On August 31, 2021, the Maryland Comptroller filed proposed regulations on the controversial digital advertising gross revenues tax (the DAT) with the Joint Committee on Administrative, Executive, and Legislative Review. Of primary interest to potential DAT taxpayers, and described in this Legal Alert, the regulations adopt a device-based apportionment fraction. The comment period for the proposed regulations runs through November 8, 2021; a public hearing will be scheduled at a later date.

Read the full Legal Alert here.

Recent developments for Illinois’ marketplace facilitator tax law.

The latest

  • August 27 – Governor J.B. Pritzker signs S.B. 2066, which allows marketplace sellers to claim a retroactive retailers’ occupation tax credit for sales in 2020 for which a marketplace facilitator has already remitted tax.
  • July 23 – the IDOR publishes emergency rules with specific guidance regarding food delivery marketplace facilitators (PDF).
  • June 9the IDOR issues updated FAQs for marketplace facilitators, marketplace sellers and remote sellers.
  • June 8 – IDOR revises its “Leveling the Playing Field Retailer Flowchart” (PDF).
  • June 3 – IDOR publishes “What’s New in 2021 for Remote Retailers and Marketplace Facilitators PowerPoint Presentation” (PowerPoint).
  • June 1 – IDOR publishes a Compliance Alert for reporting issues on form ST-1, Sales and Use Tax Return (PDF).

Illinois’s marketplace collection law at a glance:

Relevant statutes:

  • Retailer’s Occupation Act: 35 ILCS 120/2
  • Service Use Tax Act: 35 ILCS 110/2d
  • Use Tax Act: 35 ILCS 105/2d

Tax collection threshold: $100,000 in sales of tangible personal property or 200 separate transactions for the sale of tangible personal property within the preceding 12-month period. (Includes sales facilitated on behalf of marketplace sellers.)

“Marketplace facilitator” defined: A person who, pursuant to an agreement with an unrelated third-party marketplace seller, directly or indirectly through one or more affiliates facilitates a retail sale by an unrelated third party marketplace seller by:

  1. listing or advertising for sale by the marketplace seller in a marketplace, tangible personal property that is subject to tax under this Act; and
  2. either directly or indirectly, through agreements or arrangements with third parties, collecting payment from the customer and transmitting that payment to the marketplace seller regardless of whether the marketplace facilitator receives compensation or other consideration in exchange for its services.

“Remote retailer” defined: A retailer that does not maintain within this State, directly or by a subsidiary, an office, distribution house, sales house, warehouse or other place of business, or any agent or other representative operating within this State under the authority of the retailer or its subsidiary, irrespective of whether such place of business or agent is located here permanently or temporarily or whether such retailer or subsidiary is licensed to do business in this State.


Background: Marketplace facilitator collection in Illinois

Like most states with a sales tax, Illinois enacted a marketplace facilitator sales tax collection law after the 2018 Wayfair decision. The goal of this law was to “level the playing field” between online and in-store sales by requiring marketplace facilitators and remote retailers to collect sales tax. However, the interaction of Illinois’ unique sales tax system and the collection requirements imposed on digital marketplaces created issues that had to be resolved by a series of “fix” bills and guidance from the IDOR.

Sales Tax in Illinois

Illinois imposes two separate but complementary taxes upon the sale and use of tangible personal property: the Illinois Retailers’ Occupation Tax (ROT) and the Use Tax (UT). Typically, customers pay UT to retailers, who must remit the tax to the Illinois Department of Revenue unless the retailer has already remitted ROT upon the gross receipts from the same sale. If ROT has already been paid on the transaction, then the seller may keep the UT collected from the customer. Therefore, although a single retail sale transaction triggers the imposition of both the ROT and UT on the retailer and customer, only one of the taxes must be remitted to the state. If a retailer does not have nexus with Illinois and therefore lacks ROT or UT obligations, the Illinois customer must pay UT directly to state.


Marketplace Facilitator Sales Tax Laws in Illinois

IDOR emergency rules cover food delivery marketplaces and formalize February guidance

On July 21, 2021, the IDOR released emergency rules formally reversing Compliance Alert 2021-01, regarding the obligations of marketplace facilitators to collect the Chicago soft drink tax and metropolitan authority’s retailer tax. The emergency rules provide that marketplace facilitators must collect both taxes. The rules are retroactive to July 13, 2021.

