TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER A. GENERAL RULES

34 TAC §3.9

The Comptroller of Public Accounts proposes amendments to §3.9 concerning electronic filing of returns and reports; electronic transfer of certain payments by certain taxpayers. The comptroller amends the section to reflect changes in Tax Code, Chapter 151, Subchapter I-1 (Reports by Persons Involved in the Manufacture and Distribution of Alcoholic Beverages) made by House Bill 4542, 86th Legislature, 2019, effective September 1, 2019. The comptroller also proposes amendments to reflect changes in Tax Code, Chapter 151, Subchapter I-2 (Reports by Manufacturers of Certain Off-highway Vehicles Purchased Outside This State) made by House Bill 1543, 86th Legislature, 2019, effective September 1, 2019.

The comptroller amends subsection (e)(2) by adding brewpubs to implement House Bill 4542. The comptroller amends subparagraph (A) by adding brewpubs to the definition of a seller. The comptroller amends clause (iv) to reflect the updated title to §151.462(b). New subparagraph (C) excludes certain brewpubs from filing reports. Subsequent subparagraphs are re-lettered accordingly. Re-lettered subparagraph (F) is amended to require certain brewpubs to file reports on or after September 1, 2019.

In addition, the comptroller adds new paragraph (5) to implement House Bill 1543, which added Tax Code, Chapter 151, Subchapter I-2 (Reports by Manufacturers of Certain Off-highway Vehicles Purchased Outside This State). Subsequent paragraphs are renumbered accordingly.

New subparagraph (A) provides definitions related to the reporting requirements for manufacturers of off-highway vehicles. Clause (i) defines the term "manufacturer" and clause (ii) defines the term "new off-highway vehicle." The definitions are based on definitions in §151.481 (Definitions).

Clause (iii) defines off-highway vehicles. Off-highway vehicles include vehicles listed in new subclauses (I)-(V).

Clause (iii)(I) defines the term "all-terrain vehicle" based on Transportation Code, §551A.001(1) (Definitions). Subclause (II) defines the term "off-highway motorcycle" based on Transportation Code, §501.0301(1)(B) (Certain Off-Highway Vehicles Purchased Outside This State) and Transportation Code, §541.201(9) (Definitions). Subclause (III) defines the term "recreational off-highway vehicle" based on Transportation Code, §551A.001(5). Subclause (IV) defines the term "sand rail" based on Transportation Code, §551A.001(3). Subclause (V) defines the term "utility vehicle" based on Transportation Code, §551A.001(6).

Subparagraph (B) implements §151.482 (Reports by Manufacturers).

New subparagraph (C) requires a manufacturer to file a report, even if they have no warranty information to report.

Subparagraph (D) implements §151.485 (Civil Penalty), subsequent paragraphs are renumbered accordingly.

Tom Currah, Chief Revenue Estimator, has determined that during the first five years that the proposed amendment is in effect, the amendment: will not create or eliminate a government program; will not require the creation or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to the agency; will not require an increase or decrease in fees paid to the agency; will not increase or decrease the number of individuals subject to the rules' applicability; and will not positively or adversely affect this state's economy. This proposal amends a current rule.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, proposed amendment would benefit the public by conforming the rule to current statutes. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. The proposed amendment would have no significant fiscal impact on the state government, units of local government, or individuals. There would be no anticipated significant economic costs to the public.

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 comptroller proposes the amendment 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 (State Taxation).

The amendment implements Tax Code, Chapter 151, Subchapter I-1 and 2.

§3.9.Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers.

(a) Voluntary electronic filing of returns and reports. The comptroller may authorize a taxpayer to file any report or return required to be filed with the comptroller under Tax Code, Title 2 (State Taxation), by means of electronic transmission under the following circumstances:

(1) the taxpayer or its authorized agent has registered with the comptroller to use an approved reporting method, such as WebFile, or the taxpayer is filing a return or report other than a return showing a tax liability; and

(2) the method of electronic transmission of each return or report complies with any requirements established by the comptroller and is compatible with the comptroller's equipment and facilities.

(b) Required electronic transfer of certain payments by certain taxpayers pursuant to Tax Code, §111.0625 (Electronic Transfer of Certain Payments).

(1) This paragraph is effective with the state fiscal year beginning September 1, 2018, for payments due on or after January 1, 2019. This paragraph applies to a taxpayer who pays the comptroller a total of $500,000 or more in any single category of payments or taxes during the preceding state fiscal year, and whom the comptroller reasonably anticipates will pay at least that amount during the current state fiscal year. The comptroller shall notify the taxpayer of this electronic funds transfer requirement as provided in subsection (f) of this section. The taxpayer shall transfer all payments in any category of payments or taxes that totaled $500,000 or more to the comptroller using the State of Texas Financial Network (TexNet), pursuant to Chapter 15 of this title (relating to Electronic Transfer of Certain Payments to State Agencies). This requirement applies to payments due beginning January 1 of each state fiscal year in which a taxpayer is notified and continues for one calendar year. For example, a taxpayer remits $500,000 in any single category of taxes to the comptroller during the state fiscal year ending August 31, 2019. The comptroller reasonably anticipates that the taxpayer will pay at least $500,000 in the same category of payments or taxes for fiscal year ending August 31, 2020. The comptroller notifies the taxpayer of the electronic payment requirement by October 31, 2019. The taxpayer must begin transferring payments to the comptroller using TexNet beginning on January 1, 2020. The taxpayer's electronic payment requirement continues until December 31, 2020.

(2) Taxpayers who paid the comptroller a total of $100,000 or more in any single category of payments or taxes and were notified by the comptroller of a TexNet payment requirement must continue to make those payments using TexNet for original or amended reports filed for the calendar year for which the taxpayer was notified.

(3) Beginning January 1, 2019, taxpayers who paid $100,000 or more, but less than $500,000, in any single category of payments or taxes during the preceding state fiscal year, and whom the comptroller reasonably anticipates will pay at least that amount during the current state fiscal year, shall transfer all payments in that category of payments or taxes during the calendar year beginning January 1 of the current state fiscal year to the comptroller by means of electronic funds transfer as set out in paragraph (4)(C) of this subsection. The comptroller shall notify the taxpayer of this electronic funds transfer requirement as provided in subsection (f) of this section. This requirement applies to payments due beginning January 1 of each state fiscal year for which a taxpayer is notified and continues for one calendar year. For example, a taxpayer remits $100,000 in any single category of taxes to the comptroller during the state fiscal year ending August 31, 2019. The comptroller reasonably anticipates that the taxpayer will pay at least $100,000 in the same category of payments or taxes for fiscal year ending August 31, 2020. The comptroller notifies the taxpayer of the electronic payment requirement by October 31, 2019. The taxpayer must begin transferring payments to the comptroller using one of the methods described in paragraph (4)(C) of this subsection beginning on January 1, 2020. The taxpayer's electronic payment requirement continues until December 31, 2020.

(4) Taxpayers who paid at least $10,000, but less than $100,000, in a single category of payments or taxes as listed in subparagraph (A) of this paragraph during the preceding state fiscal year, and whom the comptroller reasonably anticipates will pay at least that amount during the current state fiscal year, shall transfer all payments in that category of payments or taxes during the calendar year beginning January 1 of the current state fiscal year to the comptroller by means of electronic funds transfer as set out in subparagraph (C) of this paragraph.

