A Guide to the Legislature’s Changes to Texas Sales and Use Tax Law

The Texas Legislature passed several changes to the Texas sales and use tax laws. None of these Texas sales tax law changes are particularly sweeping – they only impact particular industries.  This article summarizes the Texas sales tax law changes that the Legislature passed. These will all become law provided that Governor Rick Perry doesn’t veto them.

HB 78 – This bill exempts all purchases of precious metal coins and bullion from Texas sales and use tax.  Previously, the Texas Tax Code only exempted purchases of precious metal coins and bullion with a total sales price of $1,000 or more from Texas sales and use tax.

HB 697 – This bill exempts from Texas sales and use tax food, drinks, and candy sold by booster clubs and similar organizations if the club (1) sells the items at an event the school or school district sponsors and (2) the proceeds directly benefit the school or school district.  The Texas Legislature intended this bill to allow booster clubs and other similar organizations the sales tax exemptions that parent-teacher associations and similar groups already enjoy.

HB 800 – This bill exempts depreciable tangible personal property from Texas sales and use tax when directly used in “qualified research,” so long as the taxpayer claiming this Texas sales and use tax exemption doesn’t also take the Texas franchise tax exemption for taxable entities engaged in qualified research.  The bill uses Internal Revenue Code section 41’s definition of “qualified research,” which includes research:

• With respect to which expenditures may be treated as research and experimental expenditures under Internal Revenue Code section 174;
• Which is undertaken for the purpose of discovering information which is technological in nature;
• The application of which is intended to be useful in the development of a new or improved business component of the taxpayer; and
• Substantially all of the activities which constitute elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality.

HB 1133 – This bill allows providers of cable television, internet access, and telecommunications services a refund of Texas sales and use taxes they pay on most items they use to provide their services.  Note that this bill doesn’t give these service providers a Texas sales and use tax exemption for these items – they still must pay sales or use tax on these purchases and then seek a refund of the tax from the Texas Comptroller.  The maximum refund that the Comptroller will pay to all claimants is $50 million per calendar year. If total claimed refunds exceed that amount—and they almost certainly will—the bill requires the Comptroller to pay each claimant a pro-rata share of the $50 million. The Texas Legislature’s stated intent for allowing refunds to these providers of taxable services is to encourage economic development in Texas around these services, similar to the purpose of the manufacturing exemption.

HB 1223 – This bill exempts from Texas sales and use tax certain equipment used to operate qualifying data centers.  A qualifying data center is one that a taxpayer builds or occupies after September 2013, that is at least 100,000 square feet, creates at least 20 higher paying jobs (120% of average county wage).  The taxpayer must also invest at least $200 million over a 5-year period.  If the data center qualifies, the Texas Tax Code will exempt from Texas sales and use tax tangible personal property “necessary and essential” to the operation of the data center (including electricity) for 10 or 15 years (depending on the total capital investment).  This exemption applies only to the 6.25% due to the state. Potential 2% local tax is still due.

HB 1712 – This bill exempts from Texas sales and use tax various property and services related to offshore spill response containment systems.  The bill’s definition of an offshore spill response containment system is quite detailed.  Most importantly, it’s equipment meant only to contain a blowout or loss of control of an offshore well. It’s not equipment meant to produce oil and gas. The equipment must meet certain EPA requirements and be stored adjacent to the Gulf of Mexico.  Further, the Texas sales and use tax exemption only applies to entities formed primarily for “designing, developing, modifying, enhancing, assembling, operating, deploying, and maintaining such a device.”

HB 3169 – This bill makes several changes to the Texas sales and use tax laws in three different areas.  First, it clarifies the sales and use tax exemptions for medical items.  In this area, it clarifies the definitions of intravenous systems and medical beds exempt from Texas sales and use tax.  Second, it changes the definition of newspapers exempt from Texas sales and use tax.  Previously Texas only exempted newspapers from sales and use tax if the average sales price for a 30-day period was equal or less than $1.50. The bill increases that price to $3.  Finally, the bill changes the definition of qualified destination management companies.

SB 485 – This bill makes yet another change to when the “back to school” sales tax free weekend happens.  Under this bill, the tax-free period begins “the Friday before the 15th day preceding the uniform date prescribed by statute, without regard to any authorized exception, before which a school district may not begin instruction for the school year.”  Before, the tax-free period began on “the Friday before the eighth day preceding the earliest date on which any school district, other than a district operating a year-round system, may begin instruction for the school year.” For 2013, the effect will be to push the weekend up a week, from August 16 to August 9.

SB 529 – This bill makes it illegal to willfully and knowingly sell, purchase, install, transfer, or possess any automated sales suppression device or phantom-ware in Texas.  Automated sales suppression devices and phantom-ware are devices or software used to commit tax fraud.  They falsify sales data on electronic cash registers at the point of sale.  Retailers who use these devices and software collect the full amount of Texas sales tax from their customers.  However, they remit only a portion of what they collect to the Texas Comptroller.  Previously, the law prohibited the act of committing tax fraud, but said nothing in particular about software or devices used to commit tax fraud.

SB 1151 – This bill amends the Texas Tax Code’s definition of “food products” exempt from Texas sales and use tax to include “snack items.”  It defines “snack items,” for the purpose of this Texas sales and use tax exemption, to include breakfast bars, granola bars, nutrition bars, sports bars, protein bars, or yogurt bars (unless labeled and marketed as candy); snack mix or trail mix; nuts (unless candy-coated); popcorn; and chips, crackers, or hard pretzels.  However, under this bill, “snack items” exempt from Texas sales and use tax don’t include snack items sold through vending machines or in individual-sized portions (packages labeled as containing only one serving, or if unlabeled, less than 2.5 ounces).

SB 1533 – This bill amends the Texas Tax Code to provide that the places of business of purchasing companies are not places of business that exist solely to avoid or rebate local sales or use tax that is legally due.  This bill clarifies an amendment that the Texas Legislature made to the Texas Tax Code in the last legislative session that gave the Texas Comptroller the authority to declare that a retailer’s location is not a “place of business” for Texas sales and use tax purposes if it exists solely to avoid or rebate local sales or use tax.  This new amendment states that a location does not exist to avoid or rebate local sales or use tax if the location “provides significant business services, beyond processing invoices, to the contracting business, including logistics management, purchasing, inventory control, or other vital business services.”

Tomorrow, we’ll post a summary of the Texas Legislature’s changes to the Texas franchise tax laws, which are a bit more interesting.