In connection with this change, provisions were added to emphasize that food delivery services that are considered marketplace facilitators must provide food service establishments with a certification that the food delivery service assumes the rights and duties of a retailer under the Retailers’ Occupation Tax Act and all applicable local taxes administered by the IDOR for sales made by the food service establishment on the marketplace, and that it will remit all such taxes for such sales.

The emergency rules also describe obligations of local taxing jurisdictions to provide data to the IDOR so taxpayers can determine the correct rates of local tax due on transactions.

Section 131.175 of the emergency rules provides that beginning February 1, 2022 and on or before February 1 of each year thereafter, the IDOR will make available to each local taxing jurisdiction the taxing jurisdiction’s boundaries, determined by the IDOR, for its verification. Jurisdictions shall verify these taxing jurisdiction boundaries and notify the IDOR of any changes, additions, or deletions by April 1 of each year in the form and manner required by the IDOR. The IDOR will use its best judgment and information to confirm the information provided by the taxing jurisdictions and update its database. The IDOR will administer and enforce the changes on the first day of the next following July.

The clerk of any municipality or county from which territory has been annexed or disconnected shall notify the IDOR of that annexation or disconnection. Required documentation shall include a certified copy of the plat of annexation or, in the case of disconnection, the ordinance, final judgment, or resolution of disconnection together with an accurate depiction of the territory disconnected. Notification shall be provided to the IDOR either:

  1. On or before the first day of April, whereupon the IDOR will confirm the information provided by the municipality or county and update its database and proceed to administer and enforce the confirmed changes on the first day of July next following proper notification; or
  2. On or before the first day of October, whereupon the IDOR will confirm the information provided by the municipality or county and update its database and proceed to administer and enforce the confirmed changes on the first day of January next following proper notification.

January 2021 sales tax guidance update

The Illinois Department of Revenue (IDOR) recently issued updated sales tax rules and guidance for remote sellers and marketplace facilitators. The updated rules and guidance reflect changes made by the 2019 “Leveling the Playing Field for Illinois Retail Act” that became effective on January 1, 2021 (Public Act 101-0031 and Public Act 101-0604).

Updated Retailers Occupation Tax (ROT) rules

The new ROT administrative rules address six categories of retailers with different tax liabilities:

  1. Remote retailers incurring state and local ROT using destination sourcing for sales made to Illinois purchasers;
  2. Marketplace facilitators incurring state and local ROT using destination sourcing for sales made over the marketplace on behalf of marketplace sellers to Illinois purchasers;
  3. Marketplace facilitators incurring state and local ROT using origin sourcing for their own sales that are fulfilled from inventory located in Illinois and incurring state and local ROT using destination sourcing for all other sales of its own;
  4. Out-of-state retailers with a physical presence in Illinois incurring a use tax collection obligation for sales made outside Illinois and shipped or delivered to Illinois purchasers; such retailers also incur state and local ROT using origin sourcing for any sales made in Illinois;
  5. Illinois retailers, including brick and mortar retailers, incurring no state or local ROT for sales made over a marketplace (the marketplace facilitator will now incur state and local ROT liability based on destination sourcing for these sales); and
  6. Illinois retailers, including brick and mortar retailers, incurring state and local ROT based on origin sourcing for sales made in Illinois.

As a result of these differing tax obligations, the IDOR advises that it is critical that retailers examine their selling activities to determine their specific tax liabilities. This is especially important for retailers that engage in multichannel retailing (for example, retailers that engage in selling through their own website, as well as through a marketplace, or Illinois brick and mortar retailers that also sell over a marketplace).

Finally, the scope of the rules is limited to state and local ROT. The rules do not impact the liability of marketplace sellers and remote retailers for other taxes administered by the IDOR or taxes administered by localities.

Destination-based sales tax guidance

On January 4, 2021, the IDOR published a website with technical guidance for remote retailers and marketplace facilitators who must collect destination-based sales tax starting Jan. 1, 2021. The website addresses how these taxpayers can determine tax rates and location codes, add and change locations on a MyTax Illinois account, and properly file Forms ST-1/ST-2.