(A) This paragraph applies only to:

(i) state and local sales and use taxes;

(ii) direct payment sales tax;

(iii) gas severance tax;

(iv) oil severance tax;

(v) franchise tax;

(vi) gasoline tax;

(vii) diesel fuel tax;

(viii) hotel occupancy tax;

(ix) insurance premium taxes;

(x) mixed beverage gross receipts tax;

(xi) mixed beverage sales tax; and

(xii) motor vehicle rental tax.

(B) The comptroller may add or remove a category of payments or taxes to or from this paragraph if the comptroller determines that such action is necessary to protect the interests of the state or of taxpayers.

(C) Payments under this paragraph shall be made by those electronic funds transfer methods approved by the comptroller, which include, but are not limited to, TexNet, electronic check (WebEFT), and the electronic transmission of credit card information. The comptroller may require payments in specific categories to be made by specific methods of electronic funds transfer.

(D) A taxpayer required under this paragraph to use electronic funds transfer who cannot comply due to hardship, impracticality, or other valid reason may submit a written request to the comptroller for a waiver of the requirement.

(c) Payment date for electronic transfer of funds.

(1) Pursuant to §15.33 of this title (relating to Determination of Settlement Date), a person who enters payment information into TexNet may choose either to accept the settlement date that TexNet offers or enter a settlement date up to 30 days from the business day after payment is submitted. TexNet will offer the business day following the day on which payment information is entered into TexNet, provided that the information is entered by 6:00 p.m. central time on any business day.

(2) A taxpayer who files tax returns and makes payments through the electronic data interchange (EDI) system must submit the payment information to the comptroller by 2:30 p.m. central time.

(3) A taxpayer who makes payment by an electronic funds transfer method approved by the comptroller other than TexNet or the EDI system must transmit payment information by 11:59 p.m. central time on the date payment is due.

(d) The administrative rules found in Chapter 15 of this title on electronic funds transfer under Government Code, §404.095 (Electronic Transfer of Certain Payments) using TexNet apply to all such payments to the comptroller.

(e) Required electronic filing of certain reports by certain taxpayers.

(1) Reports required by Tax Code, §111.0626 (Electronic Filing of Certain Reports).

(A) Pursuant to Tax Code, §111.0626(a)(1), taxpayers who are required to use electronic funds transfer for payments of certain taxes must also file report data electronically, including reports required by the International Fuel Tax Agreement. This requirement applies to:

(i) state and local sales and use taxes;

(ii) direct payment sales tax;

(iii) gas severance tax;

(iv) oil severance tax; and

(v) motor fuel tax.

(B) Pursuant to Tax Code, §111.0626(a)(2), taxpayers who owe no tax and are required to file an information report under Tax Code, §171.204 (Information Report) must file the information report electronically.

(C) Pursuant to Tax Code, §111.0626(b-1), taxpayers who paid $50,000 or more during the preceding fiscal year must file report data electronically. A taxpayer filing a report electronically may use an application provided by the comptroller, software provided by the comptroller, or commercially available software that satisfies requirements prescribed by the comptroller. This subparagraph only applies after issuance to the taxpayer of the 60 days notice required by subsection (f) of this section.

(2) Reports by brewers, manufacturers, brewpubs, wholesalers, and distributors of alcoholic beverages required by Tax Code, Chapter 151, Subchapter I-1 (Reports by Persons Involved in the Manufacture and Distribution of Alcoholic Beverages).

(A) For purposes of this paragraph, a "seller" means a person who is a brewer with a brewer's self-distribution permit, manufacturer with a manufacturer's self-distribution license, brewpub, wholesaler, winery, distributor, or package store local distributor, as described in Tax Code, §§151.461(1) - (4) and (6) (Definitions), 151.465 (Applicability to Certain Brewers), and 151.466 (Applicability to Certain Manufacturers); and a "retailer" means a person who holds one or more of the permits listed in Tax Code, §151.461(5).

(B) On or before the 25th day of each month, each seller holding a comptroller-issued tax identification number must file a report of alcoholic beverage sales to retailers in this state. The report must be filed by a means of electronic transmission approved by the comptroller. The report must contain the following information:

(i) each Texas Alcoholic Beverage Commission (TABC) permit or license associated with the seller's comptroller-issued tax identification number;

(ii) the TABC permit or license number for each seller location from which a sale was made to a retailer during the preceding calendar month;

(iii) the TABC permit or license number, comptroller-issued tax identification number, and TABC trade name and physical address (street name and number, city, state, and zip code) of each retail location to which the seller sold alcoholic beverages during the preceding calendar month;

(iv) the information required by Tax Code, §151.462(b) (Reports by Brewers, Manufacturers, Brewpubs, Wholesalers and Distributors) regarding the seller's monthly sales to each retailer holding a separate TABC permit or license, including:

(I) the individual container size of each product, such as the individual bottle or can container size, sold to retailers;

(II) the brand name of the alcoholic beverage sold;

(III) the beverage class code for distilled spirits, wine, beer, or malt beverage;

(IV) the Universal Product Code (UPC) of the alcoholic beverage sold;

(V) the number of individual containers of alcoholic beverages sold for each brand, UPC, and container size. Multi-unit packages, such as cases, must be broken down into the number of individual bottles or cans;

(VI) the total selling price of the containers sold; and

(v) any other information deemed necessary by the comptroller for the efficient administration of this subsection.

(C) A brewpub license holder not performing activities described under Alcoholic Beverage Code, §74.08 (Sales by Brewpub License Holders to Retailers) is not required to file the report described by subparagraph (B) of this paragraph.

(D) [(C)] If a person fails to file a report required by subparagraph (B) of this paragraph, or fails to file a complete report, the comptroller may:

(i) suspend or cancel one or more permits issued to the person under Tax Code, §151.203 (Suspension and Revocation of Permit);

(ii) impose a civil penalty under Tax Code, §151.703(d) (Failure to Report or Pay Tax);

(iii) impose a criminal penalty under Tax Code, §151.709 (Failure to Furnish Report; Criminal Penalty); and/or

(iv) notify the TABC of the failure and the TABC may take administrative action against the person for the failure under the Alcoholic Beverage Code.

(E) [(D)] In addition to the penalties imposed under subparagraph (C) of this paragraph, if a person violates Tax Code, Chapter 151, Subchapter I-1, or this paragraph, the comptroller shall collect from the seller an additional civil penalty of not less than $25 or more than $2,000 for each day the violation continues.

(F) [(E)] The requirements of this paragraph related to brewpubs apply to sales occurring on or after September 1, 2019. The requirements of this paragraph related to permittees other than brewpubs, apply to sales occurring on or after September 1, 2011.

(3) Reports by wholesalers and distributors of cigarettes. Pursuant to Tax Code, §154.212 (Reports by Wholesalers and Distributors of Cigarettes), on or before the 25th day of each month each wholesaler or distributor of cigarettes shall file a report of sales to retailers in this state. The report must be filed by a means of electronic transmission approved by the comptroller and must contain the following information for the preceding calendar month's sales made to each retailer:

(A) the name of the retailer and the address, including city and zip code, of the retailer's outlet location to which the wholesaler or distributor delivered cigarettes;

(B) the comptroller-assigned taxpayer number of the retailer, if the wholesaler or distributor is in possession of the number;

(C) the cigarette permit number of the outlet location to which the wholesaler or distributor delivered cigarettes;

(D) the monthly net sales made to the retailer, including the quantity and units of cigarettes in stamped packages sold to the retailer and the price charged to the retailer; and

(E) any other information deemed necessary by the comptroller for the efficient administration of this subsection.

