Things have heated up this summer. Let’s see what’s brewing with the Texas comptroller’s office.

Case

United States Court of Appeals for the Fifth Circuit

Texas Entertainment Association (TEA) v. Hegar, 10 F.4th 495 (5th Cir. 2021)—On June 21, 2022, the United States Supreme Court denied the Monitor’s motion for a writ of certiorari regarding the Fifth Circuit opinion.

• The case involved commercial sexual charges under Bus. & Com. Code § 102.052 (fees based on admissions; records). This fee is imposed on certain commercial enterprises that provide entertainment or live nudity performances, “naked” meaning “fully undressed” or “dressed in a manner that leaves uncovered or visible through less than fully opaque clothing any part of the breasts below the top of the areola of the breasts, if the person is female, or any part of the genitals or buttocks. See identifier. §§ 102.051(1), (2) (Definitions), 102.052(a).
• The Comptroller had enacted a rule defining “clothing” to exclude “[p]aint, latex, wax, gel, foam, film, coatings and other substances applied to the body in a liquid or semi-liquid state. . . .” 34 Text. Admin. Code § 3.722(a)(1) (Sexual Affairs Expenses). The rule was in part aimed at so-called “latex clubs”, which required dancers to wear shorts and opaque latex over their breasts.
• The Fifth Circuit found that the Comptroller’s Rule violated the First Amendment to the U.S. Constitution because the rule targeted the essential expressive nature of latex club business and the Comptroller had shown no evidence that the rule was narrowly tailored to serve an imperative interest of the State. . The Court also ruled that the retroactive application of the latex club rule violated the Due Process Clause of the Fourteenth Amendment to the United States Constitution.
• However, the Fifth Circuit determined that the TEA failed to demonstrate that the rule violated the Equal Protection Clause of the Fourteenth Amendment, as there was no evidence that latex clubs were treated any differently than similarly located establishments. The TEA had argued that sports bars with scantily clad waitresses and concerts, body painting competitions, and bodybuilding competitions where latex was worn were similar to latex clubs. But, the Fifth Circuit wasn’t buying it.
• With cert’s denial, the Fifth Circuit’s decision in this case stands.

Texas Supreme Court

Hegar c. Health Care Service Corporation, No. 21-0080 (Texas, June 17, 2022)—The Texas Supreme Court has ruled that Blue Cross Blue Shield stop-loss policy premiums are sold to employers who self-fund their employees’ health insurance. employees (that’s to saypolicies compensating employers for sums paid in reimbursement of healthcare costs above a certain threshold) were subject to insurance premiums and maintenance taxes.

Texas Third Court of Appeals

Hegar vs. El Paso Electric CompanyNo. 03-18-00790-CV (Tex. App.—Austin Mar. 5, 2021)—On June 16, 2022, the Texas Supreme Court denied the Comptroller’s petition for review, meaning it is essentially of agreement with the third court. of the appeal decision in favor of the taxpayer, an electricity manufacturer.

• The taxpayer had claimed a refund of the sales or use tax he had paid on the purchase of meters and collars he had installed at customer premises that were used in conjunction with step-down transformers (equipment installed in customer areas to reduce the voltage of the electricity entering a customer to make it usable). The meters provided data on the operation of the transformers, including their voltage. The collars were installed on meters and allowed the ratepayer to send a signal to cut off a customer’s electricity service.
• The taxpayer claimed that these items were exempt from sales and use tax under the Manufacturing Exemption, which provides a specific exemption for “step-down transformer related telemetry units.” Tax Code § 151.318(a)(4) (Goods used in manufacture).
• The trial court ruled in favor of the taxpayer.
• On appeal, the Third Court of Appeal rejected the Comptroller’s claim that the trial court erred in refusing to grant its plea to the court. The Court held that the comptroller had been informed of the taxpayer’s claims under the fabrication exemption, thereby meeting the requirements of IRC Section 111.104 (Refunds). Any failure by the taxpayer to meet the deadline for amending its statement of reasons under 34 Tex. Admin. Code 1.11(g) (Statement of Reasons; Pre-Trial Conference) had no jurisdictional effect.
• The Third Court of Appeal also ruled that the customer meters were telemetry units, were clearly related to step-down generators and therefore qualified for the manufacturing exemption.