Eversheds Money Court Graphic

Threshold calculation guidance for marketplace facilitators

Illinois Informational Bulletin FY 2021-02-A, provides additional ROT guidance for marketplace facilitators. The guidance advises that for the purposes of calculating the remittance threshold determination for marketplace facilitators, two categories of sales should be excluded:

  • sales for resale, and
  • sales of tangible personal property that is required to be registered with an agency of Illinois, including motor vehicles, watercraft, aircraft, and trailers.

All sales other than these, even if they are exempt from tax, must be included in calculating the tax remittance thresholds. Finally, a marketplace facilitator is considered to be habitually engaged in the selling of tangible personal property and as such, no sales made by a marketplace facilitator are considered to be occasional sales (unlike a remote retailer). Therefore, marketplace facilitators do not have occasional sales to exclude from their tax remittance threshold determination.

Further guidance was provided in Sept. 2020 in Illinois Informational Bulletin FY 2021-2: Retailers’ Occupation Tax Guidance for Remote Retailers as set forth by the Leveling the Playing Field for Illinois Retail Act.

Occasional sales on marketplace platforms

The IDOR takes the position that marketplace sellers cannot qualify for the occasional sale exemption for ROT. Generally, persons who make isolated or occasional sales do not incur tax liability because ROT is imposed on persons engaged in the business of selling tangible personal property. However, according to an IDOR General Information Letter released on Jan. 28, 2021, marketplace sales are not eligible for the occasional sale exemption.

The IDOR noted that under the new administrative rules that took effect in 2021, a marketplace facilitator is considered a retailer engaged in the occupation of selling at retail in Illinois for ROT purposes if it meets the annual $100,000 in sales or 200 transaction thresholds. Thus, a marketplace facilitator makes more than isolated or occasional sales. Additionally, a “marketplace” is a location held out to the public as being habitually engaged in the selling of tangible personal property.

Ill. Dept. of Rev., General Information Letter ST 21-0003 (Jan. 28, 2021).

June 2021 Compliance Alert

The IDOR published a compliance alert on June 1 (PDF) noting that it had identified a large number of retailers who filed Form ST-1 returns for periods after January 1, 2021, with sales amounts reported only on lines 6a and 7a, the lines used to report tax on sales subject only to Illinois Use Tax.

These retailers may not be properly assessing, collecting, remitting, and reporting Illinois taxes on some or all of their sales. Some of their sales may be subject to Retailers’ Occupation Tax at the origin rate or destination rate, depending on the specifics of each sale.

The Compliance Alert notes that in-state retailers must collect and remit state and local ROT at the origin rate. Out-of-state retailers with a physical presence within the state must determine on a sale-by-sale basis if their selling activities take place within the state:

  • If selling activities occur in Illinois (for example, sales are filled from inventory in Illinois or other selling activities occur in Illinois; see, e.g., 86 Ill. Adm. Code 270.115), then state and local retailers’ occupation tax is calculated using the origin rate for that sale.
  • If selling activities occur outside Illinois, then use tax must be collected and remitted for that sale.

Remote retailers meeting the state’s $100,000 in sales/200 transaction threshold must collect and remit state and local ROT at the destination rate.

Taxes for sales made by a marketplace facilitator on behalf of a marketplace seller are incurred at the tax rate in effect at the purchaser’s location (destination rate). This applies to sales made through a marketplace by:

  • Illinois retailers
  • Out-of-state retailers (with or without physical presence)

Sales made over the marketplace by a marketplace facilitator itself are taxed as follows:

  • For sales that are fulfilled from inventory located in Illinois and for which selling activities do not otherwise occur in Illinois (see, e.g., 86 Ill. Adm. Code 270.115), state and local retailers’ occupation taxes are incurred at the tax rate in effect at the location of the Illinois inventory (origin rate);
  • For sales for which selling activities otherwise occur in Illinois (see, e.g., 86 Ill. Adm. Code 270.115), state and local retailers’ occupation taxes are incurred at the tax rate in effect at the location of the selling activities (origin rate);
  • For sales that are not fulfilled from inventory located in Illinois and for which selling activities do not otherwise occur in Illinois (see, e.g., 86 Ill. Adm. Code 270.115), state and local retailers’ occupation taxes are incurred at the tax rate in effect at the purchaser’s location (destination rate).

