TL Fahring | TaxConnections

11 Aug 2023

Crackdown On U.S. Taxpayers Use Of Malta Pension Funds

Amplifying its efforts to crack down on U.S. taxpayers’ use of Malta pension funds to attempt to achieve federal income tax savings, the IRS recently has issued proposed regulations identifying these funds as listed transactions and appears to have launched criminal investigations into these plans.

Background

Some U.S. taxpayers have been taking the position that a combination of the income tax treaty between the United States and Malta and local Maltese law regarding person retirement schemes provides them with an exemption from federal income tax for income associated with pension funds that they establish in Malta.

Here’s a brief explanation. The U.S.-Malta income tax treaty prohibits each state from taxing a pension plan established in the other state that is beneficially owned by an individual resident of the first state if the pension plan would be exempt from taxation in that other state.[1]

Some examples of U.S. pension plans where this provision could apply include an individual retirement account (IRA) under section 408 or a Roth IRA under section 408A of the Internal Revenue Code with an individual beneficiary who is Malta resident.[2] Generally, amounts in an IRA are not taxed until there is a distribution.[3] Likewise, a Roth IRA generally is not taxed on its earnings, and certain distributions from a Roth IRA may be exempt from tax.[4] There are certain limitations, however, on what constitutes and IRA and Roth IRA. Non-cash contributions are prohibited, and such contributions must be limited to the individual’s earned income.[5]

U.S. taxpayers have argued that Malta’s Retirement Pension Act of 2011 should entitle them to a similar exemption from U.S. federal income tax under the treaty with respect to earnings in and distributions from these schemes. The IRS has provided an example of this fact pattern:
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Written by TL Fahring | Posted in Malta Pension Funds

06 Jul 2023

Texas Legislative Update | Qualified Projects

Texas Legislative Update, 88th Legislature, Regular Session | Qualified Projects Under Texas Tax Code Chapter 351, Subchapter C

Summary: The Texas Legislature enacted four bills that 1) expand the list of cities that can build qualified projects (i.e., hotel and convention center projects subject to certain specifications) under Texas Tax Code Chapter 351, Subchapter C; 2) establish a claw back mechanism if state tax revenue generated by a qualified project does not meet certain metrics, 3) require a biennial report from the Texas Comptroller of Public Accounts regarding qualified projects, and 4) clarify that the provisions in Subchapter C do not provide any additional mechanism for taking property for public purposes or economic development.

Bills Enacted:

HB 5012, 88th Leg., R.S. (2023) (effective September 1, 2023)
SB 627, 88th Leg., R.S. (2023) (effective immediately)
HB 3727, 88th Leg., R.S. (2023) (effective immediately)
SB 1420, 88th Leg., R.S. (2023) (effective immediately)

Background: Texas Tax Code Chapter 351, Subchapter C entitles certain cities to receive rebates of state taxes if the cities use their municipal hotel occupancy tax revenue in connection with a “qualified project.”[1] (Note that Texas Tax Code Chapter 351 also envisions qualified projects that are not governed by Subchapter C. For the sake of clarity, I’ll refer to the projects in this post as Subchapter C qualified projects.)

A Subchapter C qualified project is a project to acquire, construct, repair, remodel, expand, or equip a qualified convention center facility, a qualified hotel, and/or certain restaurants bars, retail establishments, spas, and parking areas or structures within a certain proximity to the qualified convention center facility or qualified hotel.[2]

A “qualified convention center facility” means a facility that:
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Written by TL Fahring | Posted in Texas Law Update • Texas Legislature

16 Jun 2023

Texas Tax Update | May 2023 | Hotel Projects, Successor Liability, And More

Welcome back to another installment of the Texas Tax Roundup. Last month was pretty lowkey (aside from the Legislature’s regular session wrapping up, about which more later). Let’s see what happened!