Notable additions to the STAR (State Automated Tax Research) system

General

Personal responsibility

Monitor’s Decisions Nos. 117,436, 117,441 (2022): Administrative Judge Rejected Bar Owner’s Personal Liability Assessments Because Monitor Failed to Demonstrate with Clear and Convincing Evidence that Bar Owner bar had acted or participated in a fraudulent scheme or plan. to evade paying tax on mixed drinks from bars. In arriving at this conclusion, the administrative law judge relied on findings that the bar owner had played no role in the calculation of the amounts of mixed drink sales to be reported to the controller, in the reporting of these amounts to the Comptroller or in the payment of Mixed Beverage Sales Tax and Mixed Beverage Gross Receipts Tax to the Comptroller.

Franchise tax

unitary enterprise

Monitor’s Decisions No. 116,584, 117,455, 117,900 (2022): Administrative Judge found that a taxpayer who was a wholly owned subsidiary of its parent company and acted as a buying agent for its parent company parent company and the other subsidiaries of its parent company was engaged in a unitary enterprise with its parent company and these other subsidiaries. In making this decision, the administrative law judge noted that the taxpayer’s activities were coordinated by its parent company, that the transaction prices between the taxpayer and affiliated companies were not profit-driven, and that the taxpayer was dependent on other affiliates to perform specific functions. Moreover, the taxpayer did not dispute that it was affiliated with the other subsidiaries of its parent company, and 34 Tex. Admin. Code § 3.590(b)(6)(B) (Margin: Combined Reporting) provides that affiliates are deemed to be part of a unitary enterprise.

Cost of Goods Sold

Monitor’s Decisions Nos. 115,992, 115,993, 115,994, 115,995, 115,996, 115,997 (2022) — Administrative judge determined that payments made by a cigarette manufacturer under a master settlement agreement entered into with 46 states regarding claims for past conduct and future conduct in any manner of use or exposure to tobacco products were not properly included in the cost of goods sold because it is not s These were not costs associated with the construction, manufacture, development, mining, extraction, creation, cultivation or growth of cigarettes. See Texas Tax Code § 171.1012(c) (Determination of Cost of Goods Sold). The administrative law judge made a similar decision with respect to quota buy-back payments to offset the cost of federal subsidies to tobacco growers. The administrative law judge also found that the two types of payments were not post-production costs that were included in the cost of goods sold under Section 171.1012(d) of the Texas tax code and ruled. rejected the taxpayer’s argument that he had an insufficient connection to Texas to justify taxation, since it was undisputed that the taxpayer had inventory, leased property, and employees located in Texas.

Taxes on mixed drinks

Free drinks/Fraud penalty

Comptroller’s Decision No. 117,273, 117,274 (2022): Administrative Judge ruled that a taxpayer who operated a bar and claimed a free drink allowance did not provide sufficient evidence because the taxpayer did not not provide service vouchers for each person or party. alcoholic beverages or daily summaries, including free alcoholic beverages distributed. See 34 Text. Admin. Code § 3.1001(l)(2), (k)(1)(E) (Gross Receipt Mixed Beverage Tax). The administrative judge also upheld the imposition of the 50% fraud penalty against the taxpayer, because the taxpayer’s overall error rate was greater than 50% and therefore constituted a gross error (see Text. Tax Code § 111.205(b) (Exception to Assessment Limitation)) and there was no evidence that the employees who processed the taxpayer’s gross mixed beverage income returns or the sales tax returns of mixed drinks during the periods in question were engaged in independent conduct when calculating reportable sales or when filing fraudulent tax returns (see 34 Text. Admin. Code § 3.15(b) (Penalty for fraud, intent to evade tax, or alteration, destruction or concealment of documents))

Sales and use tax

Information Services/Data Processing Services/Non-Taxable Services

STAR Accession No. 202206008L (June 10, 2022)—In this private letter decision, the Comptroller found that an online educational program used to train medical professional students was not subject to sales tax or tax. ‘use. Specifically, the Comptroller determined that the online educational program was not a news service because it did not involve the sale of general or specialized news or other current information as described by the tax code. of Texas § 151.0038 (“Information Service”) and did not resemble other examples of information services in 34 Tex. Admin. Code § 3.342(a)(6) (Information Services). Additionally, while the online educational program had data processing elements that compiled student responses during simulations, generated performance scores, and provided answers and scores to professors (see Texas Tax Code § 151.0035 (“Data Processing Service”); 34 Text. Admin. Code 3.330 (Data Processing Services)), the Controller has exercised exclusive jurisdiction to interpret whether the services are taxable (see Text. Tax Code § 151.0101(b) (“Taxable Services”)) to determine that the online educational program was not a data processing service and was not taxable.

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