paid. The total downpayment is subject to tax unless the payment is itemized to indicate nontaxable charges. If the finance agreement bears interest, it is conclusively presumed that interest accrues and is paid by the purchaser on a straight line basis.]

(2) Retail sales other than seller-financed sales.

(A) A [Unless the sale is exempt, the selling] dealer must collect motor vehicle [the] tax on each retail sale, unless an exemption applies.The tax is imposed on the total consideration for the motor vehicle.

(B) The dealer must remit the motor vehicle tax due to the appropriate county tax assessor-collector at the time the dealer submits the Application for Texas Title and/or Registration. Motor vehicle tax is due within 30 calendar days after the date of the sale. [on the total consideration paid for the motor vehicle. The tax is a debt of the purchaser to the seller until paid.]

(C) A dealer is not required to collect motor vehicle tax on [This section does not apply to] the sale of a motor vehicle with a gross weight in excess of 11,000 pounds. If the dealer does not collect the motor vehicle tax, the dealer[; however, the seller] must provide the purchaser with an Application for Texas Title and/or Registration, signed by both the dealer and purchaser, [a completed tax statement] and all other documents required by the Texas Department of Motor Vehicles [necessary] to apply for title or [and] register the motor vehicle. The purchaser must remit motor vehicle tax to the county tax assessor-collector within 30 calendar days after the date of sale.

(D) If a dealer sells a commercial motor vehicle that is required to be equipped with a body or other necessary equipment before the motor vehicle can be registered under the Transportation Code, then the dealer must remit the motor vehicle tax within 30 calendar days after the date on which the motor vehicle becomes eligible for registration.

(3) The dealer must retain copies of the documentation provided to the purchaser and all other records pertaining to the sale. The specific records each dealer is required to keep are listed in Tax Code, §152.063 (Records) and §152.0635 (Records of Certain Sellers). The dealer must keep the records for a minimum of four years from the date on which the record is made, and throughout any period in which any tax, penalty, or interest may be assessed, collected, or refunded by the comptroller or in which an administrative hearing or judicial proceeding is pending, unless the comptroller authorizes in writing a shorter retention period.

(4) The motor vehicle tax due is 6.25% of the total consideration. Except as provided in paragraph (2)(C) of this subsection, the motor vehicle tax is a debt of the purchaser to the dealer until paid. Unpaid motor vehicle tax is recoverable by the dealer in the same manner as the total consideration for the motor vehicle, if unpaid, would be recoverable. The comptroller may proceed against either the dealer or purchaser, or both, until all applicable motor vehicle tax, penalty, and interest due has been paid.

(d) Remittance of motor vehicle [the] tax on seller-financed sales as payments are received.

(1) [Seller-financed sales.]

[(A)] Each [selling] dealer making seller-financed sales who collects motor vehicle tax as the payments are received from the purchaser must remit the motor vehicle tax collected [due] to the comptroller on [as the payments are received. On] or before the 20th day of the month following each reporting period. The [, each selling] dealer must [shall] file a consolidated report [return] with the comptroller, together with the motor vehicle tax collected [payment] for seller-financed sales made at all locations owned [operated] by the dealer [entity].

[(B) The returns must be signed by the person required to file the report or by the person's duly authorized agent.]

(2) [(C)] The dealer must file a consolidated seller-financed sales tax report for seller-financed sales made at all locations owned by the dealer, together with the motor vehicle tax collected. The report must be signed by the dealer or the dealer's authorized agent. [returns will be filed on forms prescribed by the comptroller.] The fact that the dealer does not receive the form or does not receive the correct form [forms] from the comptroller for the filing of the report [return] does not relieve the [selling] dealer of the responsibility of filing a report [return] and remitting motor vehicle tax. The report is available at comptroller.texas.gov. [payment.]

(3) A dealer making seller-financed sales may file reports and remit motor vehicle tax electronically, such as through Webfile at comptroller.texas.gov. Dealers who paid $100,000 or more in motor vehicle tax to the comptroller during the preceding fiscal year must remit motor vehicle tax electronically, as provided by Tax Code, §111.0625 (Electronic Transfer of Certain Payments). Dealers who paid $50,000 or more to the comptroller during the preceding fiscal year must file report data electronically, as provided by Tax Code, §111.0626 (Electronic Filing of Certain Reports). For more information on electronic filing and payments, see §3.9 of this title (relating to Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers).

(4) [(D)] A dealer completing a seller-financed sales tax report must allocate the motor vehicle tax paid on a motor vehicle [The return should be completed attributing the receipts] to the county in which the dealer submitted the Application for Texas Title and/or Registration for the vehicle [applied for a motor vehicle certificate of title].

(5) [(E)] A dealer who remits [Selling dealers owing tax of] less than $1,500 in motor vehicle tax per quarter may file reports [returns] quarterly. The quarterly reporting periods end on March 31st, June 30th, September 30th, and December 31st.

(6) [(F)] A dealer who remits [Selling dealers owing] $1,500 or more in motor vehicle tax per quarter must file monthly reports, except a dealer making seller-financed sales who chooses to prepay [returns unless a seller prepays] the motor vehicle tax, as provided in paragraph (7) of this subsection.

(7) [(G)] Discounts and prepayments of [prepaying] the motor vehicle tax.

(A) [(i)] Each dealer making seller-financed sales may claim a discount for timely filing a seller-financed sales tax report and remitting motor vehicle [retain 0.5% of the amount of] tax due as reimbursement for the expense of collecting and remitting the motor vehicle tax. The discount is equal to 0.5% of the amount of the motor vehicle tax due and may be claimed on the report for each reporting period. The discount is computed on the amount of motor vehicle tax timely reported and remitted for each reporting period.

(B) [(ii)] A dealer making seller-financed sales who makes a timely prepayment of at least 90% of the total amount of motor vehicle tax currently due, or an amount equal to the actual motor vehicle tax liability due and paid for the same reporting period of the immediately preceding year, [based upon an estimate of tax liability] may retain an additional 1.25% of the amount of motor vehicle tax due.

(i) The monthly prepayment must be made on or before the 15th day of the [second] month [of the quarter] for which the tax is due.

(ii) The quarterly prepayment must be made [Monthly prepayments are due] on or before the 15th day of the second month of the quarter for which the tax is due [and are also entitled to the additional 1.25% deduction].

(iii) The dealer must file a seller-financed sales tax report showing the actual liability and remit any amount due in excess of the prepayment on [On] or before the 20th day of the month following the quarter or month for which a prepayment was made[, the dealer must file a return showing the actual liability and remit any amount due in excess of the prepayment].

(iv) If there is an additional amount due when the seller-financed sales tax report is filed, the dealer may claim the 0.5% discount for timely filing, including on the additional amount of motor vehicle tax due, [retain the 0.5% reimbursement] provided that both the seller-financed sales tax report [return] and the additional amount of motor vehicle tax due are filed timely [filed]. If the prepayment exceeded the actual liability, the [selling] dealer will be mailed a notice of [an] overpayment [notice] or a refund warrant.

(v) A remittance that is less than 90% of the total amount of motor vehicle tax currently due, or less than the amount of actual motor vehicle tax due and paid for the same reporting period of the immediately preceding year, is not a valid prepayment and the 1.25% discount will not be allowed.

(8) Penalties and interest.

(A) [(iv)] If a dealer does not file a seller-financed sales tax report [quarterly or monthly return] together with payment on or before the due date, the dealer forfeits all discounts and incurs a mandatory 5.0% penalty. After the first 30 days delinquency, an additional mandatory penalty of 5.0% is assessed against the [selling] dealer. After the first 60 days delinquency, interest begins to accrue at the prime rate, [plus 1.0%] as published in the Wall Street Journal on the first business day of each calendar year, plus 1.0%. [For taxes due on or before December 31, 1999, interest is assessed at the rate of 12% annually.]

(B) A dealer who fails to timely file a seller-financed sales tax report when due must pay an additional penalty of $50. The penalty is due regardless of whether motor vehicle taxes are due for the reporting period.

[(2) Retail sales other than seller-financed sales.]

[(A) Except for sales of motor vehicles with a gross weight in excess of 11,000 pounds and for sales of motor vehicles that fall within subparagraph (B) of this paragraph, the selling dealer must remit the tax, along with the properly completed tax statement, to the county tax assessor- collector by the 20th working day following the date of sale.]

[(B) If a dealer sells a commercial motor vehicle that is required to be equipped with a body or other necessary equipment before the motor vehicle can be registered under the Transportation Code then the selling dealer must remit the tax, along with the properly completed tax statement, by the 20th working day following the date on which the motor vehicle becomes eligible for registration.]

[(C) Documentation must be retained to indicate that the proper amount of tax was submitted to the county tax assessor-collector. A copy of the receipt for taxes issued by the county tax assessor-collector will satisfy this requirement.]

(e) General principles of seller-financed sales.

(1) The total downpayment is subject to motor vehicle tax unless the payment is itemized to indicate nontaxable charges.

(2) If the finance agreement bears interest, it is presumed that interest accrues and is paid by the purchaser on a straight line basis.

(3) [(1)] A transaction is considered paid in full when the purchaser of a seller-financed [the ] motor vehicle trades-in [provides] that motor vehicle to the dealer [seller] as consideration for the purchase of another motor vehicle from the same dealer [seller]. The remainder of motor vehicle [any] tax owed on the initial sale must be reported on the first seller-financed sales tax report due no later than the 20th day of the month following the end of the reporting [in the report] period in which the trade-in occurred [motor vehicle is traded in].

(4) [(2)] Motor vehicle tax [Tax] remitted to the county tax assessor-collector at the time the Application for Texas Title and/or Registration is submitted is [of registration and title transfer will be] considered [to be intended] to satisfy the tax liability for that transaction and no refund is [will be] available if the purchaser fails to satisfy their [his] total liability to the dealer making the seller-financedsale.

(5) [(3)] If a [the selling] dealer making a seller-financed sale fails to submit the Application for Texas Title and/or Registration to apply for [certificate of] title and registration within 60 days from [of] the date of sale, the dealer [seller] becomes liable for all unremitted motor vehicle tax based on the total consideration for the motor vehicle. The dealer [and] must remit all unremitted motor vehicle tax [that amount] on the first seller-financed sales tax report [return] due no later than the 20th day of the month following the end of the reporting period in which [after] the expiration of the 60 days occurred.

(6) [(4)] Unless excluded from acceleration of motor vehicle tax by paragraph (7) of this subsection, if [If] the [selling] dealer sells, factors, assigns, or otherwise transfers the right to receive payments on a seller-financed sale, the dealer is liable for all unremitted motor vehicle [the unpaid] tax due on the total consideration for the motor vehicle. The dealer [and] must report and remit any motor vehicle tax due on [that amount in] the seller-financed sales tax report due no later than then 20th day of the month following the end of the reporting [for the] period in which the transfer of the right to receive payments occurred [is made]. The dealer may not take a deduction in the amount of motor vehicle tax due, even if the dealer sells the right to receive payments at a discount or grants the purchaser of the notes a right of recourse. [The right to receive payments is transferred and the tax remittance accelerated regardless of recourse to the seller or any other condition.]

(7) Motor vehicle tax remittance does not accelerate if a dealer sells, factors, assigns, or otherwise transfers the right to receive payments on a seller-financed sale to a person registered with the comptroller's office as a related finance company, as provided by Tax Code, §152.0475 (Registration of Related Financed Company), or when the dealer grants a security interest in a purchaser's account, but retains custody and control of the account and the right to receive payments in the absence of a default under the security agreement.

(8) [(5)] If the [selling] dealer remits the motor vehicle [unpaid] tax due in accordance with paragraph (6) [(4)] of this subsection, and the motor vehicle purchaser fails to make payments to the dealer's transferee or assignee, then no bad debt deduction for any amount that the transferee or assignee determines to be uncollectible on the purchaser's account may be taken against any motor vehicle [sales] tax that the transferee or assignee may owe.

(f) Resale certificates and exemption documentation.

(1) A seller may accept a Texas Motor Vehicle Resale Certificate, Form 14-313, its electronic equivalent, or its successor, promulgated by the comptroller [motor vehicle resale certificate] only from a dealer as defined in this section. A motor vehicle resale certificate for the sale of a new motor vehicle purchased for resale may only be accepted from a franchised motor vehicle dealer [who is authorized by law and by franchise agreement to offer the vehicle for sale as a new motor vehicle]. To be valid, the motor vehicle resale certificate must show the dealer license issued under [pursuant to] Transportation Code, Chapter 503. The resale certificate is available at comptroller.texas.gov. See §3.95 of this title (relating to Motor Vehicle Sales Tax Resale Certificate; Sales for Resale).

(2) A seller may accept a properly completed Texas Motor Vehicle Sales Tax Exemption Certificate--For Vehicles Taken Out of State, Form 14-312, its electronic equivalent, or its successor, promulgated by the comptroller, in lieu of collecting tax on motor vehicles that will be removed from this state without being operated other than to remove the motor vehicle from this state. The exemption certificate is available at comptroller.texas.gov. See §3.90 of this title (relating to Motor Vehicles Purchased for Use Outside of Texas).

(3) A purchaser claiming an exemption on the purchase of a motor vehicle that qualifies for an exemption under [Exemptions provided for in the] Tax Code, Chapter 152, Subchapter E, must indicate the exemption claimed on the Application for Texas Title and/or Registration at the time of purchase. The Application for Texas Title and/or Registration noting the exemption claimed is submitted to the county tax assessor-collector in lieu of tax. [other than those discussed in paragraphs (1) and (2) of this subsection, shall be indicated on the tax statement provided to the county tax assessor-collector at the time of title application]

(g) Unremitted tax paid to seller, transfer of certificate of title.

(1) A county tax assessor-collector may accept an Application for Texas Title and/or Registration [application for certificate of title] without the payment of motor vehicle tax from a purchaser who paid the motor vehicle tax to a dealer [as described in subsection (c) of this section to a seller] who failed to remit the motor vehicle tax as described in subsection (c) [(d)] of this section.

(2) The purchaser must present acceptable evidence of motor vehicle tax payment at the time an Application for Texas Title and/or Registration is submitted to the county tax assessor-collector. [of title application.] Acceptable evidence includes, but is not limited to, a sales contract or bill of sale that identifies the dealer and the amount of motor vehicle tax paid.

(3) The Application for Texas Title and/or Registration must contain the dealer's Motor Vehicle Seller-Financed Sales Tax Permit number (if applicable and available) and must indicate that motor vehicle tax has been paid to the dealer and no additional motor vehicle tax is due from the purchaser. [application for certificate of title and receipt should indicate "tax paid to seller," a zero in the space labeled amount of tax due, and the seller's motor vehicle seller-finance tax permit number (if appropriate and available).]

(4) The county tax assessor-collector shall notify the comptroller of the dealer's [seller's] failure to remit the motor vehicle tax through the automated Registration-Title System (RTS) and include the document indicating motor vehicle tax paid to the [selling] dealer in the title application material.

(h) Prohibited advertising. A dealer may not directly or indirectly advertise, hold out or state to a customer or the public that he will assume, absorb or refund a part of the motor vehicle tax imposed on the sale of a motor vehicle, or will not add tax to the sales price.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 24, 2017.

