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.