Court Opinions

Jurisdiction

CoTechno Group, Inv. v. Hegar, No. 03-21-00327-CV (Tex. App.—Austin May 26, 2023)—The Austin Court of Appeals upheld a trial court’s dismissal of a case on a plea to the jurisdiction when the taxpayer didn’t submit a written protest to the Comptroller until it had filed its second amended complaint. The Court held that the failure to submit a written protest before suit is filed deprived the trial court of jurisdiction to hear the case, regardless of whether the taxpayer actually was required to make a payment with the protest (at the time suit was filed, Tex. Tax Code § 112.108 provided an inability-to-pay exception to the payment requirement).[1]

Rules

Proposed

Sales and Use Tax

34 Tex. Admin. Code § 3.297 (Carriers, Commercial Vessels, Locomotives and Rolling Stock, and Motor Vehicles) (published at 48 Tex. Reg. 2255, 2321-2324) (May 5, 2023))—The Comptroller proposed amendments to implement changes made by HB 4032, 86th Leg. (2019) to Tex. Tax Code Ch. 160 (Taxes on Sales and Use of Boats and Boat Motors) as well prior Comptroller guidance regarding the distinction between boats subject to tax under Chapter 160 as opposed to tax under Chapter 151 (Limited Sales, Use, and Excise Tax).

Boat and Motor Sales and Use Tax

34 Tex. Admin. Code § 3.741 (Boat and Boat Motor Sales and Use Tax) (published at 48 Tex. Reg. 2255, 2324-2331) (May 5, 2023))—The Comptroller proposed amendments to implement H.B. 2926, 78th Leg. (2003), H.B. 1106 83d Leg. (2013), H.B. 4032, 86th Leg. (2019), as well as make changes for consistency, clarity, and to incorporate Comptroller policy.

Notable Additions to the State Tax Automated Research (“STAR”) System

Hotel Projects

STAR Accession No. 202305008L (May 11, 2023)—In this private letter ruling, the Comptroller construed the term “connected to” in Tex. Tax Code § 351.156 (Entitlement to Certain Tax Revenue). This section describes the state hotel occupancy, mixed beverage, and sales and taxes generated, paid, and collected by a qualified hotel, and each restaurant, bar, and retail establishment located in or connected to a qualified hotel and qualified convention center facility (the whole constituting a qualified project) to which a qualifying municipality would be entitled. The Comptroller interpreted “connected to” here as meaning:

sharing an adjoining wall or roofline, or joined by an intervening structure with walls or a ceiling that allows passage between buildings; or
located on a lot that:
shares any portion of the boundary line with the lot on which the qualified convention center facility or the qualified hotel is located, and
is developed as part of the municipal hotel and convention center project.
The Comptroller stated that it would adopt this definition of “connected to” in amendment to 34 Tex. Admin. Code § 3.12 (Hotel Projects, Project Financing Zones, and Qualified Hotel Projects).

Franchise Tax

Successor Liability

Comptroller’s Decision Nos. 118,449, 118,451 (2023)—The ALJ found that the Comptroller hadn’t established that successor liability was appropriate when no evidence was presented that consideration passed between the person acquiring the business and the business’s then owner.[2] However, the ALJ found that the Comptroller had shown that the transfer of the business was a fraudulent transfer because, again, there was no exchange of consideration for the transfer of the assets of the business.[3] Therefore, the person who acquired the business was liable for the franchise taxes and sales and use taxes owed by the business prior to acquisition.

Sales and Use Tax

Telecommunications Refund

Comptroller’s Decision No. 117,425 (2023)—The ALJ denied a telecommunications provider’s refund claim for sales and use taxes insofar as the taxes related to purchases of racks, handholes, conduits, ducts, switchboards, chillers, and pipe poles. Telecommunications providers are entitled to a refund of sales and use tax on the sale, lease, or rental or storage, use, or other consumption of tangible personal property if the property is sold, leased, or rented to or stored, used, or consumed by a provider or a subsidiary of a provider and the property is directly used or consumed by the provider or subsidiary in or during the transmission, conveyance, routing, or reception of telecommunications services.[4] The ALJ determined that “directly used or consumed” meant used or consumed during the actual transmission or routing with no intervening cause.[5] The ALJ found that no evidence was presented by the telecommunications provider that any of the items at issue were directly used to actually transmit or route a signal during the performance of telecommunication services.