Developments: Illinois’ marketplace and remote seller collection laws

  • August 27, 2021the Governor signs S.B. 2066.
  • May 30, 2021the Illinois Legislature passes S.B. 2066, which creates an exemption and retroactive credit for marketplace sellers for transactions in 2020 where tax was paid by the marketplace seller and the marketplace facilitator.
  • Feb. 23, 2021 – Illinois issues responses to Frequently Asked Questions regarding marketplace facilitators, marketplace sellers, and remote retailers.
  • Feb. 1, 2021 – IDOR issues a Compliance Alert on the tax remittance obligations of remote retailers, marketplace sellers, and marketplace facilitators. It concluded that remote retailers and marketplace facilitators must collect and remit state and local ROT administered by the IDOR – including the Chicago Home Rule Municipal Soft Drink ROT. However, marketplace facilitators are not required to collect and remit other (non-ROT) taxes administered by the Department on sales made by marketplace sellers over the marketplace and remote retailers, including the Prepaid Wireless E911 Surcharge, Illinois Telecommunications Access Corporation Assessment, and Tire User Fee.
  • Jan. 1, 2021Illinois issues updated sales tax rules for remote sellers and marketplace facilitators. The updated rules and guidance reflect changes made by the 2019 “Leveling the Playing Field for Illinois Retail Act” that became effective on January 1, 2021.
  • Sept. 18, 2020 – IDOR proposes regulations implementing their remote seller and marketplace facilitator legislation. (PDF) The guidance adds Ill. Admin. Code tit. 86, § 131.101 et seq. to provide updated definitions, explain the determination of remote retailer status, and explain when the gross receipts and separate transaction thresholds are met.
  • May 19, 2020 – IDOR issues proposed regulation 150.804 clarifying the state’s marketplace facilitator legislation (PDF). Under the proposed regulations, a marketplace facilitator must certify to marketplace sellers that it assumes the rights and duties of a retailer for Illinois use tax purposes, must maintain records of its marketplace sellers, and must clearly indicate to sellers that it is listing goods on behalf of a clearly identified seller. The proposed regulations also provide detail and definitions regarding the $100,000 annual revenue or 200 annual transactions thresholds. Finally, the proposed regulation clarifies that the marketplace requirements apply only to use tax obligations and marketplace facilitators are not authorized to remit sales tax obligations (related to orders fulfilled from in-state inventory).
  • Jan. 1, 2020 –Illinois expands nexus to include marketplace facilitators that meet certain thresholds.

More resources

On August 25, 2021, the New York State Department of Taxation and Finance released guidance (Technical Memorandum, TSB-M-21(1)C, (1)I) addressing the recently enacted optional pass-through entity tax (PTET) that partnerships and New York S corporations may elect to pay for tax years beginning on or after January 1, 2021.

Read the full Legal Alert here.

In an article for Bloomberg Tax, Eversheds Sutherland attorneys Dan Schlueter and Fahad Mithavayani highlight how Hawaii and Texas are the latest states to join the trend to restrict the discoverability of attorney communications with expert witnesses and what it means for state tax litigation.

On August 17, 2021, the Ohio Department of Taxation finalized amendments to its rule governing the determination of resident status for personal income tax purposes. See our prior coverage of the draft (now finalized) rule here. The amendments are intended to modernize the factors to be considered – and to be disregarded – in determining an Ohio taxpayer’s residency status.

Ohio Admin. Code 5703-7-16 (available here).

In this episode of the SALT Shaker Podcast policy series, host and Eversheds Sutherland Partner Nikki Dobay welcomes Dale Craymer, President of the Texas Taxpayers and Research Association (TTARA), as well as Eversheds Sutherland Associate Dennis Jansen for a discussion about all things Texas.

Dale provides an overview of TTARA’s work, as well as how Texas’s legislative session was impacted by COVID-19 and the winter storm. Dale, Nikki and Dennis then discuss accomplishments in the most recent legislative session, including important changes to tax protest procedures, marketplace facilitator legislation, and whether any tax policy will be discussed during the special session. All of these topics are covered before turning to the surprise non-tax question – everyone’s favorite movie!