(4) Reports by wholesalers and distributors of cigars and tobacco products. Pursuant to Tax Code, §155.105 (Reports by Wholesalers and Distributors of Cigars and Tobacco Products), on or before the 25th day of each month each wholesaler or distributor of cigars or tobacco products shall file a report of sales to retailers in this state. The report must be filed by a means of electronic transmission approved by the comptroller and must contain the following information for the preceding calendar month's sales made to each retailer:

(A) the name of the retailer and the address, including the city and zip code, of the retailer's outlet location to which the wholesaler or distributor delivered cigars or tobacco products;

(B) the comptroller-assigned taxpayer number of the retailer, if the wholesaler or distributor is in possession of the number;

(C) the tobacco permit number of the outlet location to which the wholesaler or distributor delivered cigars or tobacco products;

(D) the monthly net sales made to the retailer, including the quantity and units of cigars and tobacco products sold to the retailer and the price charged to the retailer;

(E) the net weight as listed by the manufacturer for each unit of tobacco products other than cigars; and

(F) any other information deemed necessary by the comptroller for the efficient administration of this subsection.

(5) Reports by manufacturers of certain off-highway vehicles purchased outside this state. Pursuant to Tax Code, Chapter 151, Subchapter I-2 (Reports by Manufacturers of Certain Off-highway Vehicles Purchased Outside This State) manufacturers must file a report on or before March 1 of each year, listing each warranty issued by the manufacturer for each new off-highway vehicle that was, during the preceding calendar year, sold to a resident of this state by a retailer located outside this state.

(A) For the purposes of this paragraph:

(i) Manufacturer means a person that manufactures off-highway vehicles and is required to hold a manufacturer's license under Occupations Code, Chapter 2301.

(ii) New off-highway vehicle means an off-highway vehicle that has not been the subject of a retail sale.

(iii) Off-highway vehicle includes:

(I) All-terrain vehicle--A vehicle that is equipped with a seat or seats for the use of the rider and one or more passengers, designed to propel itself with three or more tires in contact with the ground, designed by the manufacturer for off-highway use, not designed by the manufacturer primarily for farming or lawn care, and not more than 50 inches in width;

(II) Off-highway motorcycle--A vehicle, other than a tractor or moped, that is equipped with a rider's saddle, designed to propel itself with not more than three tires on the ground, and designed by the manufacturer for off-highway use only;

(III) Recreational off-highway vehicle--A vehicle that is equipped with a seat or seats for the use of the rider and one or more passengers, designed to propel itself with four or more tires in contact with the ground, designed by the manufacturer for off-highway use, and not designed by the manufacturer primarily for farming or lawn care;

(IV) Sand rail--A vehicle that is designed or built primarily for off-highway use in sandy terrains, including for use on sand dunes; has a tubular frame, an integrated roll cage, and an engine that is rear-mounted or placed midway between the front and rear axles of the vehicle; and has a gross vehicle weight of not less than 700 pounds and not more than 2,000 pounds; or

(V) Utility vehicle--A vehicle that is equipped with side-by side seating for the use of the operator and one or more passengers, designed to propel itself with at least four tires in contact with the ground, designed by the manufacturer for off-highway use, and designed by the manufacturer primarily for utility work and not for recreational purposes.

(B) The report must be filed by a means of electronic transmission approved by the comptroller and contain the following information for each new off-highway vehicle:

(i) the vehicle identification number;

(ii) the make, model, and model year of the vehicle;

(iii) e total sales price, or, if the total sales price is not available, the manufacturer suggested retail price; and

(iv) the name and address, including street name and number, city, and zip code, of the purchaser of the vehicle.

(C) A manufacturer must file a report, even if they have no warranty information to report.

(D) If a manufacturer fails to file a report or files an incomplete report, the comptroller:

(i) may impose a civil penalty of $50 under Tax Code, §151.703(d) for each report not filed or for each incomplete report;

(ii) shall impose a civil penalty of not less than $25 or more than $2,000 for each day the violation continues under Tax Code, §151.485 (Civil Penalty); and

(iii) may notify the Texas Department of Motor Vehicles (TxDMV) of the failure. The TxDMV may take administrative action against the manufacturer for the failure under Occupations Code, Chapter 2301.

(6) [(5)] Except as provided by Tax Code, §111.006 (Confidentiality of Information), information contained in the reports required by paragraphs (2), (3), [and] (4), and (5) of this subsection is confidential and not subject to disclosure under Government Code, Chapter 552 (Public Information).

(7) [(6)] The reports required by paragraphs (2), (3), [and] (4), and (5) of this subsection are required in addition to any other reports required by the comptroller.

(8) (7)] The reports required by paragraphs (2), (3), and (4) of this subsection must be filed each month even if no sales were made to retailers during the preceding month.

(f) Notification of affected persons. The comptroller shall notify taxpayers who are affected by subsection (b) or (e)(1) of this section no less than 60 days before the first required electronic transmittal of report data or payment.

(g) A taxpayer who is required to file report data electronically under subsection (e)(1) of this section may submit a written request to the comptroller for a waiver of the requirement. A taxpayer who is required to electronically file a report under subsection (e)(3) or (4) of this section may submit a written request to the comptroller for a waiver of the requirement and authorization of an alternative filing method.

(h) Pursuant to Tax Code, §111.063 (Penalty for Failure to Use Electronic Transfers and Filings), the comptroller may impose separate penalties of 5.0% of the tax due for failure to pay the tax due by electronic funds transfer, as required by this section, or for failure to file a report electronically, as required by Tax Code, §111.0626.

(i) Protest payments by electronic funds transfer. Protested tax payments made under Tax Code, §112.051 (Protest Payment Required), must be accompanied by a written statement that fully and in detail sets out each reason for recovery of the payment. Protested tax payments are not required to be submitted by electronic funds transfer.

(1) A person who is otherwise required to pay taxes by means of electronic funds transfer may make protested payments by other means, including cash, check, or money order. A written statement of protest that fully and in detail sets out each reason for recovery of the payment must accompany the non-electronic payment.

(2) A person may submit a protested tax payment by means of electronic funds transfer if the written statement is submitted in compliance with the requirements set out in subparagraph (A) of this paragraph.

(A) A person may submit a protest payment by means of electronic funds transfer only if:

(i) a written statement of protest is delivered by facsimile transmission or hand-delivery at one of the comptroller's offices in Austin, Texas;

(ii) the written statement of protest is delivered to the comptroller within 24 hours before or after the electronic transfer of the payment;

(iii) the written statement of protest identifies the date of electronic payment, the taxpayer number under which the electronic payment was or will be submitted, and the amount paid under protest; and

(iv) the electronic payment is specifically identified as a protest payment by the method, if any (such as a special transaction code or accompanying electronic message), that the comptroller may designate as appropriate to the method by which the person transferred the funds electronically.

(B) The failure of a taxpayer to submit a written statement in compliance with subparagraph (A) of this paragraph means the tax payment that the taxpayer made is not considered to be a protest tax payment as provided by Tax Code, §112.051.

(C) If a person submits multiple written statements of protest that relate to the same electronic payment, then only the first statement that the comptroller actually receives is considered the written protest for purposes of Tax Code, §112.051.

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 August 6, 2020.

