Texas Legislative Update

by DMA Staff | Mar 02, 2017
DMA-Texas-Legislative-Update-March 2 2017

DuCharme, McMillen & Associates, Inc. (DMA) provides this update relating to the 85th Texas Legislature Regular Session.
The Senate Finance Committee held its first hearing to address tax-related bills on February 28 and heard the following franchise tax bills that are of interest to a large number of taxpayers: 

  • SB 17 (Nelson, Jane) would require the Comptroller to reserve one half of any future general revenue growth in each succeeding biennium that exceeds 5% and would use the reserve to incrementally reduce the franchise tax rates until the tax is eliminated. The franchise tax rate adjustments would begin January 1, 2020. 
  • SB 142 (Taylor, Van) would allow taxable entities that are eligible to claim the COGS deduction to compute COGS by either using the definitions of COGS under current law or using the COGS reported for federal income tax purposes.
  • SB 575 (Schwertner, Charles) would increase the “no tax due” threshold from $1 million to $4 million.

Senator Schwertner noted that his proposal of increasing the “no tax due” threshold is a targeted tax relief for small businesses that are the job growers of Texas and that the proposal offers the biggest bang for the least amount of revenue impact. As DMA reported in its last update, large business associations had opposed the same proposal in the 84th legislative session, and at the February 28 hearing, the Texas Taxpayers & Research Association (TTARA) and the Texas Chemical Council voiced their opposition to SB 575. They pointed out that after the two prior increases of the “no tax due” threshold over the years since 2006, only 1 out of 10 taxable entities pays the franchise tax. If the threshold were to increase to $4 million, only 1 out of 20 taxable entities would end up paying the franchise tax. They advocated for the phase out of the franchise tax in lieu of the targeted relief proposed by SB 575. The bill was left pending in committee.

Senator Jane Nelson, the chair of the committee, laid out her bill, SB 17, which would reduce the franchise tax rates based on available revenue, and mentioned several times during the committee hearing that the franchise tax based on margin is a “horrible” tax. She expressed the desire to get rid of the tax immediately if the state had the revenue but given the state’s current financial circumstances she offered her proposal as the best possible alternative. TTARA had previously noted that if the state’s historical revenue growth is considered, it would take approximately 10 years to phase out the franchise tax under SB 17. The committee voted out SB 17. 

Senator Taylor discussed the merits of SB 142, which would allow the use of federal COGS, but acknowledged the fate of his bill given that the fiscal note for his proposal would cost the state approximately $420 million per year. Senator Taylor, however, asked the committee to recognize that the additional compliance cost that the current COGS statute imposes on taxpayers is a hidden tax, which should also be eliminated in conjunction with the reduction of the franchise tax rate. SB 142 was left pending in committee.

Here are tax-related bills that have been filed since our last update dated February 14, 2017:

Franchise Tax
HB 2126 (Button, Angie) would amend Tax Code §171.002 to clarify that the provision of telecommunications services, which excludes a taxable entity from being eligible to claim the lower tax rate as a wholesaler or retailer, does not include the selling of telephone prepaid calling cards. [Note: This is one of the Comptroller’s technical fixes.] 

HB 2250 (Darby, Drew) would add uniform rental activities classified as Industry 7213 or 7218 of the 1987 Standard Industrial Classification Manual to the definition of “retail trade,” which would allow the entities that perform such activities to be eligible for the lower tax rate.

Sales Tax
HB 2041 (Neave, Victoria) would exempt the sale of a U.S. flag or a Texas state flag.

HB 2171 (Guillen, Ryan) would amend Tax Code §151.430 (Determination of Overpaid Amounts) to add a provision that would require the Comptroller to notify a city, county, or other local taxing entity if a sales tax refund claim that is filed or credit taken on a return shows the local tax portion to be equal to or greater than 5% of the amount of sales and use tax received by the taxing entity during the preceding calendar year. The Comptroller would have to send the notice within 30 days of the date the refund claim is filed or the credit is taken.

HB 2381 (Frullo, John) and SB 1083 (Perry, Charles) would amend Tax Code §151.0039(b) to provide that a service performed by a certified public accountancy firm (as defined by Occupations Code §901.002) is not a taxable insurance service if less than 1% of the firm’s revenue in the calendar year is from services in Texas that would otherwise constitute taxable insurance services as defined by statute.

Property Tax (not an exhaustive list)
HB 1830 (Anchia, Rafael) would amend Tax Code §42.42(c) to provide that if the final determination of an appeal is based on a settlement reached by the parties, the agreement may include the waiver of penalties and interest on any additional tax due. The bill would also amend Tax Code §42.43(b) to provide that if the final determination of an appeal is based on a settlement reached by the parties, the agreement may include the waiver of interest on any refund. 