TRD-201700745

Lita Gonzalez

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: April 9, 2017

For further information, please call: (512) 475-0387


SUBCHAPTER O. STATE AND LOCAL SALES AND USE TAXES

34 TAC §3.280

The Comptroller of Public Accounts proposes new §3.280, concerning aircraft. The new section implements Senate Bill 1396, 84th Legislature, 2015, which enacted Tax Code, Chapter 163, relating to sales and use taxation of aircraft. In addition, the new section replaces those portions of §3.297 of this title (relating to Carriers) and §3.292 of this title (relating to Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property) that address aircraft in order to create a section dedicated solely to aircraft.

Subsection (a) provides definitions. Paragraph (1) defines the term "affiliate." This definition is based upon the definition of the term "affiliate" in Tax Code, §163.006(c) (Certain Transactions Between Related Persons) as an entity that would be classified as a member of the purchaser's affiliated group under Tax Code, §171.0001 (General Definitions).

Several of the terms defined in subsection (a) relate to the use of aircraft in connection with agricultural operations. Paragraph (2) defines the term "agricultural aircraft operation," pursuant to Tax Code, §151.316(a)(11) (Agricultural Items). Pursuant to Tax Code, §151.328(a)(5) (Aircraft), paragraph (3) defines the term "agricultural use" using the definition assigned to the term by Tax Code, §23.51 (Appraisal of Agricultural Land; Definitions). Paragraph (8) defines the term "exotic animals." The term references the definitions of the terms exotic fowl and exotic livestock given in Texas Agriculture Code, §161.001(a) (Definitions). Paragraphs (12), (18), and (26) define the terms "livestock," "predator control," and "wildlife," respectively, all of which appear in Tax Code, §151.328(a)(5) but are not defined therein. For purposes of this subsection, the term "livestock" is defined to refer to horses, mules, donkeys, llamas, alpacas, and animal life of a kind that ordinarily constitutes food for human consumption. This definition reflects the meaning of the term "livestock" as it appears in §3.296 of this title (relating to Agriculture, Animal Life, Feed, Seed, Plants, and Fertilizer). The definition of the term "predator control" refers to Texas Parks and Wildlife Code, Chapter 43, Subchapter G (Permits to Manage Wildlife and Exotic Animals from Aircraft). The definition of the term "wildlife" is based upon the definition of the term in Texas Parks and Wildlife Code, §43.103(6) (Definitions).

Paragraph (4) addresses the statutory change to the definition of "aircraft" in Tax Code, §151.328(c) enacted by House Bill 3319, 80th Legislature, 2007, which amended the types of flight simulation training devices that are defined as aircraft. The definition further incorporates prior comptroller determinations that "balloons" and "gliders" do not meet the definition of an aircraft for sales and use tax purposes. See, for example, Comptroller's Decision No. 33,078 (1995) and STAR Accession No. 8510L0667A14 (October 1, 1985). The definition also excludes unmanned aerial vehicles, including missiles, rockets, model aircraft, and drones.

Paragraph (5) defines the term "certificated or licensed carrier" using the definition given in Tax Code, §163.001 (Certificated or Licensed Carriers). The definition further emphasizes that letters of authorization, certificates of inspection, and airworthiness certificates do not convey authority to operate as a certificated or licensed carrier. Such letters and certificates relate to the carrier device itself rather than to a person's right to operate a carrier business.

Paragraph (6) defines the term "component part" using language derived from both §3.297 and Southwest Airlines Co. v. Bullock, 784 S.W.2d 563 (Tex. App.--Austin 1990, no writ).

Paragraph (7) defines the term "consumable supplies" consistent with the meaning given to the term in §3.292 of this title. Paragraph (9) defines the term "extended warranty or service policy" consistent with the meaning given to the term in §3.292 of this title.

Paragraph (10) defines the acronym "FAA."

Paragraph (11) defines the term "incorporated materials" consistent with the meaning given to the term in §3.291 of this title (relating to Contractors). Paragraph (13) defines the term "lump-sum contract." This definition is based, in part, on the meaning given to the term in §3.291 of this title. Paragraphs (14), (15), and (16) define the terms "maintain," "maintenance," and "manufacturer's written warranty," respectively, consistent with the meaning given to the terms in §3.292 of this title.

Paragraph (17) defines the term "operational control." This definition is based on Tax Code, §163.002(b) (Resale of Aircraft), which states, "For purposes of this subsection, 'operational control' has the meaning assigned by the Federal Aviation Regulations and includes the exercise of authority over initiating, conducting, or terminating a flight."

The definition for the term "qualified flight instruction" in paragraph (19) is adapted, in part, from §3.297, which is being proposed for amendment. Additional language is added to the definition to make clear that qualified flight instruction does not include training in aerobatic maneuvers. See STAR Accession No. 200210542L (October 30, 2002) (partially superseded on other grounds).

Paragraph (20) defines the term "remodel." This definition is derived from the definition of the term "remodeling" in §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing). Paragraphs (21) and (22) define the terms "repair" and "restore," respectively, consistent with the meaning given to the terms in §3.292 of this title.

Paragraph (23) defines the term "sale for resale" in the context of aircraft purchases. This definition is taken from Tax Code, §163.002.

The definition of the term "separated contract" in paragraph (24) is based, in part, on the definition of the term provided in §3.291. Paragraph (25) defines the term "service provider" consistent with the meaning given to the term in §3.292 of this title.

Subsection (b) provides information about the taxability of the sale, lease, or rental of aircraft, aircraft engines, and component parts. Paragraph (1) states that the sale, lease, or rental of an aircraft, aircraft engine, or component part in Texas is subject to sales tax. Paragraph (2) explains what is included in the taxable sales price of an aircraft, aircraft engine, or component part.

Subsection (c) provides information concerning use tax. Paragraph (1) reiterates that use tax is due when an aircraft purchased, leased, or rented outside of Texas is brought into Texas for use in Texas. See Tax Code, §151.101 (Use Tax Imposed) and §151.105 (Importation for Storage, Use, or Consumption Presumed).

Subsection (c)(2) addresses when an aircraft purchased outside of Texas and brought into Texas is presumed to have been purchased for use in this state. The paragraph implements Tax Code, §151.105 and §163.004 (No Presumption of Use).

Subsection (c)(3) explains that an aircraft is not subject to use tax in Texas if it is predominantly used outside of the state for a year. See Tax Code, §163.005 (No Imposition of Tax Following Out-of-State Use). This subsection also provides recordkeeping requirements for substantiating out of state use.

Subsection (c)(4) states that an aircraft is not subject to use tax in Texas if it is brought into the state for the sole purpose of being completed, repaired, remodeled, or restored. See Tax Code, §163.003 (Use of Aircraft). This subsection also provides recordkeeping requirements for proving that an aircraft was in Texas for the sole purpose of completion, repair, remodeling, or restoration.

Subsection (c)(5) states that a taxpayer may be entitled to a credit against Texas use tax for tax paid to another state and refers taxpayers to §3.338 of this title (relating to Multistate Tax Credits and Allowance of Credit for Tax Paid to Suppliers) for more information.

Subsection (d) addresses transactions between related persons. Paragraph (1) implements Tax Code, §163.006(a). Paragraphs (2) and (3) implement Tax Code, §163.006(b), which exempts from sales tax certain sales, leases, or rentals of an aircraft by an affiliate of the aircraft's purchaser.

Subsection (e) addresses the sales and use tax exemptions in Tax Code, Chapters 163 (Sales and Use Taxation of Aircraft) and 151 (Limited Sales, Excise, and Use Tax) that are specific to aircraft. This subsection reflects the comptroller's general policy that purchasers may issue a resale or exemption certificate to a seller, but are not required to do so in order to later claim an exemption on a purchase, except as provided in subsection (e)(4). "Only sellers of taxable items are required to accept and maintain resale or exemption certificates to prove tax-free sales." Comptroller's Decision No. 46,537 (2009) (emphasis added).

Subsection (e)(1) incorporates the exemptions provided by Tax Code, §151.328(a)(1) and (e) for the sale, lease, or rental to a certificated or licensed carrier of aircraft, component parts, and tangible personal property necessary for the normal operation of, and pumped or poured into, an aircraft. Paragraph (1)(D) makes clear that the exemption does not extend to, and sales and use tax is due on, the sale, lease, or rental of taxable items that support the overall operation of a certificated or licensed carrier. In addition, paragraph (1)(E) incorporates from existing §3.297 the exemption from sales tax created by Tax Code, §151.330(h) (Interstate Shipments, Common Carriers, and Services Across State Lines) for the sale of tangible personal property to a certificated or licensed carrier in Texas for use solely outside Texas if the carrier, using its own facilities, ships the items to a point outside this state under a bill of lading. Subsection (e)(1)(E) restates the language of the statute.

Subsection (e)(2) incorporates from §3.297, and expands upon, a description of the exemption created by Tax Code, §151.328(a)(2) and (e) for the sale, lease, or rental to a qualified flight school or instructor of aircraft, component parts, and tangible personal property necessary for the normal operation of, and pumped or poured into, an aircraft. Paragraph (2)(E) also incorporates from §3.297 a description of the exemption from sales tax for the rental of an aircraft by a student enrolled in a program providing qualified flight instruction.

Subsection (e)(3) incorporates from existing §3.297 the sales and use tax exemption created by Tax Code, §151.328(a)(3) for the sale, lease, or rental of an aircraft to a foreign government. The paragraph further states that sales or use tax is due on the sale or lease of component parts or materials that are incorporated in this state into an aircraft owned by a foreign government, unless the sale or lease is otherwise exempt under Tax Code, Chapter 151.

Subsection (e)(4) restates Tax Code, §151.328(a)(4), (f), and (g), which creates an exemption from tax for the sale or lease of an aircraft in this state to a person for use and registration in another state or nation before any use in this state. This subsection also memorializes the holding of Energy Education of Montana, Inc. v. Comptroller of Public Accounts, 2013 Tex. App. LEXIS 5047 (Tex. App - Austin 2013, pet. denied).

Subsection (e)(4)(A)(i) is added to establish that performing repairs, remodeling, maintenance, or restoration on the aircraft in Texas prior to flying the aircraft out of Texas does not cause a loss of the exemption. See STAR Accession No. 9401L1283G12 (December 26, 1994).

Given the unique, highly mobile nature of aircraft, the comptroller has determined that aircraft purchased under the fly-away exemption should not be subject to the general rules regarding divergent use of property purchased under an exemption, and should instead be treated as aircraft purchased out-of-state. Consequently, subsection (e)(4)(C) and (D) explains that an aircraft purchased under the fly-away exemption and subsequently used in Texas will not be subject to tax if it is predominantly used outside of Texas for one year. Subsection (e)(4)(E) establishes recordkeeping requirements for proving the predominant use of the aircraft. These subparagraphs mirror subsection (c)(3).

Subsection (e)(4)(F) provides that the fly-away exemption does not apply to short-term hourly rentals. Subsection (e)(4)(G) requires a purchaser claiming the fly-away exemption to provide the seller with a properly completed Texas Aircraft Exemption Certificate Out-of-State Registration and Use, Form 01-907. This subparagraph implements Tax Code, §151.328(f).

Subsection (e)(5) implements Senate Bill 958, 81st Legislature, 2009. This legislation amended Tax Code, §151.316 (Agricultural Items) to memorialize existing comptroller policy allowing an exemption for aircraft, machinery, and equipment used exclusively in an agricultural aircraft operation. In addition, the bill amended Tax Code, §151.328 to exempt aircraft used for other agricultural purposes, such as predator control. Subsection (e)(5)(A) provides that sales and use tax is not due on aircraft purchased exclusively for an agricultural use. See Tax Code, §151.328(a)(5). Subsection (e)(5)(B) provides that aircraft, component parts, and tangible personal property necessary for the normal operation of, and pumped or poured into, an aircraft are exempt when used exclusively in an agricultural aircraft operation. See Tax Code, §151.316(a)(11). Subsection (e)(5)(B) also implements House Bill 268, 82nd Legislature, 2011, which added Tax Code, §151.1551 (Registration Number Required for Timber and Certain Agricultural Items) requiring an agricultural aircraft operation to obtain an Agriculture/Timber registration number from the comptroller and to provide that registration number to the seller when purchasing taxable items exempt under Tax Code, §151.316.

Subsection (e)(5)(C) states that selling a gunner's seat on an aircraft used in agriculture operations to a person who will take nuisance feral hogs or coyotes is subject to Texas sales and use tax as an amusement service. See Tax Policy News, June 2012 (STAR Accession No. 201207530L). The comptroller has long held that hunting is not a taxable amusement service. See, for example, §3.298(a)(2)(H) of this title (relating to Amusement Services); see also STAR Accession No. 200807120L (July 17, 2008) ("No tax is due on a separate charge for hunts or hunting guide services."). However, using a helicopter to take feral hogs or coyotes is not hunting. A Texas hunting license is not required to take nuisance feral hogs and coyotes; rather, a special permit must be obtained from the Texas Parks and Wildlife Department. See Parks and Wildlife Code, §43.1075 (Using Helicopters to Take Certain Animals). Further, it is a violation of state law to sport hunt from an aircraft. See Parks and Wildlife Code, §43.1095(c) (Prohibited Acts).

Subsection (e)(6) addresses fractional ownership programs and explains that the sale, lease, or rental of an aircraft operated under Part 91, Subpart K of the Federal Aviation Regulations is not subject to tax. See Tax Code, §163.007 (Aircraft Operated Under Fractional Ownership Programs).

Subsection (f) provides information about the tax due when an aircraft or other taxable item that was sold, leased, or rented tax-free under a resale or exemption certificate is subsequently put to a divergent use. This subsection directs taxpayers to §3.285 of this title (relating to Resale Certificate; Sales for Resale) and §3.287 of this title (relating to Exemption Certificates) for more information.

Subsection (g) provides information concerning the tax responsibilities of service providers repairing, remodeling, maintaining, or restoring aircraft, aircraft engines, or component parts. Paragraph (1) explains that the labor to complete, repair, remodel, maintain, or restore an aircraft is not a taxable service. See Tax Code, §151.0101(a)(5)(A) (Taxable Services). Paragraph (2) contains information that was previously provided in existing §3.292(i). Paragraph (3) describes the sales tax exemption for repair, remodeling, and maintenance services performed on aircraft that are exempt from tax under subsection (e)(1), (2), or (5). Paragraph (4) memorializes guidance previously provided in STAR Accession Nos. 8804L0873G11 (April 6, 1988) and 200008645L (August 28, 2000). The provisions in paragraph (5), concerning the repair, remodeling, maintenance, or restoration of component parts removed from and returned to an aircraft pursuant to the repair, remodeling, maintenance, or restoration of that aircraft, also incorporates longstanding comptroller guidance. See STAR Accession No. 200810222L (October 9, 2008).

Subsection (h) addresses jet turbine engines. Paragraphs (1) and (2) are incorporated from existing §3.297. These paragraphs grant an exemption for persons providing electrochemical plating or a similar process used in overhauling, retrofitting, or repairing jet turbine aircraft engines and their components, as provided by Tax Code, §151.318(n) (Property Used in Manufacturing). Paragraph (3) addresses the exemption for the sale of electricity or natural gas used in the off-wing processing, overhaul, or repair of a jet turbine engine or its parts for a certificated or licensed carrier provided by Tax Code, §151.317(a)(7) (Gas and Electricity). This paragraph is also incorporated from existing §3.297.