TRD-202003184

William Hamner

Special Counsel for Tax Administration

Comptroller of Public Accounts

Earliest possible date of adoption: September 20, 2020

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


SUBCHAPTER O. STATE AND LOCAL SALES AND USE TAXES

34 TAC §3.285

The Comptroller of Public Accounts proposes amendments to §3.285, concerning resale certificate; sales for resale. The proposed amendments implement House Bill 1525, 86th Legislature, 2019 and Senate Bill 1525, 86th Legislature, 2019. House Bill 1525 establishes sales and use tax collection responsibilities for marketplace providers. Senate Bill 1525 clarifies existing statutes related to sales for resale.

The comptroller amends subsection (a)(8) to include marketplace providers in the definition of "seller" and conforms the definition to statute. The comptroller corrects the reference to §3.286 of this title (relating to Seller's and Purchaser's Responsibilities), cited therein.

The comptroller amends subsection (b) to implement the changes made in Senate Bill 1525. The comptroller amends subsection (b)(1)(A) to delete unnecessary language. The comptroller amends subsection (b)(1)(E) to clarify that a sale for resale includes the sale of tangible personal property or a taxable service acquired for the purpose of transferring it as part of a contract for the sale, other than lease or rental, of tangible personal property with an exempt organization under Tax Code, §151.309 (Governmental Entities) or §151.310 (Religious, Educational, and Public Service Organizations). The comptroller also amends subsection (b)(1)(F) to remove reference to a rule title as the rule was previously referred to in subsection (a)(4).

The comptroller amends subsection (b)(4) to clarify that a sale for resale does not include the sale of tangible personal property or a taxable service acquired for the purpose of performing a service not listed in Tax Code, §151.0101 ("Taxable Services") unless the tangible personal property or taxable service is purchased for the purpose of performing a contract for a service for specified federal agencies.

The comptroller adds new subsection (b)(9) stating that a sale for resale does not include the sale of tangible personal property that is acquired for the purpose of using, consuming, expending it in, or incorporating it into an oil or gas well in the performance of an oil well service taxable under Tax Code, Chapter 191 (Miscellaneous Occupation Taxes).

The comptroller adds new subsection (c)(6) that provides that the independent organization certified under Texas Utilities Code, §39.151 - currently, the Electric Reliability Council of Texas, Inc. (ERCOT) - is not required to collect a resale certificate from a person who purchases electricity from it solely for the purpose of resale and is not required to provide a resale certificate to a person from whom it purchases electricity solely for the purpose of resale. Collection or issuance of resale certificates is not necessary in this context because, due to the manner in which the ERCOT market functions, all electricity purchased or sold by ERCOT must necessarily be resold before it is used by an electricity consumer.

Tom Currah, Chief Revenue Estimator, has determined that during the first five years that the proposed amendment is in effect, the amendment: will not create or eliminate a government program; will not require the creation or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to the agency; will not require an increase or decrease in fees paid to the agency; will not increase or decrease the number of individuals subject to the rules' applicability; and will not positively or adversely affect this state's economy. This proposal amends a current rule.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, proposed amendment would benefit the public 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. The proposed amendment would have no significant fiscal impact on the state government, units of local government, or individuals. There would be no anticipated significant economic costs to the public.

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, 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, §151.006 and §151.008.

§3.285.Resale Certificate; Sales for Resale.

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

(1) Equipment--Any apparatus, device, or simple machine used to perform a service.

(2) Federal government--The government of the United States of America and its unincorporated agencies and instrumentalities, including all parts of the executive, legislative, and judicial branches and all independent boards, commissions, and agencies of the United States government unless otherwise designated in this section.

(3) Integral part--An essential element without which the whole would not be complete. One taxable item is an integral part of a second item if the taxable item is necessary, as opposed to desirable, for the completion of the second item, and if the second item could not be provided as a whole without the taxable item.

(4) Internet hosting service--The provision to an unrelated user of access over the Internet to computer services using property that is owned or leased and managed by the service provider and on which the unrelated user may store or process the user's own data or use software that is owned, licensed, or leased by the unrelated user or service provider. The term does not include telecommunications services as defined in §3.344 of this title (relating to Telecommunications Services).

(5) Machinery--All power-operated machines.

(6) Mexico--Within the geographical limits of the United Mexican States.

(7) Purchaser--A person who is in the business of selling, leasing, or renting taxable items.

(8) Seller--Every retailer, wholesaler, distributor, manufacturer, marketplace provider, or any other person who sells, leases, rents, or transfers ownership of tangible personal property or performs taxable services [in this state] for consideration. Specific types of sellers, such as direct sales organizations, pawnbrokers, marketplace providers, and auctioneers, are further defined 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]).

(9) Taxable item--Tangible personal property and taxable services. Except as otherwise provided by Tax Code, Chapter 151, the sale or use of a taxable item in an electronic form instead of on physical media does not alter the item's tax status.

(10) Tax-free inventory--A stock of tangible personal property purchased tax-free for resale, whether from out-of-state or by issuing a properly completed resale certificate, by a purchaser who, at the time of purchase:

(A) holds a valid Texas sales and use tax permit;

(B) makes sales of taxable items in the regular course of business; and

(C) does not know whether the tangible personal property will be resold in the normal course of business or used in the performance of a service.

(11) United States--Within the geographical limits of the United States of America or within the territories and possessions of the United States of America.

(b) Sale for resale.

(1) Except as provided in paragraphs (3) - (6) of this subsection, each of the following is a sale for resale:

(A) the sale of a taxable item to a purchaser who acquires the taxable item for the purpose of reselling it [with or] as a taxable item in the United States or Mexico in the normal course of business:

(i) in the form or condition in which it is acquired; or

(ii) as an attachment to or as an integral part of another taxable item;

(B) the sale of tangible personal property to a purchaser who acquires the property for the sole purpose of leasing or renting it in the United States or Mexico in the normal course of business to another person, but not if incidental to the leasing or renting of real estate, as described in §3.294(k) of this title (relating to Rental and Lease of Tangible Personal Property);

(C) the sale of tangible personal property to a purchaser who acquires the property for the purpose of transferring the property to a customer in the United States or Mexico as an integral part of a taxable service;

(D) the sale of a taxable service performed on tangible personal property that the purchaser of the service holds for sale, lease, or rental;

(E) the sale of tangible personal property or a taxable service to a purchaser who acquires the tangible personal property or service for the purpose of transferring it as an integral part of performing a contract, or a subcontract of a contract, for the sale, other than the lease or rental, of tangible personal property with an entity or organization exempted from the taxes imposed by this chapter under Tax Code, §151.309 (Governmental Entities) or Tax Code, §151.310 (Religious, Educational, and Public Service Organizations) [the federal government] only if the purchaser:

(i) allocates and bills to the contract the cost of the tangible personal property or service as a direct or indirect cost; and

(ii) transfers title to the tangible personal property to the exempt entity or organization [federal government] under the contract or subcontract and any applicable [federal ] acquisition regulations;

(F) the sale of a wireless voice communication device, such as a cellular telephone, to a purchaser who acquires the device for the purpose of transferring the device as an integral part of a taxable telecommunication service when the purchase of the service is a condition for receiving the device, regardless of whether there is a separate charge for the device or whether the purchaser is the provider of the taxable service. See §3.344 of this title [(relating to Telecommunications Services)] for information about telecommunication services[)]; and

(G) the sale of a computer program to a provider of Internet hosting services who acquires the computer program from an unrelated vendor for the purpose of selling the right to use the computer program to an unrelated user of the provider's Internet hosting services in the normal course of business and in the form or condition in which the provider acquired the computer program, without regard to whether the provider transfers care, custody, and control of the computer program to the unrelated user. The performance by the provider of routine maintenance of the computer program that is recommended or required by the unrelated vendor of the computer program does not affect the application of this subsection. For purposes of this subsection, the purchase of the computer program by the provider qualifies as a sale for resale only if:

(i) the provider offers the unrelated user a selection of computer programs that are available to the public for purchase directly from an unrelated vendor;

(ii) the provider executes a written contract with the unrelated user that specifies the name of the computer program sold to the unrelated user and includes a charge to the unrelated user for computing hardware;

(iii) the unrelated user purchases the right to use the computer program from the provider through the acquisition of a license; and

(iv) the provider does not retain the right to use the computer program under that license.