Nexus

Comptroller’s Decision No. 118,524 (2023)—The ALJ found that a taxpayer had nexus with Texas for purposes of collecting and remitting sales and use tax and was engaged in business in Texas because it derived receipts from the sale of licensed software to customers in Texas.

State and Local Tax Services

Freeman Law works with tax clients across all industries, including manufacturing, services, technology, oil and gas, financial services, and real estate. State and local tax laws and rules are complex and vary from state to state. As states confront budgetary deficits due to declining tax revenues and increased government spending, tax authorities aggressively enforce state tax laws to recapture lost revenues.

At Freeman Law, our experienced attorneys regularly guide our clients through complex state and local tax issues—issues that are frequently changing as states seek to keep pace with technology and the evolution of business. Staying ahead requires sophisticated legal counsel dedicated to understanding the complex state tax issues that confront businesses and individuals. Schedule a consultation or call (214) 984-3000 to discuss your local & state tax concerns and questions.

[1] If a person contends that a tax that they are required to pay is unlawful of that the legal official charged with the duty of collecting the tax may not legally demand or collect the tax, the person must pay the amount claimed by the state, and if the person intends to bring suit, the person must submit with the payment a protest. Tex. Tax Code § 112.051(a) (Protest Payment Required). After making the protest payment, the person must file suit within 90 days. Tex. Tax Code § 112.052(a) (Taxpayer Suit After Payment Under Protest).

[2] See Tex. Tax Code § 111.020 (Tax Collection on Termination of Business).

[3] See Tex. Tax Code § 111.024 (Liability in Fraudulent Transfers).

[4] Tex. Tax Code § 151.3186(b) (Property Used in Cable Television, Internet Access, or Telecommunications Services).

[5] Relying on Southwest Royalties, Inc. v. Hegar, 500 S.W.3d 400, 408 (Tex. 2016) (in another context finding that “a reasonable interpretation of ‘direct’ implies a close link with no intervening causes.”)

Have a question? Contact TL Fahring, Freeman Law, Texas.

Written by TL Fahring | Posted in Texas Tax Update

17 May 2023

Rentals Versus Services Under Texas Sales And Use Tax

One of the thorniest issues in Texas sales and use tax is the distinction between the rental of tangible personal property (which is subject to tax) and the provision of a service (which is only taxable if the service is taxable). This distinction not only affects the taxability of charges for the rental or service but also that of equipment that is purchased to provide the rental or service.

What’s a Rental?

The rental of tangible personal property in Texas is subject to sales or use tax.[1] A rental occurs when possession but not title to tangible personal property is transferred for consideration.[2] A person acquires possession of tangible personal property when that person acquires operational control over that property.[3] Operational control, in turn, means that the customer can use, control, or operate the tangible personal property.[4]

What are Taxable Services?

Only the following services are subject to Texas sales or use tax:
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Written by TL Fahring | Posted in Sales/Use Tax • TaxConnections

16 May 2023

Texas Tax Roundup | April 2023: Pleas To The Jurisdiction, Retail And Wholesale Franchise Tax Rate, And More

Howdy folks, and welcome back to another edition of the Texas Tax Roundup, where we gab about all things Texas tax and perhaps even some things Texas tax adjacent. As ole T.S. once put it, “April is the cruelest month” [1]—although maybe not for the same reasons he had. Because instead of “breeding lilacs out of the dead land”[2] or some such, which implies at least a glimmer of hope (although that might be why he thought it was so cruel, him being a bit of a downer, you know), April 2023 showered us with a string of taxpayer defeats, the one bright spot being a smackdown on a plea to the jurisdiction by the Texas Comptroller.