Subsection (i)(1) and (2), concerning manufacturer's written warranty and extended warranties, respectively, are incorporated from §3.292, which is being proposed for amendment.

Subsection (j) addresses the occasional sale exemption provided in Tax Code, §151.304 (Occasional Sales) and makes reference to §3.316 of this title (relating to Occasional Sales; Transfers Without Change in Ownership; Sales by Senior Citizens' Organizations; Sales by University and College Student Organizations; and Sales by Nonprofit Animal Shelters).

Subsection (k) addresses the purchase of an aircraft for resale. Paragraph (1) provides the requirements sellers must meet in order to accept a resale certificate in good faith. These requirements are derived from §3.285 of this title and are reflected in prior Comptroller's Decisions, such as Comptroller's Decision No. 105,680 (2013). Paragraph (2) explains when a person purchasing, leasing, or renting an aircraft may provide a properly completed resale certificate in lieu of paying tax on the purchase, lease, or rental. This paragraph implements Tax Code, §163.002.

Subsection (l) addresses the application of local sales and use tax to the sale, lease, and rental of aircraft.

Tom Currah, Chief Revenue Estimator, has determined that for the first five-year period the rule will be in effect, there will be no significant revenue impact on the state or units of local government.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be by conforming the rule to current statutes and agency policy. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposal may be submitted to Teresa G. Bostick, Manager, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528. Comments must be received no later than 30 days from the date of publication of the proposal in the Texas Register.

The new section is proposed under Tax Code, §111.002 (Comptroller's Rules, Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

The new section implements Tax Code, Chapter 163 (Sales and Use Taxation of Aircraft), and Tax Code, §§151.006 (Sale for Resale), 151.011 (Defining Use and Storage), 151.0101(a)(5) (Taxable Services), 151.101 (Use Tax Imposed), 151.105 (Importation for Storage, Use, or Consumption Presumed), 151.1551 (Registration Number Required for Timber and Certain Agricultural Items), 151.304 (Occasional Sales), 151.316 (Agricultural Items), 151.317(a)(7) (Gas and Electricity), 151.318(n) (Property Used in Manufacturing), 151.328 (Aircraft), and 151.330 (Interstate Shipments, Common Carriers, and Services Across State Lines).

§3.280.Aircraft.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Affiliate--A member of a group of entities in which a controlling interest is owned by a common owner or owners, either corporate or noncorporate, or by one or more of the member entities.

(2) Agricultural aircraft operation--The operation of an aircraft licensed by the FAA under 14 Code of Federal Regulations, Part 137. Agricultural aircraft operations include crop dusting, pollination, and seeding.

(3) Agricultural use--This term includes, but is not limited to, the following activities: cultivating the soil, producing crops for human food, animal feed, or planting seed or for the production of fibers; floriculture, viticulture, and horticulture; raising or keeping livestock; raising or keeping exotic animals for the production of human food or of fiber, leather, pelts, or other tangible products having a commercial value; planting cover crops or leaving land idle for the purpose of participating in a governmental program, provided the land is not used for residential purposes or a purpose inconsistent with agricultural use; and planting cover crops or leaving land idle in conjunction with normal crop or livestock rotation procedure. The term also includes the use of land to produce or harvest logs and posts for the use in constructing or repairing fences, pens, barns, or other agricultural improvements on adjacent qualified open-space land having the same owner and devoted to a different agricultural use. The term also includes the use of land for wildlife management. The term also includes the use of land to raise or keep bees for pollination or for the production of human food or other tangible products having a commercial value, provided that the land used is not less than 5 or more than 20 acres.

(4) Aircraft--A fixed-wing, heavier-than-air craft that is operated by a pilot from within the craft, is driven by propeller or jet and is supported by the dynamic reaction of the air against its wings; a helicopter; or an airplane flight simulation training device approved by the FAA under Appendices A and B, 14 Code of Federal Regulations, Part 60. The term does not include balloons, gliders, rockets, missiles, or unmanned aerial vehicles.

(5) Certificated or licensed carrier--A person authorized by the FAA to operate an aircraft to transport persons or property in compliance with the certification and operations specifications requirements of 14 Code of Federal Regulations, Part 121, 125, 133, or 135. Letters of authorization, certificates of inspection, and airworthiness certificates are not appropriate evidence of authority to operate as a certificated or licensed carrier.

(6) Component part--Tangible personal property that is intended to be permanently affixed to, and become a part of, an aircraft; is necessary to the normal operations of the aircraft, or is required by FAA regulations; and is secured or attached to the aircraft. The term includes tangible personal property necessary to the normal operations of the aircraft that can be removed temporarily from the aircraft for servicing, such as engines, seats, radar equipment, and other electronic devices used for navigational or communications purposes, and air cargo containers, food carts, fire extinguishers, survival rafts, and emergency evacuation slides. Items such as pillows, blankets, trays, ice for drinks, kitchenware, and toilet articles are not component parts.

(7) Consumable supplies--Tangible personal property that is used by a service provider to repair, remodel, maintain, or restore tangible personal property belonging to another; is not transferred into the care, custody, or control of the purchaser of the service; and, having been used once for its intended purpose, is completely used up or destroyed. Examples of consumable supplies include, but are not limited to, canned air used to remove dust from equipment and solvents used to clean equipment parts.

(8) Exotic animals--Livestock and fowl that are not indigenous to Texas and are defined as exotic livestock or exotic fowl by Agriculture Code, §161.001(a) (Definitions). Examples include, but are not limited to, nilgai antelope, blackbuck antelope, axis deer, fallow deer, sika deer, aoudad, ostriches, and emus.

(9) Extended warranty or service policy--A contract sold to the purchaser of tangible personal property for an amount in addition to the charge for the tangible personal property, or sold to an owner of tangible personal property, to extend the terms of the manufacture's written warranty or provide a warranty in addition to or in place of the manufacture's written warranty.

(10) FAA--Federal Aviation Administration, an agency of the United States Department of Transportation.

(11) Incorporated materials--Tangible personal property that is attached or affixed to, and becomes a part of, an aircraft, aircraft engine, or component part in such a manner that the property loses its distinct identity as separate tangible personal property.

(12) Livestock--Horses, mules, donkeys, llamas, alpacas, and animal life of a kind that ordinarily constitutes food for human consumption. The term livestock does not include wildlife or pets.

(13) Lump-sum contract--A written agreement in which the agreed price is one lump-sum amount and in which the charge for incorporated materials is not separated from the charge for skill and labor. Separated invoices or billings issued to the customer will not change a written lump-sum contract into a separated contract unless the terms of the contract require separated invoices or billings.

(14) Maintain--To perform maintenance.

(15) Maintenance--Work performed on operational and functioning tangible personal property that is necessary to sustain or support safe, efficient, and continuous operation of the tangible personal property, or is necessary to keep the tangible personal property in good working order by preventing decline, failure, lapse, or deterioration.

(16) Manufacturer's written warranty--A manufacturer's guarantee made for no additional charge to the purchaser of an item of tangible personal property that the item is operable and will remain operable for a specified period of time.

(17) Operational control--This term has the meaning assigned by FAA regulations and includes the exercise of authority over initiating, conducting, or terminating a flight.

(18) Predator control--A form of wildlife and exotic animal management regulated by the Texas Department of Parks and Wildlife under Parks and Wildlife Code, Chapter 43, Subchapter G (Permits to Manage Wildlife and Exotic Animals from Aircraft) used to protect or aid in the administration or protection of land, water, wildlife, livestock, domesticated animals, human life, or crops. Feral hog eradication using an aircraft is one form of predator control.

(19) Qualified flight instruction--Training recognized by the FAA that is designed to lead to a pilot certificate or rating issued by the FAA, or is otherwise required by rule or regulation of the FAA, and that is conducted under the direct or general supervision of a flight instructor certified by the FAA. Qualified flight instruction includes FAA-required check flights, maintenance flights, and test flights, but does not include demonstration flights for marketing purposes or training in aerobatic maneuvers.

(20) Remodel--To modify or remake tangible personal property belonging to another in a similar but different manner, or to change the style, shape, or form of tangible personal property belonging to another, without causing a loss of its identity or without causing it to operate in a new or different manner. Remodeling does not include processing.

(21) Repair--To mend or restore to working order or operating condition tangible personal property that was broken, damaged, worn, defective, or malfunctioning.

(22) Restore--To return tangible personal property that is still operational and functional, but that has faded, declined, or deteriorated, to its former or original state.

(23) Sale for resale--The sale, lease, or rental of an aircraft to a person who acquires the aircraft for the purpose of leasing, renting, or reselling the aircraft to another person, or for the purpose of transferring operational control of the aircraft to one or more persons pursuant to one or more written lease agreements, in exchange for a fixed, variable, or periodic consideration, whether or not the consideration is in the form of a cash payment, in the United States of America or a possession or territory of the United States of America or in the United Mexican States in the form or condition in which the aircraft is acquired.

(24) Separated contract--A written agreement in which the agreed price is divided into a separately stated charge for incorporated materials and a separately stated charge for skill and labor. An agreement is a separated contract if the charge for incorporated materials and the charge for labor are separately stated on an invoice or billing that, according to the terms of the contract, is deemed to be a part of the contract. Adding the separated charge for incorporated materials and the separated charge for labor together to give a lump-sum total does not transform a separated contract into a lump-sum contract. An aircraft completion, repair, remodeling, maintenance, or restoration contract that separates the charge for incorporated materials from the charge for labor is a separated contract even if the charge for labor is zero.

(25) Service provider--A person who repairs, remodels, maintains, or restores tangible personal property belonging to another.

(26) Wildlife--Animals, other than insects, that normally live in a state of nature and are not ordinarily domesticated.

(b) Sales tax.

(1) The sale, lease, or rental of an aircraft, aircraft engine, or component part in Texas is the sale, lease, or rental of tangible personal property, and is subject to sales tax, unless otherwise exempt under Tax Code, Chapter 151 (Limited Sales, Excise, and Use Tax) or Chapter 163 (Sales and Use Taxation of Aircraft). The lease or rental of an aircraft complete with pilot or crew for a single charge is a nontaxable transportation service, rather than the lease or rental of an aircraft, even when the charges for the aircraft and the pilot or crew are separately stated. For more information about leases and rentals, refer to §3.294 of this title (relating to Rental and Lease of Tangible Personal Property).

(2) Sales tax is due on the total sales, lease, or rental price of the aircraft, aircraft engine, or component part. The total sales, lease, or rental price includes separately stated charges for any service or expense connected with the sale, lease, or rental, including transportation or delivery charges. The total sales, lease, or rental price does not include separately stated cash discounts or the value of any tangible personal property taken as a trade-in by the seller in the regular course of business in lieu of all or part of the price of the aircraft. For more information on determining the taxable sales price of an item of tangible personal property, refer to Tax Code, §151.007 ("Sales Price" or "Receipts") and §3.294 of this title.

(c) Use tax.

(1) General rule. Use tax is due on the use, storage, or other consumption in this state of an aircraft purchased, leased, or rented outside of Texas and brought into Texas to be used in Texas. For more information about the application of the use tax to aircraft engines and component parts, refer to §3.346 of this title (relating to Use Tax).

(2) Presumption of purchase for use in Texas. An aircraft purchased, leased, or rented outside of Texas and then brought into Texas by a purchaser is presumed to have been purchased from a seller for use in Texas and is subject to Texas use tax. An aircraft that is brought into Texas by a person who did not purchase the aircraft directly from a seller is not presumed to have been purchased for use in Texas.

(3) Predominant use outside of Texas.

(A) An aircraft purchased, leased, or rented outside of Texas and then brought into Texas is not subject to Texas use tax if the aircraft is predominantly used outside of Texas for a period of one year beginning on the later of:

(i) the date the aircraft was acquired, by purchase, lease, rental, or otherwise, by the person bringing the aircraft into Texas; or

(ii) the date the aircraft was substantially complete in the condition for its intended use and conducted its first flight for the carriage of persons or property.

(B) For purposes of this subsection, an aircraft is predominantly used outside of this state if more than 50% of its total departures are from locations outside of Texas.

(C) The owner or operator of the aircraft must maintain records sufficient to show each of the aircraft's departures. The comptroller may examine all logs and records maintained on any aircraft brought into Texas to determine the percentage of an aircraft's total departures that were made from locations in Texas.

(4) Completing, repairing, remodeling, or restoring aircraft in Texas. An aircraft purchased, leased, or rented outside of Texas and then brought into Texas for the sole purpose of completing, repairing, remodeling, or restoring the aircraft is not subject to Texas use tax.

(A) Completion, repair, remodeling, or restoration includes flights solely for troubleshooting, testing, or training, and flights between service locations under an FAA-issued ferry permit.

(B) Any use of the aircraft for business or pleasure travel during the time that the aircraft is being completed, repaired, remodeled, or restored means the aircraft was not brought into Texas for the sole purpose of completion, repairs, remodeling, or restoration, and Texas use tax may be due on the aircraft.

(C) The owner or operator of the aircraft must maintain records sufficient to show all uses of the aircraft within Texas. The comptroller may examine all logs and records maintained on the aircraft to determine the actual use of the aircraft in Texas.

(5) Use tax credit. The purchaser or lessee of an aircraft is allowed to claim a credit against Texas use tax due on the use of the aircraft for any legally imposed sales or use tax due and paid on the sale or use of the item by the purchaser or lessee of the item to another state or any political subdivision of another state. For information on taking a credit for tax paid to another state, refer to §3.338 of this title (relating to Multistate Tax Credits and Allowance of Credit for Tax Paid to Suppliers).

(d) Related parties.

(1) The sale, lease, rental, or other transaction between a person and a member, owner, or affiliate of the person involving an aircraft that would not be subject to tax, or would qualify for an exemption from tax if the transaction were between unrelated persons remains not subject to tax or exempt from tax to the same extent as if the transaction were between unrelated persons.

(2) Except as provided in paragraph (3) of this subsection, the use of an aircraft by an affiliate of the purchaser of the aircraft, or an owner or member of either the purchaser or its affiliate, is not subject to tax if the purchaser paid Texas sales or use tax on the purchase of the aircraft, or the purchase of the aircraft was exempt from Texas sales or use tax.

(3) The exemption in paragraph (2) of this subsection does not apply if the purchase of the aircraft was exempt as:

(A) a sale for resale; or

(B) an occasional sale, unless the owner, member, affiliate, or the owner or member of the affiliate, who is leasing or renting the aircraft could have purchased the aircraft as an occasional sale. For information on the occasional sale exemption, see subsection (j) of this section.

(e) Tax exemptions specific to aircraft. In addition to the other exemptions from tax provided under Tax Code, Chapter 151, the following tax exemptions apply specifically to the sale, lease, rental, and use in Texas of aircraft, aircraft engines, and component parts. A person claiming a sales tax exemption under this subsection may provide the seller with a properly completed exemption certificate at the time of the transaction. For more information, refer to §3.287 of this title (relating to Exemption Certificates).

(1) Certificated or licensed carriers.

(A) Sales and use tax is not due on the sale, lease, or rental of an aircraft to a certificated or licensed carrier.

(B) Sales and use tax is not due on the sale, lease, or rental of component parts of an aircraft to a certificated or licensed carrier.