(2) To qualify as a sale for resale, the taxable item must be acquired for the purpose of selling, leasing, or renting it in the regular course of business or for the purpose of transferring it as an integral part of a taxable service performed in the regular course of business.

(3) A sale for resale does not include the sale of internal or external wrapping, packing, or packaging supplies to a purchaser who acquires the supplies for use in wrapping, packing, or packaging tangible personal property, or in the performance of a service, for the purpose of furthering the sale of the tangible personal property or the service. See §3.314 of this title (relating to Wrapping, Packing, Packaging Supplies, Containers, Labels, Tags, Export Packers, and Stevedoring Materials and Supplies).

(4) A sale for resale does not include the sale of tangible personal property or a taxable service to a purchaser who acquires the property or service for the purpose of performing a service not listed as a taxable service under Tax Code, §151.0101 ("Taxable Services") [service that is not taxed under this chapter], regardless of whether title transfers to the service provider's customer, unless the tangible personal property or taxable service is purchased for the purpose of performing [reselling it to the United States in] a contract, or a subcontract of a contract, for a service, including a taxable service under Tax Code, §151.0101, with any branch of the Department of Defense, Department of Homeland Security, Department of Energy, National Aeronautics and Space Administration, Central Intelligence Agency, National Security Agency, National Oceanic and Atmospheric Administration, or National Reconnaissance Office to the extent allocated and billed to the contract with the federal government.

(5) A sale for resale does not include the sale of a taxable item to a purchaser who acquires the taxable item for the purpose of reselling or transferring the taxable item outside the territorial limits of the United States or Mexico. Refer to §3.323 of this title (relating to Imports and Exports).

(6) Tangible personal property used to perform a taxable service is not considered resold unless the care, custody, and control of the tangible personal property is transferred to the purchaser of the service. The care, custody, and control of tangible personal property is transferred to the purchaser of the service when the purchaser has primary possession of the tangible personal property.

(A) Except as provided in subparagraphs (B) and (C) of this paragraph, to have primary possession, the purchaser or the purchaser's designee must have:

(i) physical possession of the tangible personal property off of the premises of the service provider;

(ii) a contractual duty to care for the tangible personal property. At a minimum, the contract must prohibit the purchaser from damaging the tangible personal property or impose liability if the purchaser damages the tangible personal property; and

(iii) a superior right to use the tangible personal property for a contractually specified period of time.

(B) The purchaser may have primary possession of tangible personal property if the purchaser or the purchaser's designee has physical possession of the tangible personal property and directly consumes the tangible personal property during the provision of the taxable service. Property is considered consumed if it can no longer be used for its intended purpose in the normal course of business or is not retained or reusable by the service provider.

(C) A purchaser may have primary possession of a computer program if the purchaser acquires a license to use the computer program from the service provider and the service provider does not retain the right to use the computer program under that license.

(7) A person performing services taxable under Tax Code, Chapter 151 is the consumer of machinery and equipment used by the person in performing the services. A person performing a taxable service is not using the machinery or equipment in performing the service if the person has transferred primary possession, as that term is described in paragraph (6) of this subsection, of the machinery or equipment to the purchaser of the service.

(8) Aircraft. See §3.280 of this title (relating to Aircraft) for the definition of "sale for resale" as it applies to aircraft.

(9) A sale for resale does not include the sale of tangible personal property to a purchaser who acquires the property for the purpose of using, consuming, or expending it in, or incorporating it into, an oil or gas well in the performance of an oil well service taxable under Tax Code, Chapter 191 (Miscellaneous Occupation Taxes).

(c) Issuance and acceptance of resale certificates.

(1) A sale for resale as defined in subsection (b) of this section is not taxable.

(2) Who may issue a resale certificate.

(A) In general, a purchaser who holds a Texas sales and use tax permit may issue a resale certificate instead of paying tax at the time of purchase of a taxable item that the purchaser intends to resell, lease, rent, or transfer as an integral part of a taxable service in the normal course of business. A purchaser may also issue a resale certificate instead of paying tax at the time of purchase of a taxable item that the purchaser intends to maintain in a valid tax-free inventory, if the purchaser does not know at the time of purchase whether the item will be resold or used in the performance of a service. The purchaser must collect, report, and remit tax to the comptroller as required by §3.286 of this title when the purchaser sells, leases, or rents taxable items.

(B) A purchaser may not issue a resale certificate in lieu of paying tax on the purchase of a taxable item, including tangible personal property to maintain in a valid tax-free inventory, that the purchaser knows, at the time of purchase, will be used or consumed by the purchaser.

(3) Accepting a resale certificate.

(A) All gross receipts of a seller are presumed subject to sales or use tax unless a properly completed resale or exemption certificate is accepted by the seller. A properly completed resale certificate contains the information required by subsection (g) of this section. See also §3.287 of this title (relating to Exemption Certificates).

(B) A seller does not owe tax on a sale, lease, or rental of a taxable item if the seller accepts a properly completed resale certificate in good faith. A resale certificate is deemed to be accepted in good faith if:

(i) the resale certificate is accepted at or before the time of the transaction;

(ii) the resale certificate is properly completed, meaning that all of the information required by subsection (g) of this section is legible; and

(iii) the seller does not know, and does not have reason to know, that the sale is not a sale for resale. It is the seller's responsibility to be familiar with Texas sales tax law as it applies to the seller's business and to take notice of the information provided by the purchaser on the resale certificate. For example, a jewelry seller should know that a resale certificate from a landscaping service is invalid because a landscaping service is not in the business of reselling jewelry.

(C) The seller should obtain a properly executed resale certificate at the time the taxable transaction occurs. All certificates obtained on or after the date the comptroller's auditor actually begins work on the audit at the seller's place of business or on the seller's records after the entrance conference are subject to verification. All incomplete certificates will be disallowed regardless of when they were obtained. The seller has 60 days from the date written notice is received by the seller from the comptroller in which to deliver the certificates to the comptroller. Written notice shall be given by the comptroller upon the filing of a petition for redetermination or claim for refund. For the purposes of this section, written notice given by mail is presumed to have been received by the seller within three business days from the date of deposit in the custody of the United States Postal Service. The seller may overcome the presumption by submitting proof from the United States Postal Service or by other competent evidence showing a later delivery date. Any certificates delivered to the comptroller during the 60-day period will be subject to independent verification by the comptroller before any deductions will be allowed. Certificates delivered after the 60-day period will not be accepted and the deduction will not be granted. See §3.282 of this title (relating to Auditing Taxpayer Records) and §3.286 of this title.

(D) Resale certificates are subject to the provisions of §3.281 of this title (relating to Records Required; Information Required). A seller is required to keep resale certificates for a minimum of four years from the date on which the sale 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.