The Eversheds Sutherland State and Local Tax team has been engaged in state tax policy work for years, tracking tax legislation, helping clients gauge the impact of various proposals, drafting talking points and rewriting legislation. This series, which is focused on state and local tax policy issues, is hosted by Partner Nikki Dobay, who has an extensive background in tax policy.

Questions or comments? Email SALTonline@eversheds-sutherland.com.

 

 

 

 

 

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Apple recently appealed an Ohio Commercial Activity Tax (CAT) assessment, alleging that the Department of Taxation improperly treated receipts from sales made through its app store as Apple’s receipts for purposes of determining its tax base under the CAT.  Ohio law allows agents to exclude gross receipts (other than commission) from the agent’s CAT base. Apple argues that under this law, Apple acted as an agent in collecting receipts on behalf of the app’s publisher. Thus, Apple’s gross receipts for CAT purposes are only the commission, not the full app price paid that Apple collects on the publisher’s behalf. Apple also asserted that the Department improperly included receipts in its CAT base for sales made to Ohio retail distribution centers or warehouses, which are excluded from the CAT when the item is shipped from the distribution center to a destination outside Ohio.

Effective August 6, 2021, Illinois amended its unclaimed property law to include cryptocurrency. SB 338, Public Act 102-0288, was approved by the Governor and became law the same day. Under the unclaimed property law, “virtual currency” is presumed unclaimed after 5 years of no indication of interest by the apparent property owner. The new law amends the definition of “virtual currency” to specifically include “cryptocurrency” or “a form of digitally stored value, which does not have legal tender status recognized by the United States.” Once virtual currency is abandoned, the holder must liquidate the virtual currency and turn it over to the administrator. However, the virtual currency owner has no recourse to recover any gain in value against the holder who liquidated the virtual currency.

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which member of the Multistate Tax Commission recently joined Eversheds Sutherland Partner Nikki Dobay for an episode of the SALT Shaker Podcast policy series?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card.

Answers will be posted on Saturdays in our SALT Shaker Weekly Digest. Be sure to check back then!

The Texas Comptroller of Public Accounts held its annual meeting on August 17 and provided taxpayers with updates regarding legislation, audit procedures, staffing, and other related topics. The meeting, which was held virtually, struck a positive tone regarding Texas’ fiscal outlook and taxpayer-friendly procedural changes.

Audit updates: hope in sight for staffing shortages and the R&D backlog

Audit Director Emma Fuentes provided an update regarding the state of the Comptroller’s audit division. Fuentes said that although the Comptroller’s auditors are partially working remotely due to the pandemic, in-person field visits and appointments have resumed. Audits are being generated at pre-pandemic rates for all industries and the Comptroller is no longer offering automatic extensions of time to respond to redetermination notices.

Texas’ controversial research and development credit audits are no longer on hold, but the audit division is working through a backlog of roughly 1,200 assignments related to approximately 450 taxpayers. The Comptroller’s audits of research and development credits have drawn criticism from the taxpayer community because Texas claims to have a higher burden of proof for these credits than R&D credits offered by other states and the federal government. The Texas Comptroller also does not automatically accept IRS sampling methods or audit findings regarding research and development credit documentation, creating unpleasant surprises and increased costs to substantiate credit amounts.

Fuentes said that the Comptroller recently hired new auditors to assist with the massive R&D credit backlog, but estimates that it is roughly 120 auditors short of being fully staffed.

New tax protest options and a push toward settling tax disputes

This year the Comptroller dedicated an entire annual update session to new legislation changing Texas’ tax protest procedures. H.B. 2080 eliminated the state’s “pay-to-play” rule for taxpayers to file tax protest lawsuits in district court. Now, a taxpayer can file in district court without first paying a disputed tax assessment. This law change came amid uncertainty regarding whether the state’s prior pay-to-play rules violated the Texas constitution’s open courts guarantees.

Another bill, S.B. 903, allows a taxpayer claiming a tax refund to file with the Comptroller a notice of intent to bypass a tax refund hearing. The notice of intent must:

  • be filed within 60 days after the comptroller denied the claim;
  • be in writing;
  • assert the material facts and each specific legal basis on which a refund was claimed; and
  • specify the amount of the refund claimed.

Additionally, the Comptroller can force a taxpayer to participate in a conference to clarify the issues contained in the taxpayer’s claim.