(C) Sales and use tax is not due on the sale or use of tangible personal property that is necessary for the normal operations of, and is pumped, poured, or otherwise placed in, an aircraft owned or operated by a certificated or licensed carrier.

(D) Sales and use tax is due on the sale, lease, or rental of machinery, tools, and equipment that support the overall operation of a certificated or licensed carrier, such as baggage loading or handling equipment, reservation or booking machinery and equipment, garbage and other waste disposal equipment, and office supplies and equipment, unless otherwise exempt under Tax Code, Chapter 151.

(E) Sales tax is not due on the sale of tangible personal property transferred to a certificated or licensed carrier in Texas, if the carrier, using its own facilities, ships the items to a point outside of Texas under a bill of lading and the items are purchased for use by the carrier in the conduct of its business as a certificated or licensed carrier solely outside Texas.

(2) Flight schools, instructors, and students.

(A) Sales or use tax is not due on the sale, lease, or rental of an aircraft to a person who:

(i) holds a current flight school or flight instructor certificate issued by the FAA;

(ii) holds a current sales and use tax permit issued under Tax Code, Chapter 151; and

(iii) uses the aircraft to provide qualified flight instruction.

(B) Any use of the aircraft other than that described in this paragraph is subject to tax as a divergent use under subsection (f) of this section, unless otherwise exempt under Tax Code, Chapter 151.

(C) Sales or use tax is not due on the sale or use of component parts of an aircraft owned or operated by a flight school or flight instructor to provide qualified flight instruction.

(D) Sales or use tax is not due on the sale or use of tangible personal property that is necessary for the normal operations of, and is pumped, poured, or otherwise placed in, an aircraft owned or operated by a flight school or flight instructor to provide qualified flight instruction.

(E) A student enrolled in a program providing qualified flight instruction may claim an exemption from sales tax on the short-term hourly rental of an aircraft for qualified flight instruction, including solo flights and other flights. When completing an exemption certificate claiming this sales tax exemption, the student must identify the flight school by name and address or, if the student is not enrolled in a flight school program, the student must identify the student's flight instructor and the instructor's address. The student must also retain copies of written tests and instructor's endorsements. Without evidence that the student is in pursuit of a FAA-certified pilot certificate or flight rating, aircraft rentals are subject to sales tax.

(3) Foreign governments. Sales tax is not due on the sale, lease, or rental of an aircraft to a foreign government. Sales tax is due on the sale or lease of component parts or materials incorporated in Texas into an aircraft owned by a foreign government, unless otherwise exempt under Tax Code, Chapter 151. Refer to subsection (g) of this section for information concerning the repair, remodeling, maintenance, and restoration of aircraft, aircraft engines, and component parts.

(4) Fly-away exemption.

(A) Sales tax is not due on the sale or lease of an aircraft in Texas to a person for use and registration in another state or nation before any use in Texas other than:

(i) completing, repairing, remodeling, maintaining, or restoring the aircraft in Texas, including necessary flights for troubleshooting, testing, or flights between service locations under an FAA-issued ferry permit; or

(ii) flight training in the aircraft.

(B) Any use of the aircraft in Texas other than that described in subparagraph (A) of this paragraph before the aircraft is flown out of this state for use and registration in another state or nation will result in the loss of the exemption.

(C) The subsequent use of an aircraft in Texas after the aircraft has left Texas will not subject the aircraft to tax on the purchase price if the aircraft is predominantly used outside of Texas for a period of one year beginning on the later of:

(i) the date the aircraft was purchased or leased by the person bringing the aircraft into Texas; or

(ii) the date the aircraft was substantially complete in the condition for its intended use and conducted its first flight for the carriage of persons or property.

(D) For purposes of this subsection, an aircraft is predominantly used outside of Texas if more than 50% of its total departures are from locations outside of Texas.

(E) The owner or operator of the aircraft must maintain records sufficient to show each of the aircraft's departures. The comptroller may examine all logs and records maintained on any aircraft brought into Texas to determine the percentage of an aircraft's total departures that were made from locations in Texas.

(F) The fly-away exemption does not apply to the short-term hourly rental of an aircraft in Texas, even if the person renting the aircraft intends to use the aircraft in another state.

(G) Exemption certificate required.

(i) A purchaser claiming the fly-away exemption under this paragraph must provide the seller with a properly completed Texas Aircraft Exemption Certificate Out-of-State Registration and Use, Form 01-907, its electronic equivalent, or any form promulgated by the comptroller that succeeds such form. The seller may only accept the certificate if the seller lacks actual knowledge that the claimed exemption is invalid. Within 30 days of the sale of the aircraft, a copy of the completed certificate signed by both the seller and the purchaser must be provided to the Comptroller of Public Accounts, Business Activity Research Team, P. O. Box 13003, Austin, Texas, 78711-3003.

(ii) By signing the certificate, the purchaser authorizes the comptroller to provide a copy of the certificate to the state or nation in which the aircraft is intended to be used and registered.

(iii) Issuing an invalid certificate is a misdemeanor punishable by a fine not to exceed $500 in addition to the assessment of tax and, when applicable, penalty and interest on the purchase price of the aircraft.

(5) Agricultural use.

(A) Sales or use tax is not due on the sale, lease, or rental of an aircraft for use exclusively in connection with an agricultural use, as defined in this section, when used for:

(i) predator control;

(ii) wildlife or livestock capture;

(iii) wildlife or livestock surveys;

(iv) census counts of wildlife or livestock;

(v) animal or plant health inspection services; or

(vi) agricultural aircraft operations, such as crop dusting, pollination, or seeding.

(B) Component parts and necessary supplies for aircraft used exclusively in agricultural aircraft operations.

(i) Sales or use tax is not due on the sale or use of component parts of an aircraft used exclusively in agricultural aircraft operations.

(ii) Sales or use tax is not due on the sale or use of tangible personal property that is necessary for the normal operations of, and is pumped, poured, or otherwise placed in, an aircraft used exclusively in agricultural aircraft operations.

(iii) Exemption certificate required. A person claiming the exemption under this subparagraph must have a valid Texas Agricultural and Timber Exemption Registration Number issued by the comptroller, and must issue a properly completed Texas Agricultural Sales and Use Tax Exemption Certification, Form 01-924, its electronic equivalent, or any form promulgated by the comptroller that succeeds such form.

(iv) This exemption does not include the sale or use of firearms, ammunition, or other equipment or tangible personal property used to perform predator control, wildlife census counts, or any other activity not included in the definition of agricultural aircraft operation.

(C) Use of an aircraft is considered to be "for use exclusively in connection with an agricultural use" if 95% of the use of the aircraft is for a purpose described by subparagraph (A) of this paragraph. Travel of less than 30 miles each way to a location to perform a service described by subparagraph (A) of this paragraph will not disqualify the sale, lease, or rental of an aircraft from the exemption, and will not be regarded as divergent use.

(D) Selling the use of a gunner's seat on an aircraft that is exempt under this paragraph to a person participating in aerial wildlife management, as authorized by Parks and Wildlife Code, §43.1075 (Using Helicopters to Take Certain Animals), will not result in a loss of the exemption. The sale of the gunner seat is subject to sales tax as a taxable amusement service under Tax Code, §151.0028 (Amusement Services) and §3.298 of this title (relating to Amusement Services).

(E) A person who claims an exemption under this paragraph must maintain and make available to the comptroller upon request flight records for all uses of the aircraft, as well as any other records requested by the comptroller, such as Aerial Wildlife Management Permits issued under Parks and Wildlife Code, Chapter 43, Subchapter G. Failure to maintain adequate records may result in loss of the exemption.

(6) Fractional ownership operations. Sales and use tax is not due on the sale, lease, or rental of an aircraft operated as part of a fractional ownership program under 14 Code of Federal Regulations Part 91, Subpart K-Fractional Ownership Operations. Sales tax is due on the sale or lease of component parts or materials incorporated into an aircraft that is part of an aircraft fractional ownership operation, unless otherwise exempt under Tax Code, Chapter 151.

(f) Divergent use.

(1) Exempt aircraft, aircraft engines, and component parts. Sales and use tax is due when an aircraft, aircraft engine, or component part sold, leased, or rented tax-free under a properly completed exemption certificate is subsequently put to a taxable use other than the use allowed under the certificate. For more information, refer to §3.287 of this title.

(2) Sales for resale. Sales and use tax is due when an aircraft engine or component part sold, leased, or rented tax-free under a properly completed resale certificate is subsequently put to a taxable use other than the use allowed under the certificate. For more information, refer to §3.285 of this title (relating to Resale Certificate; Sales for Resale). Sales and use tax is not due on the divergent use of an aircraft that is purchased for resale.

(3) Agricultural use and agricultural aircraft operations. No divergent use may be made of an aircraft exempted under subsection (e)(5) of this section, relating to agricultural use, without a total loss of the exemption. Certain limited uses identified in subsection (e)(5)(C) of this section do not constitute divergent use of an agricultural aircraft. No divergent use of component parts or necessary tangible personal property exempted under subsection (e)(5)(B) of this section, relating to agricultural aircraft operations, can be made without a total loss of that exemption.

(g) Repair, remodeling, maintenance, restoration, and completion.

(1) Labor to complete, repair, remodel, maintain, or restore aircraft in Texas is not subject to sales tax. The sale or use of materials incorporated into an aircraft, aircraft engine, or component part being completed, repaired, remodeled, maintained, or restored in Texas is subject to sales and use tax as provided in paragraph (2) of this subsection, unless otherwise exempt.

(2) Tax responsibilities of service providers.

(A) Incorporated materials. Whether the service provider owes tax on the purchase of materials that will become incorporated materials as part of the completion, repair, remodeling, maintenance, or restoration of an aircraft, aircraft engine, or component part depends upon whether the service provider is operating under a lump-sum or separated contract.

(i) Separated contracts. If the services are performed under a separated contract, the service provider is regarded as the seller of the incorporated materials. If the service provider has a sales and use tax permit, the service provider may issue a properly completed resale certificate to the supplier in lieu of paying sales tax on the purchase of the incorporated materials. The service provider must then collect sales tax from the customer on either the agreed contract price for the incorporated materials, or the amount the service provider paid for the incorporated materials, whichever amount is greater. The service provider may also use incorporated materials removed from an inventory of items upon which sales or use tax was paid at the time of purchase. In such a case, sales tax is to be collected from the customer on the agreed contract price of the incorporated materials as though the incorporated materials had been purchased tax-free with a resale certificate.

(ii) Lump-sum contracts. If the services are performed under a lump-sum contract, the service provider is the ultimate consumer of all incorporated materials. The service provider may not collect sales tax from the customer. The service provider must pay sales or use tax to the suppliers of the incorporated materials at the time of purchase, unless the service provider works under both lump-sum and separated contracts and uses incorporated materials removed from a valid tax-free inventory that were originally purchased tax-free by use of a resale certificate. In such a case, the service provider incurs a tax liability based upon the purchase price of the incorporated materials and must report and remit the tax to the comptroller. The service provider owes sales or use tax on the purchase of incorporated materials even when the services are performed for a customer that is exempt from tax under Tax Code, Chapter 151.

(B) Tools, equipment, and consumable supplies. Sales and use tax is due on the purchase, lease, or rental of tools, equipment, and consumable supplies used by the service provider but not incorporated into the aircraft, aircraft engine, or component part at the time of the service, regardless of the type of contract used to perform the service, and the service provider may not collect sales or use tax from the customer on any charges for such items.

(3) Exemption for certificated or licensed carriers, flight schools or instructors, and persons operating aircraft for an agricultural use.

(A) The total charge for services to complete, repair, remodel, maintain, or restore aircraft, aircraft engines, or component parts by or for a certificated or licensed carrier, a flight school or instructor providing qualified flight instruction, or a person operating aircraft for an agricultural use is exempt from sales and use tax, whether the charge is lump-sum or separately stated.

(B) Sales and use tax is not due on the sale, lease, or rental of machinery, tools, supplies, and equipment used directly and exclusively in the repair, remodeling, maintenance, or restoration of aircraft, aircraft engines, or component parts by or for a certificated or licensed carrier, a flight school or a flight instructor providing qualified flight instruction, or person conducting an agricultural aircraft operation, provided the purchaser issues the seller a properly completed exemption certificate. This includes equipment, such as battery chargers and diagnostic equipment, used to sustain or support safe and continuous operations and to keep the aircraft in good working order by preventing its decline, failure, lapse, or deterioration.

(4) Aircraft used outside Texas. The following guidelines apply to aircraft brought into Texas by out-of-state owners or operators for completion, repair, remodeling, or restoration.

(A) Separated contracts. Sales or use tax is not due on the separately stated charge for labor to complete, repair, remodel, maintain, or restore an aircraft, aircraft engine, or component part performed under a separated contract. The cost of incorporated materials is:

(i) subject to sales tax when the owner or operator takes delivery of the aircraft in Texas; or

(ii) not subject to sales tax when the aircraft is delivered to an out-of-state location by the service provider.

(B) Lump-sum contracts. Sales tax is not due by the owner or operator of an aircraft completed, repaired, remodeled, maintained, or restored under a lump-sum contract. The service provider owes sales or use tax on the incorporated materials, whether the service provider delivers the aircraft out of state or the owner or operator takes delivery of the aircraft in Texas.

(5) The repair, remodeling, maintenance, or restoration of component parts removed from and returned to an aircraft pursuant to the repair, remodeling, maintenance, or restoration of that aircraft is to be treated in accordance with the provisions of this subsection. The repair, remodeling, maintenance, or restoration of a component part removed from an aircraft that is not returned to the aircraft is subject to the provisions of §3.292 of this title (relating to Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property).

(h) Jet turbine aircraft engines.

(1) Sales or use tax is not due on the sale, lease, or rental of the following items used in electrochemical plating or a similar process by persons overhauling, retrofitting, or repairing jet turbine aircraft engines and their component parts:

(A) machinery, equipment, or replacement parts or accessories with a useful life in excess of six months; and

(B) supplies, including aluminum oxide, nitric acid, and sodium cyanide.

(2) A person claiming an exemption under paragraph (1) of this subsection must maintain documentation sufficient to show that no exclusion under Tax Code, §151.318 (Property Used in Manufacturing) applies. Also refer to §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing).

(3) Sales tax is not due on the sale of electricity or natural gas used in the off-wing processing, overhaul, or repair of a jet turbine engine or its parts for a certificated or licensed carrier. For more information, refer to §3.295 of this title (relating to Natural Gas and Electricity).

(i) Warranties.

(1) Manufacturer's written warranty or recall campaign.

(A) Sales or use tax is not due on the use of incorporated materials or services furnished by the manufacturer to repair an aircraft, aircraft engine, or component part under a manufacturer's written warranty or recall campaign.

(B) Records must be kept by a service provider showing that the incorporated materials or services were used in repairing an item under a manufacturer's written warranty or recall campaign.

(C) A service provider purchasing incorporated materials used in a repair under a manufacturer's written warranty or recall campaign may issue a properly completed exemption certificate to the seller in lieu of paying tax on the purchase.

(2) Extended warranties and service policies.

(A) Sales tax is not due on the sale of an extended warranty or service policy that covers an aircraft, aircraft engine, or component part.