Court Opinions
Franchise Tax
Plea to the Jurisdiction/Total Revenue

Hibernia Energy, LLC v. Hegar, No. 03-21-00527-CV (Tex. App.—Austin Apr. 21, 2023, no pet. h.)—The Texas Third Court of Appeals affirmed the trial court’s judgment denying the Comptroller’s plea to the jurisdiction but also denying a taxpayer’s/consultant’s claim for refund for franchise taxes attributable to the inclusion in total revenue of gains from the sale of oil-and-gas leasehold interests.

The taxpayer, a limited liability company, acquired oil-and-gas leasehold interests in 2010, and then sold these interests in 2012 and 2014 at a gain of $95,866,370 and $296,691,853 for each year respectively. The taxpayer included these gains in its total revenue for purposes of determining its franchise tax liability for the respective franchise tax report years and paid the taxes.

In 2015, the taxpayer hired a consultant that filed a refund claim on the taxpayer’s behalf for the franchise taxes paid that were attributable to these gains.[3] The reason given for why the taxpayer was entitled to a refund was that it had overstated total revenue by including gains whose inclusion was not required under applicable law.

A limited liability company by default is treated as a partnership for federal income tax purposes.[4] A partnership is required to file a Form 1065, U.S. Return of Partnership Income to “report the income, gains, losses, deductions, credits, and other information about the operation of the partnership.”[5]

Under the Texas franchise tax, the total revenue of a taxable entity treated as a partnership for federal income tax purposes is calculated by first adding up the amounts reportable as income on various lines on the entity’s Form 1065:
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Written by TL Fahring | Posted in Franchise Tax Rate • Texas

11 Apr 2023

Texas Tax Roundup | March 2023: Flowback, Welding, Local Taxes, And More!

Welcome back to another Texas Tax Roundup! March 2023 brought us a lot of administrative action, especially for Texas sales or use tax. Let’s get started!

Rules

Franchise Tax

Apportionment

34 Tex. Admin. Code § 3.591 (Margin: Apportionment)—The Comptroller adopted his amendments outlined in our previous post to implement the Texas Supreme Court’s opinion in Sirius XM Radio, Inc. v. Hegar, No. 20-0462 (Tex. March 25, 2022).[1]

Notable Additions to the State Tax Automated Research System

Franchise Tax

Apportionment

Comptroller’s Decision No. 116,251, 116,252 (2023)— The ALJ upheld assessments of sales tax and franchise tax against an out-of-state corporate taxpayer for periods in which the corporation had only a single employee in Texas. The taxpayer was in the business of selling telecommunication services. The Comptroller had become aware of the taxpayer’s business activities in Texas due to information from the Texas Workforce Commission. The ALJ found that the presence of an employee in Texas created nexus for purposes of both sales and franchise tax.[2] Outside of asserting that Texas lacked jurisdiction to tax, the taxpayer didn’t provide any evidence showing that the assessments were incorrect.

Sales And Use Tax

Flowback Services
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Written by TL Fahring | Posted in Franchise Tax • Sales And Use Tax Manufacturing Exemption

17 Mar 2023

Who Is Subject To Mixed Beverage Taxes?

The state of Texas imposes two taxes on alcoholic beverages that impact holders of certain permits under the Texas Alcoholic Beverage Code. These taxes are the mixed beverage gross receipts tax and the mixed beverage sales tax. Both are set forth in Texas Tax Code, Chapter 183 (“Chapter 183”) and Texas Comptroller Rule 3.1001 (“Rule 3.1001”).[1]

Who’s Subject to Mixed Beverage Taxes?

The folks who get hit with mixed beverage taxes (other than consumers) are what are called “permittees.” [2] Chapter 183 defines a “permittee” is defined as someone who holds one of the following permits under the Texas Alcoholic Beverage Code:

-a mixed beverage permit;
-a private club registration permit;
-a private club exemption certificate;
-a private club registration permit with a retailer late hours certificate;
-a nonprofit entity temporary event permit;
-a private club registration permittee holding a food and beverage certificate;
-a mixed beverage permit with a retailer late hours certificate;
-a mixed beverage permit with a food and beverage certificate; or
-a distiller’s and rectifier’s permit.[3]