Associate Deputy Comptroller Karey Barton said administrative hearings remain an attractive option for taxpayers who do not want the expense and hazards of litigation associated with a district court lawsuit.  The total number of active hearings at the Comptroller’s office has dropped during the pandemic, but Barton attributes this to an internal process that identifies taxpayers’ redetermination petitions for settlement prior to hearings.

Sarah Pai, Senior Counsel for Tax Compliance, said that the Comptroller’s office is supportive of these taxpayer-friendly law changes because it frees up the Comptroller to dedicate more resources to taxability questions versus time-intensive procedural issues.

Legislative and rulemaking updates: booze, ATVs, and sourcing disputes

Comptroller staff detailed a variety of new rules implementing recently-passed tax legislation.

  • Marketplace providers: The Comptroller amended several rules to implement S.B. 477, which requires marketplace providers to collect taxes and fees (in addition to Texas sales and use tax) that may apply to marketplace sales (such as wireless 911 fees and lead-acid battery fees). The bill also allows marketplace providers to accept resale certificates for sales of event tickets and clarifies that marketplace providers are not eligible to claim the occasional sale exemption.
  • Data processing: Amendments to Rule 3.330 implement changes in S.B. 153 that “clarify” an existing Comptroller policy regarding the exemption of payment processors from Texas’ sales tax for data processing services. Notably, the bill states that exempt services involving “settling of an electronic payment transaction” do not include charges by a marketplace provider.
  • Insurance services: H.B. 1445 and amended Rule 3.355 provide that medical and dental billing services performed prior to an insurance claim submission are not taxable “insurance services.” The Comptroller stated that it will enforce the rule immediately, rather than the Jan. 1, 2022 effective date. This legislation was enacted in response to the Comptroller’s shifting position on the taxability of medical-related insurance services.
  • Pets: Acknowledging the number of pandemic-related pet adoptions, amendments to Rule 3.316 expands the types of organizations that are eligible to make tax-exempt adoptions of animals.
  • Booze: Texas residents were most excited about H.B. 1024, which made pandemic-related alcohol-to-go rules permanent. The law also fixed some quirks with pandemic rules, such as mixed-beverage taxes only applying to permit holders for on premise consumption, rather than off-premise consumption. H.B. 1755 similarly allows customers to take home unopened bottles of wine – prior to the amendment to-go alcohol was limited to opened bottles.
  • Energy bills: Generally, taxpayers without a sales and use tax permit were required to procure a right-of-assignment form from a vendor to obtain a sales tax refund. S.B. 833 created an exception for oil and gas producers that report severance tax but are otherwise non-permitted taxpayers. Because producers purchase a significant quantity of goods and services from a variety of vendors and assignment forms must be executed by a corporate officer for each vendor, the refund assignment requirement resulted in a cumbersome and inefficient process for all parties involved. Additionally several bills (H.B. 1520, S.B. 1580, and H.B. 4492) provide exemptions to help Texas energy producers impacted by the state’s historic winter storm.
  • Resale and exemption certificates: S.B. 296 and amended Rule 3.282 allows taxpayers to take an extra 30 days to provide resale and exemption certificates during audits. The Comptroller noted that a best practice is to obtain these certificates at the time of sale.
  • ATVs: The Texas Comptroller noted that a number of Texans are scooting into nearby states to purchase ATVs. S.B. 586 is a clean-up bill that expands use tax reporting requirements from ATV manufacturers to ATV distributers that have begun voluntarily registering in Texas and remitting use tax on behalf of their Texas customers.

Finally, Associate Deputy Comptroller Karey Barton noted that several Texas cities have filed lawsuits challenging Comptroller Rule 3.334, which changes the sourcing of sales tax imposed on online purchases to the destination  (i.e., buyer’s location) instead of the origin (i.e., seller’s place of business). Barton indicated the Comptroller intends to defend the rule.

Fiscal outlook: Texas sees green

In July 2020, the Texas Comptroller’s Certification Revenue Estimate projected a $4.58 billion deficit for the 2020-21 biennium. The Comptroller now projects a $7.85 billion surplus, which also has yet to appropriate $16 billion from the American Rescue Plan. Additionally, the state’s “rainy day” fund balance is projected to be approximately $12 billion by the end of the next biennium, showing that the Lone Star State is not hurting for cash.