HB 2219 (Lozano, Jose) would amend Tax Code §313.024(b) to include in the eligible list for a limitation on appraised value under the Texas Economic Development Act the use of property for a water desalination project. “Water desalination" means the removal of organic and inorganic elements and compounds from saline or biologically impaired waters.

HB 2241 (Lozano, Jose) would amend several provisions that do not treat an improvement as such if the improvement is a replacement for a structure that was rendered uninhabitable or unusable by a casualty or by wind or water damage by eliminating the current requirement that the exterior of the replacement structure must be of higher quality construction and composition than that of the replaced structure.

HB 2560 (King, Tracy) would amend Tax Code §23.1241, which addresses the appraisal of dealer’s heavy equipment inventory, by making the following changes: (1) removes a person who is engaged in the business of leasing and renting heavy equipment from the definition of a “dealer”; (2) modifies the definition of “dealer’s heavy equipment inventory” to mean all heavy equipment sold at retail and removes leased or rented equipment from the definition unless a lessee or renter has a purchase option; (3) defines “sales price” of a lease or rental with a purchase option to mean the total amount of rental or lease payments plus final consideration, excluding interest; (4) amends the definitions of “subsequent sale” and “total annual sales” by eliminating rental and lease; and (5) provides that for purposes of computation of the property tax, a sale is considered to occur when possession of an item of heavy equipment is transferred from the dealer to the purchaser.

HB 2564 (Button, Angie) would require a periodic review by the Economic Incentive Oversight Board of projects undertaken by certain economic development corporations and the ad valorem tax incentive program established by the Texas Economic Development Act.

SB 971 (Zaffirini, Judith) would amend Tax Code §6.412(e), which currently prohibits a person who has served three consecutive terms on an appraisal review board from serving as a board member in the following year, by making an exception for a county with population of less than 100,000 if there is no eligible person seeking appointment. 

SB 972 (Zaffirini) would add a new statute that would allow a property owner to request the reappraisal of real property under a provided formula if a building located on the property is completely destroyed by a casualty. The request must be made within 180 days of the date the casualty occurs. 

SB 1026 (Estes, Craig) would repeal Tax Code §313.024(d-2), which currently provides that, in determining the new jobs created for eligibility for a limitation on appraised value, new qualifying jobs created under an agreement between the property owner and another school district may be included in the total number of new qualifying jobs created if the Texas Economic Development and Tourism Office determines that the projects covered by the agreements constitute a single unified project.  

SB 1027 (Estes, Craig) would repeal Tax Code §313.025(f-1), which currently allows a school district to waive the new jobs creation requirement in Section 313.021(2)(A)(iv)(b) or 313.051(b) and approve an application if the governing body makes a finding that the jobs creation requirement exceeds the industry standard for the number of employees reasonably necessary for the operation of the facility of the property owner that is described in the application.

Alcoholic Beverage Tax
SB 955 (Hancock, Kelly) and HB 2186 (Kuempel, John) would amend Alcoholic Beverage Code §203.01 to change the tax rate imposed on the first sale of beer manufactured in Texas or imported into Texas from $6 per barrel to $0.193548 per gallon. The bills would also amend Alcoholic Beverage Code §201.42 to change the tax rate imposed on the first sale of ale and malt liquor from $0.198 per gallon to $0.193548 per gallon.

SB 956 (Hancock, Kelly) and HB 2188 (Kuempel, John) would amend Alcoholic Beverage Code §201.04, which currently imposes tax on the first sale of vinous liquor under a bifurcated tax rate based on whether the alcohol by volume is 14% or more. The bill raises the bifurcation threshold from 14% of alcohol by volume to 16% of alcohol by volume.

Cigarette Tax
HB 2514 (Uresti, Tomas) would amend Tax Code §154.021(b) to increase tax rate from $70.50 to $83.00 per thousand on cigarettes weighing three pounds or less per thousand and would allocate tax revenue in excess of $70.50 per thousand on cigarettes, regardless of weight, to be deposited to the foundation school fund.

SB 1095 (Taylor, Larry) would amend Tax Code §111.009 to extend the deadline to file a petition for redetermination from 30 days to 90 days.

Hotel Tax
HB 1896 (Bohac, Dwayne) would provide that if a city or county imposes a new hotel occupancy tax or increases the tax rate for the hotel occupancy tax, the new tax or the increase in the tax rate does not apply to a room rented under an existing contract signed before the effective date of the tax or rate change.