(B) A service provider performing services under an extended warranty or service policy must collect sales or use tax on the sale or use of incorporated materials as required under subsection (g)(2)(A) of this section, unless the aircraft, aircraft engine, or component part is owned by a certificated or licensed carrier, a flight school or instructor providing qualified flight instruction, or an agricultural aircraft operation.

(j) Occasional sales. The purchase of an aircraft, aircraft engine, or component part is exempt from sales and use tax if the purchase meets the definition of an occasional sale provided by §3.316 of this title (relating to Occasional Sales; Transfers Without Change in Ownership; Sales by Senior Citizens' Organizations; Sales by University and College Student Organizations; and Sales by Nonprofit Animal Shelters).

(k) Sales for resale.

(1) A person selling, leasing, or renting an aircraft, aircraft engine, or component part may accept a properly completed and signed resale certificate from the purchaser at the time of sale in lieu of collecting tax on the sale if the person does not know, and does not have reason to know, that the sale is not a sale for resale. For more information on the good faith acceptance of a resale certificate, refer to §3.285 of this title.

(2) A person purchasing, leasing, or renting an aircraft in a transaction that meets the definition of a sale for resale may provide the seller or lessor with a properly completed resale certificate if the person:

(A) holds a valid sales and use tax permit at the time of the transaction; and

(B) does not intend to exclusively lease the aircraft together with a crew or pilot.

(3) The purchase of an aircraft for lease or rental to another does not qualify as a sale for resale unless more than 50% of the aircraft's departures are made under the operational control of a person other than the purchaser, pursuant to one or more written lease agreements, in exchange for consideration. For purposes of this subsection, consideration is not required to be in the form of a cash payment, and may be fixed, variable, or periodic.

(l) Local tax. Local sales and use taxes, including taxes imposed by a city, county, transit authority, or special purpose district, apply to aircraft in the same manner as any other tangible personal property.

(1) Sales consummated in Texas. Generally, local sales taxes are allocated to the local taxing jurisdictions in which the seller's place of business is located, and the seller must collect the local sales tax, without regard to whether the aircraft is actually delivered to, or intended for use in, a Texas location in a different local taxing jurisdiction. If the seller does not collect the applicable local tax, the purchaser must accrue and remit local tax to the comptroller.

(2) Sales consummated outside of Texas. When an aircraft is purchased or leased outside of Texas and brought into Texas, local use tax is due based on the local taxing jurisdictions in which the aircraft is first stored or used. If the seller does not collect the applicable local tax, the purchaser must accrue and remit to the comptroller any local use tax due.

(3) For more information regarding the local tax collection and reporting responsibilities of sellers and purchasers, refer to §3.334 of this title (relating to Local Sales and Use Tax).

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 24, 2017.

TRD-201700746

Lita Gonzalez

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: April 9, 2017

For further information, please call: (512) 475-0387


34 TAC §3.292

The Comptroller of Public Accounts proposes amendments to §3.292, concerning repair, remodeling, maintenance, and restoration of tangible personal property. The proposed amendments delete information in current subsections (a)(8) and (i) relating to the repair, remodeling, maintenance, and restoration of aircraft because this information is being included in new §3.280 of this title (relating to Aircraft). The proposed amendments also update information relating to vessels to better distinguish between services provided on noncommercial vessels, which are covered by this section, and services provided on commercial vessels, which are addressed in §3.297 of this title (relating to Carriers).

Subsection (a) is amended to revise existing definitions and to add definitions for several terms which appear in the current section but are not expressly defined therein. Subsequent paragraphs are renumbered accordingly.

New paragraph (1) is added to define the term "Chapter 160 boat" consistent with the definition proposed in §3.297 of this title. The proposed definition is adapted from the definition of the term "taxable boat" in §3.741 of this title (relating to Imposition and Collection of Tax). This definition also states that, for purposes of this section, the length of a vessel is measured from the tip of the bow in a straight line to the stern. This measurement is based upon Tax Code, Chapter 160 (Taxes on Sales and Use of Boats and Boat Motors), which defines the term "boat" by reference to Parks and Wildlife Code, §31.003(1) (Definitions), as revised by House Bill 1106, 83rd Legislature, 2013.

Renumbered paragraph (2), defining the term "commercial vessel," is amended consistent with the amendments proposed to the definition of the term in §3.297 of this title.

New paragraph (3) is added to define the term "consumable supplies." The proposed definition is intended to provide guidance and assist taxpayers in distinguishing between materials that are transferred to the customer as part of the provision of a service and materials that are consumed by a service provider when repairing, remodeling, maintaining, or restoring the tangible personal property belonging to another. This definition is based, in part, on the definition of the term provided in §3.290 of this title (relating to Motor Vehicle Repair and Maintenance; Accessories and Equipment Added to Motor Vehicles; Moveable Specialized Equipment). Subsequent paragraphs are renumbered accordingly.

Renumbered paragraph (4), defining the term "extended warranty or service policy," is amended to describe both contracts sold to purchasers for an amount in addition to the charge for the underlying tangible personal property and contracts sold to owners of tangible personal property.

New paragraphs (5) and (9) are added to memorialize longstanding agency policy that the terms "fabricate" and "processing" have the same meaning for the purposes of this section as the meaning given those terms in §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing).

New paragraph (6) is added to define the term "maintain," which is used throughout the section, to mean "to perform maintenance."

Paragraph (7), defining the term "repairman," is deleted. The term "service provider" is used throughout the section in place of the term "repairman." Paragraph (8), defining the term "private aircraft," is also deleted. Information about the repair, remodeling, maintenance, or restoration of private aircraft is proposed to be addressed in new §3.280 of this title.

Renumbered paragraph (7), defining the term "maintenance," is amended to make the paragraph easier to read.

Renumbered paragraph (8), defining the term "manufacturer's written warranty," is amended to state that the term refers to a warranty provided at no additional charge to the purchaser of the tangible personal property.

Renumbered paragraph (10), defining the term "remodel," is amended to follow the definition of the term "remodeling" provided in §3.300 of this title.

New paragraph (12) is added to define the term "restore." This definition is based upon the definition of the term "restoration" in §3.357 of this title (Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance). Section 3.357 defines restoration as, "An activity performed to bring back real property that is still operational and functional but that has faded, declined, or deteriorated, as near as possible to its original condition."

New paragraph (13), defining the term "service provider," is added to replace the term "repairman," which is proposed to be deleted. The definition states that a service provider is someone who repairs, remodels, maintains, or restores tangible personal property belonging to another.

New paragraph (14) is added to define the term "vessel" consistent with the definition proposed in §3.297 of this title. The definition is adapted from Parks and Wildlife Code, §31.003(2) (Definitions), Comptroller's Decision Nos. 8864 & 9034 (1980), and STAR Accession Nos. 7708T0083C10 (August 8, 1977) and 8906L0943C10 (June 7, 1989).

New paragraph (15) is added to define the term "warrantor" in accordance with the commonly understood meaning of the term.

Subsection (b), which explains the basic rules of taxability in the context of the repair, remodeling, maintenance, and restoration of tangible personal property, is amended to provide paragraph headings throughout the section to assist taxpayers in locating information. New subsection (b)(1) is added to draw emphasis to information that was previously provided at subsection (b). The subsection also includes a cross-reference to §3.286 of this title (relating to Seller's and Purchaser's Responsibilities, including Nexus, Permits, Returns and Reporting Periods, and Collection and Exemption Rules).

Subparagraphs (A), (B), (C), and (D) are added to subsection (b)(1) to address, respectively, the taxability of services related to aircraft, motor vehicles, vessels, and locomotives and rolling stock. Subparagraph (E) is added to address the taxability of services performed on tax-exempt equipment. The information contained in new subsection (b)(1)(E) was previously provided in subsection (g). All of former subsection (g) was reincorporated into subsection (b)(1)(E), except for former subsections (g)(2)(D) and (F). Subsection (g)(2)(D), regarding boats and motors subject to tax under Chapter 160, is restated in subsection (b)(1)(C). Subsection (g)(2)(F), concerning timber operations, became inapplicable as of January 1, 2008, pursuant to Tax Code, §151.3162(d) (Timber Items), when the exemption in Tax Code, §151.3162(b) became effective.

Former subsection (b)(1) is deleted because the information currently provided in this paragraph is stated more clearly in the new subsection (b)(1).

Subsection (b)(2) is amended by adding the heading, "Resale certificates," creating new subparagraphs (A) and (B), and including cross references to §3.285 of this title (relating to Resale Certificate; Sales for Resale) and §3.294 of this title (relating to Rental and Lease of Tangible Personal Property). Language is added in subparagraph (A) to explain when a service provider can issue a resale certificate. Subparagraph (B) explains a seller of tangible personal property can issue a resale certificate to a service provider. Minor revisions are proposed to subsection (b)(3) to make the subsection easier to read. Subsection (b)(4) is amended to include a cross reference to §3.287 of this title (relating to Exemption Certificates) and to make the subsection easier to read. In addition, the reference to subsection (g) is deleted as the information is incorporated into subsection (b).

Subsection (c) is amended to address only consumable supplies and equipment. The defined term consumable supplies is used in the body of the subsection in place of the term supplies. The subsection is further amended to state that a service provider owes sales or use tax on consumable supplies, as that term is proposed to be defined in this section.

Taken together, subsections (b)(2)(A) and (c), as amended, reflect tests that must be met before a provider of taxable services can purchase tangible personal property for resale. First, the tangible personal property must be transferred as an integral part of a taxable service. This gives effect to Tax Code, §151.006(a)(1) ("Sale for Resale"). Second, care, custody, and control of the tangible personal property must be transferred to the purchaser of the service. This gives effect to Tax Code, §151.302(b) (Sales for Resale).

Subsection (d), which addresses taxability issues that arise in the context of repairs made under warranty, is reorganized for clarity. The heading of the subsection is changed from "Repairs under warranties," to "warranties," and the first paragraph is amended to refer taxpayers with questions about the repair of motor vehicles and aircraft to §3.290 and §3.280 of this title, respectively. Subsection (d)(1) is amended to replace the phrase "manufacturer's warranties" with the defined term "manufacturer's written warranty" and to add a reference to recall campaigns. Additional amendments are made to make the paragraph easier to read.

Subsection (d)(2) is amended to make the paragraph easier to read and to use certain defined terms, such as "extended warranty or service policy" and "warrantor." New subsection (d)(2)(E) explains the taxability of charges for tangible personal property and labor not covered by a warranty when the services are performed by a third party.

New subsection (d)(3) is added to reflect longstanding agency policy as to what happens when tangible personal property is replaced or taken in trade or reimbursement is given under the terms of a warranty rather than being repaired, remodeled, or restored.

Subsections (e) and (f) are amended for clarity and readability. No substantive change to policy is intended as a result of these changes.

The information previously provided in subsection (g) concerning services performed on exempt tangible personal property is moved to new subsection (b)(1)(E). Relettered subsection (g), formerly subsection (h), is amended for clarity and readability. In addition, relettered subsection (g)(3)(B) is amended to correct the cross reference to federal authority that allows the President of the United States to declare a disaster area.

Subsection (i) is deleted as the repair, remodeling, maintenance, and restoration of aircraft is now addressed in §3.280 of this title.

Tom Currah, Chief Revenue Estimator, has determined that for the first five-year period the rule will be in effect, there will be no significant revenue impact on the state or units of local government.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be by incorporating into the rule current agency policy and by improving the rule's clarity. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposal may be submitted to Teresa G. Bostick, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528. Comments must be received no later than 30 days from the date of publication of the proposal in the Texas Register.

This amendment is proposed under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

The amendment implements Tax Code §§151.006 (Sale for Resale), 151.0101 (Taxable Services), 151.058 (Property Used to Provide Taxable Services and Sale Price of Taxable Services), 151.151 (Resale Certificate), 151.302 (Sales for Resale), 151.3111 (Services on Certain Exempted Personal Property), and 151.331 (Rolling Stock; Train Fuel and Supplies).

§3.292.Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Chapter 160 boat--A vessel not more than 65 feet in length, measured from the tip of the bow in a straight line to the stern, that is not a canoe, kayak, rowboat, raft, punt, inflatable vessel, or other watercraft designed to be propelled by paddle, oar, or pole, and that is subject to tax under Tax Code, Chapter 160 (Taxes on Sales and Use of Boats and Boat Motors).

(2) [(1)] Commercial vessel--A vessel that displaces [A ship of] eight or more tons of fresh water before being loaded with fuel, supplies, or cargo, and [displacement] that is:

(A) used exclusively and directly in a commercial or business enterprise or activity, including, but not limited to, commercial fishing; or[,]

(B) used commercially for pleasure fishing by individuals who are paying passengers [but excludes any ship used for sports fishing or pleasure].

(3) Consumable supplies--Tangible personal property that is used by a service provider to repair, remodel, maintain, or restore tangible personal property belonging to another; is not transferred into the care, custody, and control of the purchaser of the service; and, having been used once for its intended purpose, is completely used up or destroyed. Examples of consumable supplies include, but are not limited to, canned air used to remove dust from equipment and solvents used to clean equipment parts.

(4) [(2)] Extended warranty or service policy--A [This] contract [is] sold to the purchaser [buyer] of tangible personal property [the product] for an [additional] amount in addition to the charge for the tangible personal property, or sold to an owner of tangible personal property, to extend the terms of the manufacturer's written warranty or provide a warranty in addition to or in place of the manufacturer's written warranty. [The provisions of the contract become effective after the manufacturer's warranty expires.]

(5) Fabricate--To make, build, create, produce, or assemble components of tangible personal property, or to make tangible personal property work in a new or different manner.

(6) Maintain--To perform maintenance.

(7) [(3)] Maintenance--Work performed [All work] on operational and functioning tangible personal property that is necessary to sustain or support safe, efficient, continuous operation of the tangible personal property [operations], or is necessary to keep the tangible personal property in good working order by preventing [the] decline, failure, lapse, or deterioration [of tangible personal property].

(8) [(4)] Manufacturer's written warranty--A manufacturer's guarantee made for no additional charge to the purchaser of an item of tangible personal property [by the manufacturer] that the item [product at the time of sale] is operable and will remain operable for a specified period of time. [The manufacturer's warranty is provided without additional cost to the buyer.]

(9) Processing--The physical application of the materials and labor necessary to modify or to change the characteristics of tangible personal property. The repair of tangible personal property, belonging to another, by restoring it to its original condition is not considered processing of the tangible personal property. The mere packing, unpacking, or shelving of tangible personal property to be sold is not considered to be processing of the tangible personal property. Processing does not include remodeling.

(10) [(5)] Remodel--To modify or remake [the style, shape, or form of] tangible personal property belonging to another in a similar but different manner, or to change the style, shape, or form of tangible personal property belonging to another, without causing a loss of its identity or without causing it [the item] to operate in a new or different manner. Remodeling does not include processing.

(11) [(6)] Repair--To mend or restore to working order or operating condition tangible personal property that was broken, damaged, worn, defective, or malfunctioning.

(12) Restore--To return tangible personal property that is still operational and functional, but that has faded, declined, or deteriorated, to its former or original state.

(13) Service provider--A person who repairs, remodels, maintains, or restores tangible personal property belonging to another.

(14) Vessel--A watercraft, other than a seaplane on water, used, or capable of being used, for navigation and transportation of persons or property on water. The term includes a ship, boat, watercraft designed to be propelled by paddle or oar, barge, and floating dry-dock.