(4) Blanket resale certificate. A purchaser may issue to a seller a blanket resale certificate describing the general nature of the taxable items purchased for resale. The seller may rely on the blanket certificate until it is revoked in writing.

(5) Bulk commodities. A resale certificate is not required to be issued by a broker or dealer that buys and sells only raw commodities in bulk, such as natural gas, raw cotton bales, or raw aluminum, from producers or other commodity brokers or dealers solely for resale in the normal course of business. However, if requested by the seller, a properly completed resale certificate, absent a sales tax permit number, may be issued by the purchaser of such raw commodities even if the purchaser does not hold a sales and use tax permit.

(6) Electricity sales and purchases by independent organization certified under Texas Utilities Code, §39.151. A resale certificate is not required to be issued by a person who purchases electricity solely for the purpose of resale from the independent organization certified under Texas Utilities Code, §39.151. The independent organization certified under Texas Utilities Code, §39.151 is not required to issue a resale certificate to a person from whom it purchases electricity solely for the purpose of resale.

(d) Retailers outside Texas.

(1) A seller in Texas may accept a resale certificate in lieu of tax from a retailer located outside Texas who purchases taxable items for resale in the United States or Mexico in a transaction that is a sale for resale, as defined in subsection (b) of this section.

(2) The resale certificate must show the signature and address of the purchaser, the date of the sale, the state in which the purchaser intends to resell the item, the sales tax permit number or the registration number assigned to the purchaser by the state in which the purchaser is authorized to do business or a statement that the purchaser is not required to be permitted in the state in which the purchaser is authorized to do business. Mexican retailers who purchase taxable items for resale must show their Federal Taxpayers Registry (RFC) identification number for Mexico on the resale certificate and give a copy of their Mexican Registration Form to the Texas seller. An invoice describing the taxable item purchased and showing the exact street address or office address from which the taxable item will be resold must be attached to the resale certificate. The resale certificate must also state the type business engaged in by the purchaser and the type items sold in the regular course of business. A resale certificate may be accepted from the out-of-state retailer even if the Texas retailer ships or delivers the taxable item directly to a recipient located inside Texas.

(3) The Texas retailer is not responsible for determining whether the out-of-state retailer is required to hold a Texas sales and use tax permit or to enter a Texas permit number on the resale certificate.

(4) Foreign purchasers, other than purchasers from Mexico, who are not engaged in business in Texas and do not hold a Texas sales and use tax permit, may issue a properly completed resale certificate, as described in paragraph (2) of this subsection, in lieu of paying tax on the purchase of taxable items for sale in the normal course of business when the items are delivered or shipped to a location outside of Texas but within the United States or Mexico.

(5) An out-of-state or foreign purchaser who acquires goods or services from a Texas seller for resale in Texas should refer to §3.286 of this title for information on their responsibilities.

(6) A purchaser, whether from Texas, Mexico, or another foreign country, may not issue a resale certificate for taxable items purchased for resale outside the United States or Mexico. See subsection (b)(5) of this section. Purchasers who purchase taxable items in Texas for sale outside the United States or Mexico must comply with the requirements of §3.323 of this title to claim exemption from the Texas sales tax.

(e) Taxable use of items purchased for resale; items removed from tax-free inventory.

(1) Divergent use; paying tax on fair market rental value. When a taxable item is removed from a valid tax-free inventory for use in Texas, Texas sales tax is due. When a taxable item purchased under a resale certificate is used for any purpose other than retention, demonstration, or display while holding it for sale, lease, or rental, or for transfer as an integral part of a taxable service, the purchaser is liable for sales tax based on the value of the taxable item for the period of time used.

(A) The value of tangible personal property is the fair market rental value of the tangible personal property. The fair market rental value is the amount that a purchaser would pay on the open market to rent or lease the tangible personal property for use. If tangible personal property has no fair market rental value, sales tax is due based upon the original purchase price.

(B) The value of a taxable service is the fair market value of the taxable service. The fair market value is the amount that a purchaser would pay on the open market to obtain that taxable service. If a taxable service has no fair market value, sales tax is due based upon the original purchase price.

(C) At any time the person using a taxable item may stop paying tax on the value of the taxable item and instead pay sales tax on the original purchase price. When the person elects to pay sales tax on the original purchase price, credit will not be allowed for taxes previously paid based on value.

(2) Donation of taxable item. A purchaser who gives a valid resale certificate instead of paying tax on the purchase of a taxable item is not liable for sales tax on the taxable item when donated to an organization exempt under Tax Code, §151.309 (Governmental Entities), or §151.310(a)(1) and (2) (Religious, Educational, And Public Service Organizations), provided the purchaser did not make a taxable use of the donated taxable item prior to its donation.

(3) Use of taxable item as a trade-in. A purchaser who gives a valid resale certificate instead of paying tax on the purchase of a taxable item is liable for sales tax if the purchaser uses the taxable item as a trade-in on the purchase of another taxable item. Tax must be paid on the original purchase price of the taxable item used as a trade-in.

(4) Use of taxable item outside Texas. Texas sales or use tax is not due on a taxable item removed from a valid tax-free inventory for use by the purchaser outside the state.

(5) Lost or destroyed inventory. Texas sales or use tax is not due on tangible personal property purchased under a valid resale certificate that is totally destroyed or permanently disposed of by the purchaser in a manner other than for use or sale in the normal course of business. For example, documented theft, casualty damage or loss, or disposal in a landfill. This does not apply to consumable items that are completely used up or destroyed by the purchaser in the course of performing a service in Texas.

(f) Improper use of a resale certificate; criminal offenses.

(1) A person may not issue a resale certificate at the time of purchase for a taxable item if the person knows the item is being purchased for a specific taxable use.

(2) Any person who intentionally or knowingly makes, presents, uses, or alters a resale certificate for the purpose of evading Texas sales or use tax is guilty of a criminal offense. For more information, see §3.305 of this title (relating to Criminal Offenses and Penalties).

(g) Content of a resale certificate. A resale certificate must show:

(1) the name and address of the purchaser;

(2) the number from the sales tax permit held by the purchaser or a statement that an application for a permit is pending before the comptroller with the date the application for a permit was made. If the application is pending, the resale certificate is valid for only 60 days, after which time the resale certificate must be renewed to show the permanent permit number. If the purchaser holds a Texas sales and use tax permit, the number must consist of 11 digits that begin with a 1 or 3. Federal employer's identification (FEI) numbers or social security numbers are not acceptable evidence of resale. See also subsection (d)(2) of this section regarding registration numbers for retailers outside Texas;

(3) a description of the taxable items generally sold, leased, or rented by the purchaser in the regular course of business and a description of the taxable items to be purchased tax free by use of the certificate. The item to be purchased may be generally described on the certificate or itemized in an order or invoice attached to the certificate;

(4) the signature of the purchaser or an electronic form of the purchaser's signature authorized by the comptroller and the date; and

(5) the name and address of the seller.

(h) Form of a resale certificate. A resale certificate must be substantially either in the form of a Texas Sales and Use Tax Resale Certificate or a Border States Uniform Sale for Resale Certificate. Copies of both certificates are available at comptroller.texas.gov or may be obtained by calling our toll-free number 1-800-252-5555. A seller may also accept as a resale certificate the Uniform Sales and Use Tax Certificate-Multijurisdiction promulgated by the Multistate Tax Commission and available online at http://www.mtc.gov. The Streamlined Sales and Use Tax Agreement Certificate of Exemption may not be accepted as a resale certificate.

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 August 6, 2020.