HB 1924 (Elkins, Gary) and SB 1086 (Seliger, Kel) would add a new statute to Chapter 156, Tax Code (State Hotel Occupancy Tax), that prohibits a state agency from posting on a public internet website information that identifies the taxable receipts of an individual business that is contained in or derived from a record, report, or other document required to be provided under the chapter. The bill provides that the same type of information is public under the Texas Public Information Act and is not subject to any exceptions therein. 

Insurance Tax
HB 1940 (Turner, Chris) would require the Comptroller to allocate premium or revenue for insurance premium tax based solely on the premium or revenue allocation by state as reported by an insurer or health maintenance organization on the applicable form prescribed by the National Association of Insurance Commissioners and adopted by the Texas Insurance Commissioner by rule.

HB 2036 (King, Phil) would allow an insurer or health maintenance organization to claim a credit against life, health, and accident insurance premium equal to the amount of insurance premium tax that is paid on the recoupment fees collected under Section 9010, Affordable Care Act.

HB 2393 (Guillen, Ryan) would allow an entity to apply for a credit against state premium tax liability for eligible costs and expenses incurred in the certified rehabilitation of a certified historic structure. The credit against state premium tax liability is available only on or after the franchise tax under Chapter 171, Tax Code, is repealed, expires, or otherwise becomes inapplicable to all taxable entities under that chapter. 

HB 2492 (Frullo, John) would amend Chapter 981, Insurance Code, to add within “eligible surplus lines insurer” the following: a property and casualty insurance company organized under Chapter 822 that has capital and surplus in an amount of at least $15 million that has applied for designation as a domestic surplus lines insurer. 

Motor Fuel Taxes
HB 2513 (Uresti, Tomas) would amend Tax Code §162.202 to increase the diesel fuel tax rate from 20 cents for each net gallon to 22 cents for each net gallon.

Motor Vehicle Sales/Use Tax
HB 2067 (Oliveira, Rene) would amend Tax Code §152.0475(c) to change the registration of a related finance company from an annual registration to a one-time registration that remains in effect until revocation by the holder or the Comptroller.

Severance Taxes
SB 1008 (Seliger, Kel) and SJR 41 (Seliger, Kel) proposes a constitutional amendment to transfer excess oil and gas production tax revenue into an account set aside for tax relief rather than into the Rainy Day Fund. 

HB 2277 (Darby, Drew) would make the following changes to Tax Code §201.057 (relating to the temporary exemption or tax reduction of certain high-cost gas): (1) eliminate from the definition of “high-cost gas” all gas produced from oil wells or gas wells within a commission approved co-production project and make other conforming changes; (2) require the Comptroller, in making a determination of the median drilling and completion cost for all high-cost wells, to use the drilling and completion cost data reported by taxpayers on their applications; (3) provide that the median drilling and completion cost is fixed as of the date of the Comptroller's determination for computation of the reduced tax; (4) prohibit the drilling and completion costs reported on the application to be amended after March 1 of the year following the state fiscal year in which the required application was made; (5) clarify that if tax is paid before the certification of a well as a high-cost gas well, the person who remitted the tax is entitled to the refund equal to the difference between the amount of the tax paid and the amount of tax that would have been paid on the high-cost gas if it had received the tax reduction; (6) clarify that the person entitled to a refund must apply to the Comptroller for a refund within one year after the date the Comptroller approves the application for a tax reduction; (7) eliminate provisions involving credit, including the provision that allows a producer to demonstrate that it does not have sufficient tax liability to claim the credit within five years from the date the application for the credit is made and the Comptroller’s determination as to what amount of the credit may not be claimed within that five years; and (8) repeal certain outdated provisions. [Note: This is one of the Comptroller’s technical fixes.]

Texas Emission Reduction Plan (TERP)
SB 1046 (Estes, Craig) would extend the expiration date of the TERP surcharge from August 31, 2019, to the last day of the state fiscal biennium during which TCEQ publishes in the Texas Register that that the U.S. Environmental Protection Agency has for each area under the national ambient air quality standard for ozone under 40 C.F.R. §81.344 (“Texas”), designated the area as attainment or unclassifiable or approved a redesignation substitute making a finding of attainment for the area. TERP surcharge is imposed on the retail sale, lease or rental of off-road, heavy-duty diesel equipment under Chapter 151, Tax Code, and on the sale, lease or use of an on-road diesel motor vehicle that is over 14,000 pounds under Chapter 152, Tax Code.  

We look forward to providing you information during the 85th Texas Legislature Session that will assist you in your work. Please do not hesitate to contact one of our DMA professionals below should you have specific questions or requests. We will respond as promptly as possible.

Please do not hesitate to contact your local DMA office should you have specific questions or requests.