(15) Warrantor--A person who has a contractual obligation for a specified period of time to repair, remodel, maintain, or restore tangible personal property belonging to another.

[(7) Repairman--Any person who, under either lump-sum or separated contracts, restores, repairs, performs maintenance services, or replaces a component of an inoperable or malfunctioning item.]

[(8) Private aircraft--An aircraft that is operated or used for a purpose other than as a certificated carrier of persons or property or by a flight school for the purpose of training pilots. Persons repairing aircraft belonging to or operated by a certificated carrier of persons or property or flight schools should refer to §3.297 of this title (relating to Carriers).]

(b) Taxability of services [Services] to repair, remodel, maintain, or restore tangible personal property [other than aircraft, commercial vessels, and motor vehicles].

(1) General rule. Except as otherwise provided in this section, service providers [Persons] who repair, [restore,] remodel, [or] maintain, or restore tangible personal property belonging to another are providing taxable services. A service provider is a seller and must obtain a sales and use tax permit and collect and remit sales and use tax as provided in §3.286 of this title (relating to Seller's and Purchaser's Responsibilities, including Nexus, Permits, Returns and Reporting Periods, and Collection and Exemption Rules). Sales or use tax is due from the purchaser on the entire charge for a service to repair, remodel, maintain, or restore tangible personal property, including any separately stated charge for materials, parts, labor, consumable supplies, or equipment. In addition, the purchaser owes sales or use tax on any charge connected to the taxable service, including separately stated charges for inspecting, monitoring, or testing. [Persons who remodel motor vehicles are also covered by this section.]

(A) Aircraft. Service providers [Persons] who repair, remodel, maintain, or restore [private] aircraft should refer to §3.280 of this title (relating to Aircraft) [subsection (i) of this section].

(B) Motor vehicles. Service providers who remodel motor vehicles are providing taxable services and are covered by this section. Service providers [Persons] who repair, maintain, or restore motor vehicles should refer to §3.290 of this title (relating to Motor Vehicle Repair and Maintenance; Accessories and Equipment Added to Motor Vehicles; Moveable Specialized Equipment).

(C) Vessels. Service providers who repair, remodel, maintain, or restore a vessel that is a Chapter 160 boat, sports fishing boat, or any other boat used for pleasure, and that is not a commercial vessel, are providing taxable services and are covered by this section. Service providers who repair, remodel, maintain, or restore commercial vessels should refer to §3.297 of this title (relating to Carriers, Commercial Vessels, Locomotives and Rolling Stock, and Motor Vehicles).

(D) Locomotives and rolling stock. Service providers who repair, remodel, maintain, or restore locomotives or rolling stock should refer to §3.297 of this title.

(E) Exempt equipment. A service to repair, remodel, maintain, or restore tangible personal property that, if sold, leased, or rented at the time the service is performed, would be exempt under Tax Code, Chapter 151 (Limited Sales, Excise, and Use Tax) due to its nature or its use is exempt from sales and use taxes. Tax is due on the sale of services to repair, remodel, maintain, or restore tangible personal property that was exempt at the time of purchase but would not be exempt at the time the service is performed. For example, services to repair, remodel, maintain, or restore the following tangible personal property will not qualify for exemption based solely on the fact that such tangible personal property was exempt at the time of its purchase;

(i) tangible personal property purchased from an organization exempted from paying sales or use tax under Tax Code, §151.309 (Governmental Entities) or §151.310 (Religious, Educational, and Public Service Organizations);

(ii) tangible personal property exempted from use tax because sales tax was paid on the purchase;

(iii) tangible personal property acquired tax-free in a transaction qualifying as an occasional sale under Tax Code, §151.304 (Occasional Sales), or as a joint ownership transfer exempted under Tax Code, §151.306 (Transfers of Common Interests in Property). See §3.316 of this title (relating to Occasional Sales; Transfers Without Change in Ownership; Sales by Senior Citizens' Organizations; Sales by University and College Student Organizations; and Sales by Nonprofit Animal Shelters) and §3.331 of this title (relating to Transfers of Common Interests in Tangible Personal Property; Intercorporate Services); or

(iv) tangible personal property purchased tax-free during a sales tax holiday as provided by §3.353 of this title (relating to Sales Tax Holiday--Certain Emergency Preparation Supplies), §3.365 of this title (relating to Sales Tax Holiday--Clothing, Shoes and School Supplies) or §3.369 of this title (relating to Sales Tax Holiday--Certain Energy Star Products, Certain Water-Conserving Products, and WaterSense Products).

[(1) A service provider is a retailer and must obtain a tax permit and collect sales or use tax on the entire charge for materials, parts, labor, consumable supplies, equipment, and any charges connected to the repair, remodeling, restoration, or maintenance service.]

(2) Resale certificates.

(A) A service provider may issue a properly completed resale certificate instead of paying sales or use tax on the purchase of tangible personal property that is integral to repairing, remodeling, maintaining, or restoring tangible personal property belonging to another and is [to the supplier when purchasing materials that will be] transferred to the care, custody, and control of the purchaser of the taxable service. See §3.285 of this title (relating to Resale Certificate; Sales for Resale) [a customer].

(B) A person holding tangible personal property for sale, lease, or rental may issue a properly completed resale certificate in lieu of paying sales or use tax on the purchase of labor and tangible personal property used to repair, remodel, maintain, or restore that tangible personal property. Refer to §3.285 of this title and §3.294 of this title (relating to Rental and Lease of Tangible Personal Property).

(3) A service provider working [must collect sales or use tax on services (labor)] under an agreement that provides that the purchaser of the service [customer ] will furnish the tangible personal property [parts and materials] required for the service must collect sales or use tax on the charge for the service [repair].

(4) A service provider may accept a properly completed [an] exemption certificate instead of collecting sales or use tax when performing a taxable service for a purchaser who is [customer] exempt from sales and use tax under Tax Code, Chapter 151, or when performing services [tax or] on tangible personal property [an item] that is exempt from sales and use tax. Refer to §3.287 of this title (relating to Exemption Certificates).[, see subsection (g) of this section.]

(c) Consumable supplies and equipment. Sales or use tax must be paid by the service provider on consumable supplies[, tools,] and equipment that are purchased for use in the performance of a service [the repair but] that are not transferred to the care, custody, and control of the customer.

(d) Warranties. For information on warranties for the repair of motor vehicles, refer to §3.290 of this title. For information concerning warranties for the repair of aircraft, refer to §3.280 of this title. [Repairs under warranties.]

(1) Manufacturer's written warranty or recall campaign [warranties]. No sales or use tax is due on tangible personal property [parts] or labor furnished by the manufacturer to repair tangible personal property under a manufacturer's written warranty or recall campaign.

(A) Records must be kept by the service provider to document that the service and tangible personal property [parts] were used in repairing an item under a manufacturer's written warranty or recall campaign.

(B) The service provider may purchase tangible personal property [parts] to be used in repairs under a manufacturer's written warranty or recall campaign tax-free by issuing an exemption certificate to the seller [supplier].

(2) Extended warranty or [warranties and] service policy [contracts for tangible personal property (motor vehicles and private aircraft see subsection (i)(4) of this section)].

(A) Sales or use tax [Tax] is due on the sale of an extended warranty[, service contract] or service policy [for the repair or maintenance of tangible personal property].

(B) The warrantor [person who warrants the item and is obligated to perform services under the terms of the agreement] may issue a resale certificate in lieu of paying sales or use tax on the purchase of taxable items [for parts or service to be] used in performing the services [repair or maintenance services] covered by the contract as long as the taxable items are integral to performing the service and the taxable items are also transferred to the care, custody, and control of the purchaser.

(C) If the warrantor [person obligated to perform the services] uses a third-party service provider [repairman] to perform the service [do the work], the third-party service provider [repairman] may accept a resale certificate from the warrantor in lieu of sales or use tax.

(D) The [repairman or] warrantor [performing the service] must collect sales or use tax on any charge to the purchaser [customer] for labor or tangible personal property [parts] not covered by the extended warranty or service policy.

(E) If the warrantor uses a third-party service provider to fulfill the warranty and the service provider charges the warrantor or the purchaser for tangible personal property or labor not covered under the warranty, the service provider must collect sales or use tax on such charges.

(3) Replacements and reimbursements.

(A) Trade-in. If the warrantor is a seller of tangible personal property, and if the terms of a manufacturer's or extended warranty agreement provide for either the replacement or the repair, remodeling, maintenance, or restoration of tangible personal property, then tangible personal property accepted by the warrantor under the terms of the warranty in exchange for, or towards the purchase of, tangible personal property of the type sold by the warrantor in the regular course of business will be considered a trade-in. The provisions of Tax Code, §151.007(c)(5) ("Sales Price" or "Receipts") apply to such a transaction and any amount or credit provided for the trade-in reduces the taxable amount of the sale of the replacement item.

(B) The sale of a contract that provides that a warrantor will reimburse a purchaser for payments made to replace, repair, remodel, maintain, or restore faulty, damaged, lost, or stolen tangible personal property, including the amount of any sales and use tax, is not taxable. In addition, the amount reimbursed to the purchaser of the faulty, damaged, lost, or stolen tangible personal property by the warrantor under such a contract is not taxable.

(e) Services performed on real property [Contractors and persons who perform real property repair and remodeling]. Persons who build new improvements to real property, or repair, restore, or remodel residential real property belonging to others, should refer to §3.291 of this title (relating to Contractors). Persons who repair or remodel nonresidential real property belonging to others should refer to §3.357 of this title (relating to Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance).

(f) Fabricating or processing tangible personal property. Persons who fabricate or process tangible personal property belonging to [for] another should refer to §3.300 of this title [(relating to Manufacturing; Custom Manufacturing; Fabricating; Processing)].

[(g) Services performed on certain tangible personal property.]

[(1) Labor to repair, remodel, maintain, or restore certain tangible personal property that, if sold, leased, or rented, at the time of the performance of the service, would be exempted under Tax Code, Chapter 151, because of the nature of the property, its use, or a combination of its nature or use is exempted from sales and use taxes.]

[(2) The exemption provided in paragraph (1) of this subsection does not apply to:]

[(A) tangible personal property sold by an organization exempted by Tax Code, Chapter 151;]

[(B) tangible personal property exempted from use tax because sales tax was paid on the purchase;]

[(C) tangible personal property acquired tax free in a transaction qualifying as an occasional sale under Tax Code, §151.304, or as a joint ownership transfer exempted under Tax Code, §151.306;]

[(D) taxable boat or motor defined by Tax Code, §160.001;]

[(E) clothing and footwear purchased tax-free during a sales tax holiday; or]

[(F) machinery and equipment used in timber operations.]

(g) [(h)] Exemption for [labor to repair tangible personal property in a] disaster areas [area].

(1) Labor to repair, restore, remodel, or maintain tangible personal property is exempt if:

(A) the amount of the charge for labor is separately stated from any charge for tangible personal property on the invoice, contract, or similar document provided by the service provider to the purchaser [itemized]; and

(B) the service is performed on tangible personal [repair is to] property that was damaged within a disaster area by the condition that caused the area to be declared a disaster area.

(2) The exemption does not apply to tangible personal property transferred from the service provider to the purchaser as part of the repair.

(3) In this subsection, "disaster area" means:

(A) an area declared a disaster area by the Governor of Texas under Government Code, Chapter 418 (Emergency Management); or

(B) an area declared a disaster area by the President of the United States under 42 United States Code, Chapter 68 (Disaster Relief) [§5141].

[(i) Responsibilities of repairman or remodelers of private aircraft.]

[(1) Responsibilities under a lump-sum contract.]

[(A) Labor to maintain, repair or remodel private aircraft is not taxable. A person maintaining, repairing or remodeling a private aircraft for a lump-sum price is not a retailer of a taxable item and may not issue a resale certificate for parts or material used or consumed in such repair or remodel.]

[(B) Under a lump-sum contract, the repairman or remodeler is the ultimate consumer of consumable supplies, tools, equipment, and all materials incorporated into the private aircraft. The lump-sum repairman or remodeler must pay the tax to suppliers at the time of purchase. The repairman will not collect tax from customers on the lump-sum charge or any portion of the charge. Under this type of contract, the repairman will pay the tax on materials even when the property is repaired for an exempt customer.]

[(C) A lump-sum repairman may use materials from inventory that were originally purchased tax free by use of a resale certificate. In those instances, the repairman incurs a tax liability based upon the purchase price of the materials and must report and remit the tax to the comptroller.]

[(2) Responsibilities under a separated maintenance, repair or remodeling contract. Under a separated contract, the repairman of a private aircraft is a retailer and may issue a resale certificate in lieu of tax to suppliers for materials that will be incorporated into the private aircraft of the customer; the repairman must then collect tax from the customer on the agreed contract price of the materials, which must not be less than the amount the repairman paid to suppliers. The repairman must obtain a tax permit to be able to issue a resale certificate in lieu of tax when materials are purchased. The repairman may also use materials from inventory upon which tax was paid to the supplier at the time of purchase. In these instances, tax will be collected from the customer on the agreed contract price of the materials as if the materials had been purchased with a resale certificate; however, the repairman will remit tax to the comptroller only on the difference between the agreed contract price and the price paid to the supplier. See §3.338 of this title (relating to Multistate Tax Credits and Allowance of Credit for Tax Paid to Suppliers). A repairman of private aircraft is the ultimate consumer of consumable supplies, tools, and equipment used that are not incorporated into the private aircraft being repaired. The repairman must pay tax to suppliers at the time of purchase. The repairman may not collect tax from customers on any charges for these items.]

[(3) Repairing jet turbine aircraft engines. Persons engaged in overhauling, retrofitting, or repairing jet turbine aircraft engines and their component parts should refer to §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing).]

[(4) Warranties.]

[(A) Manufacturer warranties. Manufacturer's warranties are treated in the same manner as those for tangible personal property (see subsection (d)(1) of this section).]

[(B) Extended warranties and service contracts. A repairman performing services under an extended warranty covering a private aircraft must collect tax on the parts as required under paragraph (2) of this subsection.]

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 24, 2017.

TRD-201700747

Lita Gonzalez

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: April 9, 2017

For further information, please call: (512) 475-0387


34 TAC §3.297

The Comptroller of Public Accounts proposes an amendment to §3.297, concerning carriers. The section is proposed to be retitled as, "Carriers, Commercial Vessels, Locomotives and Rolling Stock, and Motor Vehicles." All provisions in this section related to aircraft are moved to new §3.280 of this title (relating to Aircraft).

New subsection (a) is added to define key terms used throughout this section. Terms that are defined in other subsections of the rule are relocated to new subsection (a) to make the section easier to read and for consistency with other sections of this title. Subsequent subsections are relettered accordingly.

Paragraphs (1) and (2) define terms related to vessels. Paragraph (1) defines the term "Chapter 160 boat." This definition is adapted from the definition of the term "taxable boat" in §3.741 of this title (relating to Imposition and Collection of Tax). This definition also states that, for purposes of this section, the length of a vessel is measured from the tip of the bow in a straight line to the stern. This measurement is based upon Tax Code, Chapter 160 (Taxes on Sales of Boats and Boat Motors), which defines the term "boat" by reference to Parks and Wildlife Code, §31.003(1) (Definitions), as revised by House Bill 1106, 83rd Legislature, 2013. Paragraph (2) defines the term "commercial vessel" as a vessel that displaces eight or more tons of fresh water and is used exclusively and directly in a commercial or business enterprise. This definition is based on the language in Tax Code, §151.329 (Certain Ships and Ship Equipment) and §151.0101(a)(5)(B) ("Taxable Services"), current §3.292(a)(1) of this title (relating to Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property), and STAR Accession No. 200206205L (June 24, 2002).