TRD-202003185

William Hamner

Special Counsel for Tax Administration

Comptroller of Public Accounts

Earliest possible date of adoption: September 20, 2020

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 section is being amended to reflect the changes made to Tax Code, §151.338 ("Environment and Conservation Services") by Senate Bill 1525, 86th Legislature, 2019. The section is being amended to also reflect the changes made to Tax Code, §160.001(2) ("Definitions") by House Bill 4032, 86th Legislature, 2019.

The comptroller amends subsection (a)(1) "Chapter 160 boat" to update the maximum length of such a boat from 65 to 115 feet to implement House Bill 4032.

The comptroller amends subsection (b)(1) to update the title reference to §3.286 of this title (relating to Seller's and Purchaser's Responsibilities).

The comptroller amends section (f) to add the title reference §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing).

The comptroller adds new subsection (h) to clarify the exemption for labor to repair, remodel, maintain, or restore tangible personal property when that labor is required by law to protect the environment or conserve energy to implement Senate Bill 1525.

Tom Currah, Chief Revenue Estimator, has determined that during the first five years that the proposed amendment is in effect, the amendment: will not create or eliminate a government program; will not require the creation or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to the agency; will not require an increase or decrease in fees paid to the agency; will not increase or decrease the number of individuals subject to the rules' applicability; and will not positively or adversely affect this state's economy. This proposal amends a current rule.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, proposed amendment would benefit the public by conforming the rule to current statutes. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. The proposed amendment would have no significant fiscal impact on the state government, units of local government, or individuals. There would be no anticipated significant economic costs to the public.

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 amendments are 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 amendments implement Tax Code, §151.338, ("Environment and Conservation Services"), and §160.001(2) ("Definitions").

§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 115 [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) 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) 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 manufacturer's written warranty or provide a warranty in addition to or in place of the manufacturer's written warranty.

(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) Maintenance--Work performed on operational and functioning tangible personal property that is necessary to sustain or support safe, efficient, 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.

(8) 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.

(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) 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.

(11) 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.

(b) Taxability of services to repair, remodel, maintain, or restore tangible personal property.

(1) General rule. Except as otherwise provided in this section, service providers who repair, remodel, 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.

(A) Aircraft. Service providers who repair, remodel, maintain, or restore aircraft should refer to §3.280 of this title (relating to Aircraft).

(B) Motor vehicles. Service providers who remodel motor vehicles are providing taxable services and are covered by this section. Service providers 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).

(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 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).

(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 under an agreement that provides that the purchaser of the service will furnish the tangible personal property required for the service must collect sales or use tax on the charge for the service.

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

(c) Consumable supplies and equipment. Sales or use tax must be paid by the service provider on consumable supplies and equipment that are purchased for use in the performance of a service 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.

(1) Manufacturer's written warranty or recall campaign. No sales or use tax is due on tangible personal property 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 were used in repairing an item under a manufacturer's written warranty or recall campaign.

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

(2) Extended warranty or service policy.

(A) Sales or use tax is due on the sale of an extended warranty or service policy.

(B) The warrantor may issue a resale certificate in lieu of paying sales or use tax on the purchase of taxable items used in performing the 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. Refer to §3.285 of this title.

(C) If the warrantor uses a third-party service provider to perform the service, the third-party service provider may accept a resale certificate from the warrantor in lieu of sales or use tax.

(D) The warrantor must collect sales or use tax on any charge to the purchaser for labor or tangible personal property 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. 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 another should refer to §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing).

(g) Exemption for disaster areas.

(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; and

(B) the service is performed on tangible personal 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).

(h) Repair services required to protect the environment or conserve energy.

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

(A) the repair, remodeling, maintenance, or restoration is required by statute, ordinance, order, rule, or regulation of any commission, agency, court, or political, governmental, or quasi-governmental entity in order to protect the environment or to conserve energy; and

(B) the charge for the labor is itemized separately from the charge for materials furnished.

(2) The exemption in paragraph (1) of this subsection does not apply to a lump sum charge for labor and materials.

(3) Sixty-five percent of a lump-sum charge for labor and materials for the repair, remodeling, maintenance, or restoration of tangible personal property is exempt if:

(A) the repair, remodeling, maintenance, or restoration is required by statute, ordinance, order, rule, or regulation of any commission, agency, court, or political, governmental, or quasi-governmental entity in order to protect the environment or to conserve energy; and

(B) the labor and materials are purchased for a health care facility (Health and Safety Code, §108.002) or oncology center.

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 August 6, 2020.

TRD-202003186

William Hamner

Special Counsel for Tax Administration

Comptroller of Public Accounts

Earliest possible date of adoption: September 20, 2020

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


34 TAC §3.305

The Comptroller of Public Accounts proposes amendments to §3.305, concerning criminal offenses and penalties. The comptroller amends the section to reflect the changes in Tax Code, §151.704 (Sales Tax Absorption; Criminal Penalty) made by House Bill 2358, 86th Legislature, 2019.

House Bill 2358 amended Tax Code, §151.704, retitled to Sales Tax Absorption; Criminal Penalty, to provide conditions under which a seller may advertise to a customer that the seller will pay the sales tax due on a taxable transaction. To implement these changes, the comptroller amends subsection (b)(1) to state it is a criminal offense for a seller to state in an advertisement or other similar statement that the sales or use tax payable by the customer is not part of the sales price. The comptroller adds new paragraph (2) to provide the conditions under which a seller can indicate in an advertisement or statement that the seller is paying the tax for the customer. Subsequent paragraphs are renumbered accordingly.

Tom Currah, Chief Revenue Estimator, has determined that during the first five years that the proposed amendment is in effect, the amendment: will not create or eliminate a government program; will not require the creation or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to the agency; will not require an increase or decrease in fees paid to the agency; will not increase or decrease the number of individuals subject to the rules' applicability; and will not positively or adversely affect this state's economy. This proposal amends a current rule.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, the proposed amendment would benefit the public 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. The proposed amendment would have no significant fiscal impact on the state government, units of local government, or individuals. There would be no anticipated significant economic costs to the public.

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 amendments are 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, §151.704, (Sales Tax Absorption; Criminal Penalty).

§3.305.Criminal Offenses and Penalties.

(a) General. Tax Code, Chapter 151, prohibits certain activities and provides criminal penalties for violations.

(b) Criminal offenses provided in Tax Code, Chapter 151, include, but are not limited to, the following:

(1) A seller commits an offense if the seller directly or indirectly advertises, [or] holds out, or states to a customer or to the public that the tax is not part of the sales price payable by the customer. [seller will assume, absorb, or refund any portion of the tax, or that the seller will not add the tax to the sales price of taxable items.] This offense is a misdemeanor punishable by a fine of not more than $500 for each occurrence.

(2) It is not a criminal offense if:

(A) a seller indicates in an advertisement, holding out, or statement that the seller is paying the tax due on the purchased item(s) for the customer;

(B) the seller does not indicate or imply in the advertisement, holding out, or statement that the sale is exempt or excluded from taxation; and

(C) any purchaser's receipt or other statement given to the customer lists the sales price paid or to be paid by the customer, separately states the amount of the tax due on the purchase price, and indicates that the tax will be paid and remitted by the seller.