What’s a Mixed Beverage?
Chapter 183 defines a “mixed beverage” as “a beverage composed in whole or part of an alcoholic beverage in a sealed or unsealed container of any legal size for consumption on the premises when served or sold by the holder of a mixed beverage permit, the holder of certain nonprofit entity temporary event permits, the holder of a private club registration permit, or the holder of certain retailer late hours certificates.”[4]

Written by TL Fahring | Posted in Mixed Beverage Taxes

14 Mar 2023

Tax Policy – How Texas Is Recapturing Lost Revenue

Texas Tax Rules
As states confront budgetary deficits due to declining tax revenues and increased government spending, tax authorities aggressively enforce state tax laws to recapture lost revenues.

Sulphur Production Tax
34 Tex. Admin. Code § 3.41 (48 Tex. Reg. 1149)—The Comptroller repealed this rule dealing with sulphur production tax to reflect the Legislature’s repeal of the tax with S.B. 757, 84th Legislature, R.S. (2015). RIP.

Cigarette Tax
34 Tex. Admin. Code § 3.102 (48 Tex. Reg. 1150)—The Comptroller adopted amendments to the rule on cigarette tax to implement S.B. 248, 87th Leg., R.S. (2021), which requires a person in this state who receives unstamped cigarettes from a manufacturer, bonded agent, distributor, or importer to store the cigarettes exclusively in an interstate warehouse. The Comptroller also added a definition of cigar, to remove language regarding sales by a permitted bonded agent from a vehicle, and to provide that a permitted importer is required to be a permitted distributor.

Notable Additions to the State Tax Automated Research (“STAR”) System

Franchise Tax

Research and Development Credit

STAR Accession No. 202302002L (Feb. 6, 2023)
In this memo to Audit, Tax Policy summarizes the federal statutes and regulations relating to internal use software that have been incorporated by reference under Texas law for purposes of the franchise tax research & development credit and the sales tax research & development credit. Tax Policy notes the that current Rules 3.340 (Qualified Research) and 3.599 (Margin: Research and Development Activities Credit) give taxpayers the election between two different versions of Treas. Reg. § 1.41-4(c)(6): the version of that regulation adopted in 2003 as contained in IRB 2001-5 and the one proposed in 2002 as contained in IRB 2002-4.

Mixed Beverage Taxes
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Written by TL Fahring | Posted in TaxConnections

21 Feb 2023

2023 Court Cases And Decisions: Sales And Use Taxes

The Geo Group, Inc. v. Hegar, No. 07-22-00005-CV (Tex. App.-Amarillo Jan. 23, 2023, no pet. hist.)—The Seventh Court of Appeals held that a company that owns and operates correctional and detention facilities under contracts with the state of Texas and the United States was not entitled to a sales tax refund due to the company’s purchases being exempt, affirming the trial court’s decision to that effect.

The company had argued that the detention and rehabilitation services that it provided are a quintessential governmental function, making the company an “instrumentality” of the state and federal governments and thereby rendering the company’s purchases exempt from sales or use tax under 34 Tex. Admin. Code 3.322(c) (Exempt Organizations).

The court of appeals noted that “instrumentality” isn’t defined in the Texas Administrative Code and the Black’s Law Dictionary defines “instrumentality” as: “1. A thing used to achieve an end or purpose. 2. A means or agency through which a function of another entity is accomplished, such as a branch of a governing body.”[1] Finding the first definition to be too broad to serve any purpose (virtually any independent contractor employed by the government could be an instrumentality under this definition), the court of appeals determined that the second definition of “instrumentality”— relating the term to “a branch of a governing body”—was more in harmony with the exemption in question.

The court of appeals found that while the company housed federal detainees and was required to comply with specific government regulations, the company was a distinct entity engaged in commercial for-profit activities, wasn’t controlled by the federal or state or federal government and didn’t contract exclusively with the federal or state government. For all of these reasons, the court of appeals held that the company wasn’t an instrumentality of the federal or state government that was exempt from sales or use tax.