Paragraph (3) defines the term "common carrier." The definition in paragraph (3) is derived from Comptroller's Decision Nos. 8,984 (1983) and 35,637 (2001).

Paragraph (4) defines the term "licensed and certificated common carrier," which appears in Tax Code, §151.330(i) (Interstate Shipments, Common Carriers, and Services Across State Lines), but is not defined therein. The substance of this definition is relocated from current subsection (a)(1), which defined licensed and certificated carrier. The definition is amended to clarify that certificates of inspection or safety are not the appropriate documents for authorizing a person to operate as a common carrier because these documents relate to the carrier device itself rather than a person's right to operate a carrier business.

Paragraph (5) defines the term "locomotive," which appears in Tax Code, §151.331 (Rolling Stock; Train Fuel and Supplies), but is not defined therein, as self-propelled railroad equipment consisting of one or more units powered by steam, electricity, or diesel electric designed to operate on stationary steel rails or electromagnetic guideways. The definition is derived, in part, from definitions in 49 Code of Federal Regulations §218.5 and §229.5.

Paragraph (6) defines the term "marine cargo container." The substance of this definition is relocated from current subsection (b)(2)(A).

Paragraph (7) defines the term "motor vehicle." The substance of this definition is based, in part, on the definition of the term in §3.290 of this title (relating to Motor Vehicle Repair and Maintenance; Accessories and Equipment Added to Motor Vehicles; Moveable Specialized Equipment).

Paragraph (8) defines the phrase "operating exclusively in foreign or interstate coastal commerce," which appears in Tax Code, §151.329, but is not defined therein. This definition is relocated from current subsection (b)(3)(A). Minor revisions are made to make the definition easier to read.

Paragraph (9), defining the term "railroad," is based on the definition in 49 Code of Federal Regulations §229.5, and §220.5, and Comptroller's Decision Nos. 39,781 and 41,577 (2004). The term includes narrow gauge shortline railroads, such as tourist, historical, or amusement park railroads, pursuant to Comptroller's Decision No. 36,869 (2000) and STAR Accession Nos. 7012L0782G14 (December 23, 1970) and 9003L0996A01 (March 30, 1990). The term is further defined to include private industrial railroads operated on steel rails connected directly to traditional railroads, but not private industrial railroads inside an installation not connected directly to traditional railroads, pursuant to Comptroller's Decision Nos. 39,781 and 41,577.

Paragraph (10) defines the term "rolling stock," which appears in Tax Code, §151.331, but is not defined therein. The term is defined, in part, as railroad equipment mounted on wheels and designed to be operated in combination with one or more locomotives upon stationary steel rails or electromagnetic guideways. This portion of the definition is derived from Comptroller's Decision No. 36,869 (2000) and 49 Code of Federal Regulations §215.5. "Rolling stock" is further defined to include self-propelled specialized roadway maintenance equipment and trackmobile rail car movers pursuant to Comptroller's Decision No. 21,658 (1988) and STAR Accession No. 9208L1190C01 (August 31, 1992). However, "rolling stock" excludes equipment mounted on steel rails that is used for intra-plant transportation that is not part of or connected to a railroad. Examples include cranes operated on steel rails or tracks used to load or unload ships. See Reynolds Metals Co. v. Combs, 2009 Tex. App. LEXIS 2466 (Tex. App.-- Austin 2009, pet. denied).

Paragraph (11) defines the term "train" as one or more locomotives coupled to one or more units of rolling stock operated by a railroad. This definition is based on 49 Code of Federal Regulations §220.5.

Paragraph (12) defines the term "vessel." This definition is adapted from Parks and Wildlife Code, §31.003(2), Comptroller's Decision Nos. 8,864 & 9034 (1980), and STAR Accession Nos. 7708T0083C10 (August 8, 1977) and 8906L0943C10 (June 7, 1989).

Relettered subsection (b), which is currently subsection (a), is amended to delete paragraph (1). The definition of a licensed and certificated carrier provided in this paragraph is relocated to new subsection (a). Subsequent paragraphs are renumbered accordingly. In addition, subsequent paragraphs are revised to replace the phrase "this state" with "Texas," and to replace the phrase "taxable items" with "tangible personal property," where appropriate. Renumbered paragraph (1) is amended to state that use tax is not due on "the storage or use of" repair or replacement parts. Tax Code, §151.101 (Use Tax Imposed) does not impose use tax on taxable items themselves, but rather imposes a tax on the storage or use in Texas of taxable items purchased outside of the state. Renumbered paragraph (2) is amended to replace the term "licensed and certificated carrier devices" with an explanation of the term derived from Comptroller's Decision No. 35,424 (2000). Current paragraph (5), concerning divergent use, is deleted. The information contained in this paragraph is moved to relettered subsection (d).

Relettered subsection (c), which is currently subsection (b), addresses the sale and repair of commercial vessels and their component parts. New paragraph (1) is added to explain that boat and boat motor sales or use tax is due on the sale or use of a Chapter 160 boat. Subsequent paragraphs are renumbered accordingly. Renumbered paragraph (2) is amended to add a subheading and to use the defined terms "commercial vessel" and "Chapter 160 boat." Information currently contained in paragraph (2), regarding the taxability of labor to repair vessels, is relocated to new paragraph (4).

Renumbered paragraph (3), addressing component parts, is revised to use the defined term "marine cargo container." This paragraph is also revised to memorialize prior comptroller guidance. See STAR Accession Nos. 9107T1125E10 (July 19, 1991) (identifying what constitutes the attachment of a component part to a commercial vessel), 8706L0819B10 (June 19, 1987) (identifying navigation equipment as a component part), 9210L1197D11 (October 2, 1992) (listing long-line fishing gear, rigging equipment, turnbuckle, shackle, thimble, eye swivel, etc., as component parts), 201001518L (January 6, 2010) (including permanent coatings such as paint or varnish as a component part), and 8403T0557C14 (March 22, 1984) (stating that items required by federal or state law are component parts).

New paragraph (4) is added to address the taxability of labor and materials used to repair, remodel, restore, renovate, convert, or maintain a commercial vessel. This paragraph contains information previously provided in paragraph (2). Additional language is added from Comptroller's Decision No. 12,354 (1982) (providing that equipment used to repair commercial vessels is subject to tax). Subsequent paragraphs are renumbered accordingly.

Renumbered paragraph (5), which is currently paragraph (3), is revised to use the defined term "operating exclusively in foreign or interstate coastal commerce" and for readability.

Current subsections (c) and (d), which address aircraft, are deleted. The information contained in these subsections is relocated to new §3.280 of this title. Subsequent subsections are relettered accordingly.

Relettered subsection (d) which is currently subsection (e), is revised to more clearly address divergent use of property purchased tax free. Much of the information contained in this subsection is derived from subsection (a)(5) of the existing section.

Relettered subsection (e), which is currently subsection (f), contains specific rules of taxation relating to locomotives, rolling stock, and railroad tracks. The subsection's heading is amended by adding the terms "locomotives" and "trains" for consistency with the language in the body of the subsection. Paragraph (2) is amended to state, "Sales or use tax is not due on the sale or use of fuel or supplies essential to the operation of locomotives and trains, including items required by federal or state regulation." The phrase "if required by federal or state regulation" is deleted to more closely follow the language of Tax Code, §151.331. The paragraph is further amended to identify specific examples of supplies essential to the operations of locomotives and trains and to memorialize prior comptroller guidance. See Comptroller's Decision No. 33,003 (2000) (concerning federally-required telecommunication and signaling devices or equipment), and STAR Accession Nos. 9202L1155C02 (February 4, 1992) (listing rails, ballast, cross ties, plates, spikes, bridges, and trestles as examples of essential supplies) and 200002042L (February 11, 2000) (including roadbed moisture barriers as essential supplies). Paragraph (2) also gives examples of certain supplies that are not exempt, such as materials used to construct, repair, remodel, or maintain depots, loading facilities, and storage facilities pursuant to STAR Accession No. 9205L1169E01 (May 7, 1992).

Paragraph (3) is added to explain the exemption from sales or use tax on the sale of labor and incorporated materials used to repair, remodel, maintain, or restore locomotives and rolling stock. This paragraph is based, in part, on language from Tax Code, §151.331 and §151.3111 (Services on Certain Exempted Personal Property) and STAR Accession No. 9003L0996A01 (March 30, 1990). Subsequent paragraphs are renumbered accordingly.

Renumbered paragraph (4), currently paragraph (3), is amended to add a cross-reference to §3.295 of this title (relating to Natural Gas and Electricity).

Paragraph (5) is added to address the taxability of labor and incorporated materials used in both the new construction and the repair of railroad tracks and roadbeds pursuant to Comptroller's Decision No. 34,595 (1998) and STAR Accession Nos. 9112L1142C11 (December 11, 1991) and 9202L1155C02 (February 4, 1992).

Relettered subsection (f), which is currently subsection (g), is amended to add a cross-reference to §3.290 of this title.

Subsection (h), which adopts by reference Texas Aircraft Exemption Certificate for Out-of-State Registration and Use, is deleted. Aircraft are addressed in new §3.280 of this title.

Tom Currah, Chief Revenue Estimator, has determined that for the first five-year period the rule will be in effect, there will be no significant revenue impact on the state or units of local government.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be by incorporating into the rule current agency policy and by improving the rule's clarity. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposal may be submitted to Teresa G. Bostick, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528. Comments must be received no later than 30 days from the date of publication of the proposal in the Texas Register.

The amendment is proposed under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

The section implements Tax Code, §§151.0101 (Taxable Services), 151.3111 (Services on Certain Exempted Personal Property), 151.329 (Certain Ships and Ship Equipment), 151.330 (Interstate Shipments, Common Carriers, and Services Across State Lines), 151.331 (Rolling Stock; Train Fuel and Supplies), 151.3291 (Boats and Boat Motors) and 152.089 (Exempt Vehicles).

§3.297.Carriers, Commercial Vessels, Locomotives and Rolling Stock, and Motor Vehicles.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Chapter 160 boat--A vessel not more than 65 feet in length, measured from the tip of the bow in a straight line to the stern, that is not a canoe, kayak, rowboat, raft, punt, inflatable vessel, or other watercraft designed to be propelled by paddle, oar, or pole, and that is subject to tax under Tax Code, Chapter 160 (Taxes on Sales and Use of Boats and Boat Motors).

(2) Commercial vessel--A vessel that displaces eight or more tons of fresh water before being loaded with fuel, supplies, or cargo, and that is:

(A) used exclusively and directly in a commercial or business enterprise or activity, including, but not limited to, commercial fishing; or

(B) used commercially for pleasure fishing by individuals who are paying passengers.

(3) Common carrier--A person who holds out to the general public a willingness to provide transportation of persons or property from place to place for compensation in the normal course of business.

(4) Licensed and certificated common carrier--A person authorized through issuance of a license or certificate by the appropriate United States agency or by the appropriate state agency within the United States to operate a vessel, train, motor vehicle, or pipeline as a common carrier. Certificates of inspection or safety do not authorize a person to operate as a licensed and certificated common carrier.

(5) Locomotive--A self-propelled unit of railroad equipment consisting of one or more units powered by steam, electricity, diesel electric, or other fuel, designed solely to be operated on and supported by stationary steel rails or electromagnetic guideways and to move or draw one or more units of rolling stock owned or operated by a railroad. The term includes a yard locomotive operated to perform switching functions within a single railroad yard, but does not include self-propelled roadway maintenance equipment.

(6) Marine cargo container--A container that is fully or partially enclosed; is intended for containing goods; is strong enough to be suitable for repeated use; and is specially designed to facilitate the carriage of goods by one or more modes of transportation without intermediate reloading. The term includes the accessories and equipment that are carried with the container. The term does not include trailer chassis, motor vehicles, accessories, or spare parts for motor vehicles.

(7) Motor vehicle--A self-propelled vehicle designed to transport persons or property upon the public highway and a vehicle designed to be towed by a self-propelled vehicle while carrying property. The term includes, but is not limited to: automobiles; motor homes; motorcycles; trucks; truck tractors; trailers; semitrailers; house trailers or travel trailers, as defined by §3.72 of this title (relating to Trailers, Farm Machines, and Timber Machines); park models, as defined by §3.481 of this title (relating to Imposition and Collection of Manufactured Housing Tax); trailers sold unassembled in a kit; dollies; jeeps; stingers; auxiliary axles; converter gears; and truck cab/chassis. The term does not include a nonrepairable vehicle and a salvage vehicle, as defined by §3.86 of this title (relating to Destroyed and Repaired Motor Vehicles).

(8) Operating exclusively in foreign or interstate coastal commerce--Transporting persons or property between a point in Texas and a point in another state or foreign country. A vessel that travels between a point in Texas and an offshore area or fishing area on the high seas, or between two points in Texas, is not operating exclusively in foreign or interstate coastal commerce.

(9) Railroad--A form of non-highway ground transportation of persons or property in the normal course of business by means of trains solely operated on and supported by stationary steel rails or electromagnetic guideways, including but not limited to:

(A) high speed ground transportation systems that connect metropolitan areas;

(B) commuter or other short-haul rail passenger service in a metropolitan or suburban area;

(C) narrow gauge shortline railroads, including tourist, historical, or amusement park railroads; and

(D) private industrial railroads operated on steel rails that connect directly to the national rail system of transportation, but not a private industrial railroad operated on steel rails totally inside an installation that is not connected directly to the national rail system of transportation.

(10) Rolling stock--A unit of railroad equipment that is mounted on wheels and designed to be operated in combination with one or more locomotives upon stationary steel rails or electromagnetic guideways owned or operated by a railroad. Examples include, but are not limited to, passenger coaches, baggage and mail cars, box cars, tank cars, flat cars, and gondolas. Rolling stock also includes self-propelled trackmobile rail car movers and roadway maintenance equipment. Rolling stock does not include equipment used for intra-plant transportation or other nontraditional railroad activities and that is mounted on stationary steel rails or tracks but that are not part of, or connected to, a railroad. For example, cranes operated on steel rails or tracks and used to load or unload ships are not rolling stock.

(11) Train--One or more locomotives coupled to one or more units of rolling stock that are designed to carry freight or passengers, are operated on steel rails or electromagnetic guideways, and are owned or operated by a railroad.

(12) Vessel--A watercraft, other than a seaplane on water, used, or capable of being used, for navigation and transportation of persons or property on water. The term includes a ship, boat, watercraft designed to be propelled by paddle or oar, barge, and floating dry-dock.

(b) [(a)] Carriers generally.

[(1) Licensed and certificated carrier--A person authorized by the appropriate United States agency or by the appropriate state agency within the United States to operate an aircraft, vessel, train, motor vehicle, or pipeline as a common or contract carrier transporting persons or property for hire in the regular course of business. Certificates of inspection or airworthiness certificates are not the appropriate documents for authorizing a person to operate as a common or contract carrier. These documents relate to the carrier device itself rather than a person's right to operate a carrier business.]