(3) [(2)] A person commits an offense if the person intentionally or knowingly makes a false entry in, or a fraudulent alteration of, an exemption or resale certificate; makes, presents, or uses an exemption or resale certificate with knowledge that it is false and with intent that the certificate be accepted as valid; or intentionally conceals, removes, or impairs the verity or legibility of an exemption or resale certificate; or unreasonably impedes the availability of an exemption or resale certificate. An offense is:

(A) a Class C misdemeanor if the tax avoided by the use of the exemption or resale certificate is less than $20;

(B) a Class B misdemeanor if the tax avoided by the use of the exemption or resale certificate is $20 or more but less than $200;

(C) a Class A misdemeanor if the tax avoided by the use of the exemption or resale certificate is $200 or more but less than $750;

(D) a felony of the third degree if the tax avoided by the use of the exemption or resale certificate is $750 or more but less than $20,000; and

(E) a felony of the second degree if the tax avoided by the use of the exemption or resale certificate is $20,000 or more.

(4) [(3)] A person or officer of a corporation commits an offense if the person or the corporation engages in business as a seller in this state without a permit or with a suspended permit. A separate offense is committed each day a person operates a business without a permit or with a suspended permit. An offense is:

(A) a Class C misdemeanor for a first offense;

(B) a Class B misdemeanor punishable by a fine not to exceed $2,000 for a second conviction;

(C) a Class A misdemeanor punishable by a fine not to exceed $4,000 for a third conviction; and

(D) a Class A misdemeanor punishable by a fine not to exceed $4,000, confinement in jail for a term not to exceed a year, or both the fine and confinement for a fourth or subsequent conviction.

(5) [(4)] A person commits an offense if the person intentionally or knowingly fails to pay to the comptroller the tax collected by that person. When tax is collected and not paid pursuant to one scheme or continuous course of conduct, all such conduct may be considered as one offense and the amounts of tax collected and not paid may be aggregated in determining the grade of the offense. An offense is:

(A) a Class C misdemeanor if the amount of the tax collected and not paid is less than $50;

(B) a Class B misdemeanor if the amount of the tax collected and not paid is $50 or more but less than $500;

(C) a Class A misdemeanor if the amount of the tax collected and not paid is $500 or more but less than $1,500;

(D) a state jail felony if the amount of the tax collected and not paid is $1,500 or more but less than $20,000;

(E) a felony of the third degree if the amount of the tax collected and not paid is $20,000 or more but less than $100,000;

(F) a felony of the second degree if the amount of the tax collected and not paid is $100,000 or more but less than $200,000; and

(G) a felony of the first degree if the amount of the tax collected and not paid is $200,000 or more.

(6) [(5)] A person commits an offense if the person refuses to furnish a report as required by Tax Code, Chapter 151, or by the comptroller. An offense is:

(A) a Class C misdemeanor for a first offense;

(B) a Class B misdemeanor punishable by a fine not to exceed $2,000 for a second conviction; and

(C) a Class A misdemeanor punishable by a fine not to exceed $4,000 for a third or subsequent conviction.

(7) [(6)] A person commits an offense if the person intentionally or knowingly conceals, destroys, makes a false entry in, or fails to make an entry in records that are required to be made or kept under Tax Code, Chapter 151. An offense is a felony of the third degree.

(8) [(7)] A person commits an offense if the person fails to produce or allow inspection of a record that is required to be kept under Tax Code, Chapter 151, within an allowed period of time after a person who is authorized by the comptroller requests the record. Except as provided in paragraph (9) [(8)] of this subsection, an offense is a Class C misdemeanor. A separate offense is committed each day the person fails to allow inspection of records or fails to produce records after the allowed time period expired. See subsection (c) of this section for certain restrictions.

(9) [(8)] A person commits an offense if the person intentionally fails to produce to the comptroller records that document the taxpayer's taxable sale of items that the taxpayer obtained using a resale certificate. The records to which the offense applies are those required to be kept under Tax Code, §151.025 (Records Required to be Kept), which were requested by the comptroller under Tax Code, §151.023 (Investigations and Audits) and which are not produced in the period required by that section. The items to which the offense applies are items the sales of which are required to be reported to the comptroller under Tax Code, §§151.433 (Reports by Wholesalers and Distributors of Beer, Wine, and Malt Liquor), 154.212 (Reports by Wholesalers and Distributors of Cigarettes), or 155.105 (Reports by Wholesalers and Distributors of Cigars and Tobacco Products). It is an affirmative defense to prosecution under this paragraph that the items listed for purchase on the resale certificate had not been resold at the time of the comptroller's request for records under Tax Code, §151.023. If the conduct described by this paragraph is related to one scheme or continuous course of conduct, all such conduct may be considered as one offense and the amounts aggregated in determining the grade of the offense. See subsection (c) of this section for certain restrictions. An offense is:

(A) a Class C misdemeanor if the tax avoided by use of the resale certificate is less than $20;

(B) a Class B misdemeanor if the tax avoided by use of the resale certificate is $20 or more but less than $200;

(C) a Class A misdemeanor if the tax avoided by use of the resale certificate is $200 or more but less than $750;

(D) a felony of the third degree if the tax avoided by use of the resale certificate is $750 or more but less than $20,000; or

(E) a felony of the second degree if the tax avoided by use of the resale certificate is $20,000 or more.

(c) Inspection and demand for production. Tax Code, §151.023 permits the comptroller to inspect business premises where a taxable event has occurred and to issue a written demand notice to a taxpayer or to an employee, an authorized representative, or agent of the taxpayer for the production of documents within 10 business days of delivery of the notice. This authority will be exercised within the parameters outlined in §3.281(f) of this title (relating to Records Required; Information Required). The comptroller may file criminal charges with appropriate authorities for violations of Tax Code, §151.023, if the taxpayer fails to permit inspection or fails to produce documents in response to a demand by the comptroller's Enforcement Division or Criminal Investigation Division.

(d) Confidential information. The comptroller or the attorney general may use taxpayer information or records made confidential by Tax Code, Title 2 to enforce Tax Code, Title 2 or the criminal laws of Texas or the United States, or may authorize the use of information or records made confidential by Tax Code, Title 2 in a judicial or administrative proceeding in which this state, another state, or the federal government is a party.

(e) Penal Code.

(1) Criminal conspiracy. Penal Code, §15.02 (Criminal Conspiracy) and §15.04 (Renunciation Defense) apply to all criminal offenses prescribed by the Tax Code.

(2) Organized crime. A person commits an offense under Penal Code, §71.02, if the person, with the intent to establish, maintain, or participate in a combination or in the profits of a combination or as a member of a criminal street gang, commits or conspires to commit a felony offense prescribed by the Tax Code. The terms "combination," "profits," "criminal street gang," and "conspires to commit," are defined by Penal Code, §71.01.

(3) Money laundering. The definition of the term "proceeds" in Penal Code, Chapter 34 (Money Laundering) includes funds acquired or derived directly or indirectly from, produced through, or realized through conduct that constitutes an offense under Tax Code, §151.7032 (Failure to Pay Taxes Collected; Criminal Penalty and Aggregation of Amounts Involved).

(f) Venue. The venue for prosecution of any offense incurred under Tax Code, Chapter 151 is Travis County or the county in which any element of the offense occurs. If prosecution for engaging in criminal conspiracy, an organized criminal activity, or money laundering is based upon an offense classified as a felony under the Tax Code, the venue for prosecution of the conspiracy, organized criminal activity, or money laundering is any county in which venue for the underlying offense is proper under the Tax Code.

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 August 6, 2020.

TRD-202003187

William Hamner

Special Counsel for Tax Administration

Comptroller of Public Accounts

Earliest possible date of adoption: September 20, 2020

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