Collections

Tax Liens
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Written by TL Fahring | Posted in Sales/Use Tax

09 Feb 2023

Taxation In The United States Virgin Islands

The United States Virgin Islands (“USVI”) is an unincorporated territory of the United States.[1] But that doesn’t mean that they’re subject to exactly the same laws as in the United States—especially when it comes to taxes.

The Mirror Code

As a territory, the U.S. Congress is empowered to “make all needful Rules and Regulations respecting” the USVI.[2] As far as taxes go, Congress requires that the USVI impose an income tax that “mirrors” the U.S. federal income tax found in United States Code, Title 26 (also known as the “Internal Revenue Code” or “IRC”).[3] Because of this requirement, USVI’s income tax law is commonly called a “mirror code.” One of the basic principles used in the application of the “mirror code” is the substitution principle, according to which “Virgin Islands” generally is substituted for “United States” wherever that phrase appears in the IRC.[4]

Under the IRC, the United States taxes citizens and residents on their worldwide income and nonresident aliens on income from sources within the United States or that is effectively connected with the conduct of a United States trade or business.[5] For these purposes, the United States includes only the States and the District of Columbia.[6]

The USVI applies similar rules to its residents and nonresident aliens under the mirror code.[7]

Non-Bona Fide Residents

A U.S. citizen or resident who isn’t a bona fide resident of the USVI during the entire taxable year and who has income derived from USVI sources or effectively connected with a trade or business within the USVI is required to file income tax returns in the taxable years with both the United States and the USVI.[8] The income taxes that such a person is required to pay to the USVI is determined by multiplying the income taxes imposed under the IRC by the “applicable percentage,” which means the percentage that USVI adjusted gross income bears to adjusted gross income.[9] USVI gross income is adjusted gross income determined by only taking into account income from USVI sources and deductions allocable to that income.[10]

Bona Fide Residents
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Written by TL Fahring | Posted in Taxes And U.S. Virgin Islands

10 Dec 2022

Court Cases: What’s A Franchise Tax?

Welcome back to another for another edition of Texas Tax Roundup! We got some franchise tax apportionment, some sales and use tax in the oil and gas industry, and some mulling over the age-old question: Is a franchise tax an occupation tax? Let’s dive in!

Court Cases

Franchise Tax

Distinction from Occupation Tax

Swift Transp. Co. of Az., LLC v. Hegar, No. 13-21-00010-CV (Tex. App.—Corpus Christi-Edinburg Nov. 10, 2022)—The Thirteenth Court of Appeals held that the franchise tax wasn’t an occupation tax. Thus, Tex. Transp. Code § 20.001 (Certain Carries Exempt from Gross Receipts Tax), which exempts certain motor carriers from any occupation tax measured by gross receipts, didn’t apply to franchise tax. The court of appeals observed that Texas franchise taxes and occupations tax dated back to at least 1880, that both types of taxes were in existence when Section 20.001 was enacted, and that various statutes implied a distinction between these types of taxes. The court of appeals also distinguished as dicta (and thus nonbinding) insinuations in the case law that the franchise tax was an occupation tax or that that a franchise tax and an occupation was basically the same.[1]

Written by TL Fahring | Posted in Franchise Tax

06 Dec 2022

Getting Out | Expatriation And Federal Taxes

Are you U.S. citizen or resident? Have you ever just wanted to leave the whole U.S. federal tax system behind? Well, you can . . . try at least. But there’s a cost.

The Problem

U.S. citizens and residents are subject to federal income tax on their worldwide income.[1] They’re subject to federal estate tax based on all assets wherever located upon death.[2] And, they’re subject to gift tax on the transfer of all property, whether it be real or personal, tangible or intangible.[3]

Noncitizens-nonresidents, on the other hand, are subject to federal income tax only on certain U.S. source income and income that’s effectively connected with the conduct of a U.S. trade or business.[4] They’re subject to federal estate tax only with regards to assets situated within the United States upon death.[5] And, they’re generally subject to gift tax only when the gift is real estate or tangible personal property located in the United States at the time of the gift.[6]

Written by TL Fahring | Posted in Expatriation And Federal Taxes