(1) [(2)] Use tax is not due on the storage or use of repair or replacement parts acquired outside of Texas [this state] and actually affixed in Texas [this state] to a self-propelled vehicle that is used by [as] a licensed and certificated common carrier. Trailers, barges, and semitrailers are not considered to be self-propelled vehicles.

(2) [(3)] Use tax is due on the storage or use of tangible personal property [Except as provided under subsection (d) of this section, taxable items] brought into Texas [this state] to be assembled into a vehicle used by a common carrier to transport persons or property from place to place, unless the tangible personal property is otherwise exempt from sales and use tax under this section [licensed and certificated carrier devices are not exempt from the taxes imposed by the Tax Code, Chapter 151, Subchapter D].

(3) [(4)] Sales tax is not due on the sale of tangible personal property [taxable items] to a common carrier if the tangible personal property is [such items are] shipped to a point outside of Texas [this state] using the purchasing carrier's facilities under a bill of lading, and if the tangible personal property is [such items are] to be used by the purchasing carrier in the conduct of its business outside [the State] of Texas.

[(5) Sales tax is due on licensed and certificated carrier devices purchased under valid resale or exemption certificates that are put to a use other than the one specified in the certificate. The sales tax is based on the fair market rental value of the licensed and certificated carrier device for the period of time used. At any time the person using the carrier device in a taxable manner may stop paying tax on the fair market rental value and instead pay sales tax on the original purchase price. When the person elects to pay sales tax on the purchase price, credit will not be allowed for taxes previously paid on the fair market rental value. See §3.285 of this title (relating to Resale Certificate; Sales for Resale) and §3.287 of this title (relating to Exemption Certificates).]

(c) [(b)] Vessels.

(1) Chapter 160 boats. The sale or use in Texas of a Chapter 160 boat is subject to boat and boat motor sales or use tax under Tax Code, Chapter 160, even if the vessel meets the definition of a commercial vessel. The lease or rental of a Chapter 160 boat is subject to limited sales, excise, and use tax under Tax Code, Chapter 151 (Limited Sales, Excise, and Use Tax). For information concerning the imposition of the boat and boat motor sales and use tax, see §3.741 of this title (relating to Imposition and Collection of Tax).

(2) [(1)] Commercial vessels. Sales or use tax is not due on the sale by the builder of a commercial vessel that is not a Chapter 160 boat [in excess of eight tons displacement that is used exclusively for commercial purposes. For the purpose of this section, eight tons displacement means the weight of fresh water displaced by a vessel before being loaded with fuel, supplies, or cargo. Vessels not more than 65 feet in length measured from end to end over the deck, excluding sheer, are subject to Boat and Boat Motor Sales Tax under Tax Code, Chapter 160].

(3) Component parts. Sales and use tax is not due on the sale or use of materials, equipment, and machinery that become component parts of a commercial vessel or a marine cargo container. A component part is

[(2)] [Sales or use tax is not due on labor to repair vessels, or machinery, equipment, or component parts of vessels in excess of eight tons displacement that are used exclusively for commercial purposes whether purchased by the builder or by a subsequent owner or operator. A component part is:]

[(A) a marine cargo container that is fully or partially enclosed to constitute a compartment of a permanent character intended for containing goods. It is strong enough to be suitable for repeated use, specially designed to facilitate the carriage of goods, by one or more modes of transport, without intermediate reloading. It is designed for ready handling, particularly when being transferred from one mode of transport to another. The term "marine cargo container" includes the accessories and equipment of the container provided that such accessories and equipment are carried with the container. The term "marine cargo container" does not include chassis, vehicles, accessories or spare parts of vehicles.]

[(B)] [all] tangible personal property that is actually attached to and becomes a part of a commercial vessel or a marine cargo container. For example, items such as radios, radar equipment, navigation equipment, wenches, long-line fishing gear, and rigging equipment, that are attached to the vessel by means of bolts or brackets, or are otherwise attached to the vessel, including items required by federal or state law, are component parts. Permanent coatings such as paint and varnishes are also component parts [qualified under paragraph (1) of this subsection]. The term does not include furnishings of any kind that are not attached to the vessel, nor does it include consumable supplies. For example, it does not include bedding, linen, kitchenware, tables, chairs, ice for cooling, refrigerants for cooling systems, fuels, [or ] lubricants, first aid kits, tools, or polishes, waxes, glazes, or other similar temporary coatings.

(4) Repair and maintenance. Sales and use tax is not due on the labor to repair, remodel, restore, renovate, convert, or maintain a commercial vessel or a component part of a commercial vessel. Sales and use tax is due on the sale or use of machinery, equipment, tools, and other items used or consumed in performing the non-taxable service. For more information about the repair, remodeling, maintenance, and restoration of vessels that are not commercial vessels, see §3.292 of this title (relating to Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property).

(5) Vessels operating exclusively in foreign or interstate coastal commerce.

(A) [(3)] Sales or use tax is not due on the sale of materials [Materials] and consumable supplies, including items commonly known as ships' stores and sea stores, [sold] to the owner [owners ] or operator [operators] of a vessel [ships or vessels] operating exclusively in foreign or interstate coastal commerce, if the materials and consumable supplies are for use and consumption in the operation and maintenance of the vessel, or if the materials and supplies enter into and become component parts of the vessel [such ships or vessels, are exempt from the sales and use tax].

[(A) "Operating exclusively in foreign or interstate coastwise commerce" is defined, for the purposes of this section, as transporting goods or persons between a point in the State of Texas and a point in another state or in a foreign country. It does not include trips to and from offshore areas or fishing areas on the high seas, or trips between two points in the State of Texas.]

(B) Operation of the vessel in a manner other than in foreign or interstate coastal commerce will result in a loss of the exemption for ships' stores and sea stores for the quarterly period in which the nonexempt operation occurs.

(C) Any owner or operator of [such] a vessel operating exclusively in foreign or interstate coastal commerce shall, when giving an exemption certificate, include on the certificate [set forth] the title or position of the person issuing the certificate and the name of the vessel on which the items are to be loaded.

(D) Sales tax is due on sales made to individual seamen operating these vessels.

(6) [(4)] Closely associated service companies provide servicing operations such as stevedoring, loading, and unloading vessels. Sales or use tax is not due on the sale or use of materials and supplies purchased by a person providing stevedoring services for a [ship or] vessel operating exclusively in foreign or interstate coastal commerce if the materials and supplies are loaded aboard the [ship or] vessel and are not removed before its departure. This includes, but is not limited to, such items as lumber, plywood, deck lathing, turnbuckles, and lashing shackles.

[(c) Aircraft other than aircraft used by licensed and certificated carriers.]

[(1) The term "aircraft" does not include rockets or missiles, but does include:]

[(A) a fixed-wing, heavier-than-air craft that is driven by propeller or jet and is supported by the dynamic reaction of the air against its wings;]

[(B) a helicopter;]

[(C) an airplane flight simulator approved by the Federal Aviation Administration for use as a Phase II or higher flight simulator under Appendix H, 14 Code of Federal Regulations, Part 121.]

[(2) Sales or use tax is not due on aircraft sold to a foreign government.]

[(3) An aircraft is not subject to use tax if it is hangared outside this state and is used more than 50% outside this state. In order to qualify for exemption from the use tax, owners or operators of aircraft entering this state must maintain sufficient records to show the percentage of time the aircraft was used in this state.]

[(A) In determining whether an aircraft is used more than 50% outside this state, the comptroller will consider all flight time in this state, including the portion of interstate flights in Texas airspace.]

[(B) The comptroller may examine all flight, engine, passenger, airframe, and other logs and records maintained on any aircraft brought into this state to determine whether it is used more than 50% in this state.]

[(4) An aircraft purchased outside this state is subject to Texas use tax, if not otherwise exempt, if it is hangared in this state. Some factors to be considered in determining whether an aircraft is hangared in this state include:]

[(A) where the aircraft is rendered for ad valorem taxes;]

[(B) whether the owner owns or leases hangar space in this state; and]

[(C) declarations made to the Federal Aviation Administration, an insurer, or another taxing authority concerning the place of storage of the aircraft.]

[(5) Sales or use tax is not due on supplies, including aluminum oxide, nitric acid, and sodium cyanide, used in electrochemical plating or a similar process by persons overhauling, retrofitting, or repairing jet turbine aircraft engines and their component parts.]

[(6) Persons repairing or remodeling aircraft other than aircraft used by persons qualified under subsection (a)(1) of this section or paragraph (7) of this subsection should refer to §3.292 of this title (relating to Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property).]

[(7) Sales or use tax is not due on aircraft purchased by a person who uses the aircraft to provide flight instruction that is recognized by the Federal Aviation Administration (FAA), under the direct or general supervision of an FAA certified flight instructor, and designed to lead to a pilot certificate or rating issued by a rule or regulation of the FAA. See §3.287 of this title (relating to Exemption Certificates).]

[(8) A student enrolled in an FAA approved program may claim a tax exemption when renting aircraft for flight training, including solo flights and other flights, under an instructor's direction. When completing an exemption certificate claiming sales tax exemption, the student must identify the flight school (name and address) or if the student is not enrolled in a flight school, the student must list his or her primary flight instructor with the instructor's address. The student must also retain copies of written tests and instructors endorsements. Without evidence that the student is in pursuit of a flight rating, he or she will owe tax on aircraft rentals.]

[(9) Texas sales or use tax is not due on aircraft sold to a person for use and registration in another state or nation before any use in Texas. Flight training in the aircraft in Texas and flying the aircraft out of state does not constitute a use of the aircraft in Texas.]

[(A) To claim the exemption, an exemption certificate, substantially similar in form and content to the certificate shown on the last page of this section, must be signed by both the seller and the purchaser at the time of purchase. The seller may accept a certificate if the seller lacks actual knowledge that the claimed exemption is invalid. The seller must provide a copy of the completed certificate to the Comptroller of Public Accounts within 30 days of the sale.]

[(B) By signing the certificate, the purchaser authorizes the comptroller to provide a copy of the certificate to the state or nation of intended use and registration.]

[(C) Issuing an invalid certificate is a misdemeanor punishable by a fine not to exceed $500 in addition to the assessment of tax and, when applicable, penalty and interest on the purchase price of the aircraft.]

[(d) Licensed and certificated carriers, flight schools, and flight school instructors].

[(1) Sales or use tax is not due on aircraft used by persons defined in subsection (a)(1) of this section in the regular course of business of transporting persons or property for hire.]

[(2) The following items or services used in the repair, remodeling, or maintenance of aircraft or aircraft engines or component parts by or for a person qualified under subsection (a)(1) or (c)(7) of this section are exempt if purchased by the aircraft owner or operator, by the aircraft manufacturer, or by a repair facility.]

[(A) Machinery, tools, supplies, and equipment used directly and exclusively in the repair, remodeling, or maintenance. Included in the exemption is equipment used to sustain or support safe and continuous operations or to keep the aircraft in good working order by preventing its decline, failure, lapse, or deterioration, such as battery chargers or diagnostic equipment.]

[(B) Repair, remodeling, and maintenance services.]

[(3) Tax is not due on tangible personal property that is permanently affixed or attached as a component part of an aircraft owned or operated by a person described in subsection (a)(1) or (c)(7) of this section or that is necessary for the normal operations of the aircraft and is pumped, poured, or otherwise placed in an aircraft owned or operated by a person described in subsection (a)(1) or (c)(7) of this section. Exempt component parts include air cargo containers that are secured or attached to the aircraft while in flight, radar equipment or other electronic devices used for navigational or communications purposes, food carts, smoke detectors, fire extinguishers, and seats. Pillows, blankets, trays, ice for drinks, kitchenware, or toilet articles are not exempt from tax.]

[(4) Tax is not due on electricity or natural gas used in the off-wing processing, overhaul or repair of a jet turbine engine or its parts for a person described in subsection (a)(1) of this section.]

[(5) Machinery, tools, and equipment that support the overall carrier operation such as baggage loading or handling equipment, garbage and other waste disposal equipment, or reservation making or booking machinery and equipment, do not qualify for exemption.]

(d) [(e)] Taxable uses of tangible personal property purchased tax free. Sales and use tax is due when tangible personal property sold, leased, or rented tax-free under a properly completed resale or exemption certificate is subsequently put to a taxable use other than the use allowed under the certificate. For more information [Persons making a taxable use of tangible personal property purchased tax free, including aircraft purchased for flight training, should] refer to §3.285 of this title (relating to Resale Certificate; Sales for Resale) and §3.287 of this title (relating to Exemption Certificates).

(e) [(f)] Rolling stock, locomotives, and trains.

(1) Sales or use tax is not due on the sale or use of locomotives and rolling stock.

(2) Sales or use tax is not due on the sale or use of fuel or supplies essential to the operation of locomotives and trains, including items [if] required by federal or state regulation. Examples include, but are not limited to, telecommunication and signaling equipment, rails, ballast, cross ties, and roadbed moisture barriers. Items of tangible personal property used to construct, repair, remodel, or maintain improvements to real property such as depots, maintenance facilities, loading facilities, and storage facilities are not supplies essential to the operation of locomotives and trains.

(3) Sales or use tax is not due on the amount charged for labor or incorporated materials used to repair, remodel, maintain, or restore locomotives and rolling stock. Sales or use tax is due on the sale or use of machinery, equipment, tools, and other items used or consumed in performing the non-taxable service.

(4) [(3)] Sales or use tax is not due on the sale or use of electricity, natural gas, and other fuels used or consumed predominately in the repair, maintenance, or restoration of rolling stock. For more information, see §3.295 of this title (relating to Natural Gas and Electricity).

(5) Sales or use tax is not due on the amount charged for labor or incorporated materials, whether lump-sum or separately stated, used for the construction of new railroad tracks and roadbeds. For more information, see §3.291 of this title (relating to Contractors). Sales or use tax is not due on the separately stated sales price of incorporated materials used to repair, remodel, restore, or maintain existing railroad tracks and roadbeds. Sales and use tax is due on the sales price for labor to repair, remodel, restore, or maintain existing railroad tracks and roadbeds as nonresidential real property repair, remodeling, and restoration. For more information, see §3.357 of this title (relating to Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance).

(f) [(g)] Motor vehicles [carriers]. The sale and use of motor vehicles are taxed under the Tax Code, Chapter 152 (Taxes on Sale, Rental, and Use of Motor Vehicles). For information on repairs to motor vehicles, see §3.290 of this title (relating to Motor Vehicle Repair and Maintenance; Accessories and Equipment Added to Motor Vehicles; Moveable Specialized Equipment.

[(h) Certificate. The comptroller adopts by reference the Texas Aircraft Exemption Certificate Out-of-State Registration and Use (Form 01-907). Copies of the certificate are available for inspection at the office of the Texas Register or may be obtained from the Comptroller of Public Accounts, Account Maintenance, 111 E. 17th Street, Austin, Texas 78774-0100. Copies may also be requested by calling our toll-free number 1-800-252-5555. In Austin, call 463-4600. (From a Telecommunication Device for the Deaf (TDD) only, call 1-800-248-4099 toll free. In Austin, the local TDD number is 463-4621.)]

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 24, 2017.

TRD-201700748

Lita Gonzalez

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: April 9, 2017

For further information, please call: (512) 475-0387