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A petroleum and natural gas producer was denied an exemption for its purchase of down-hole equipment because it is considered taxable transportation equipment. Since this equipment is not exempt manufacturing equipment, the taxpayer could not receive a credit for tax paid on services to repair the equipment. The exemption claim for aboveground equipment was also denied due to a lack of evidence. Lastly, the taxpayer was denied a refund on backhoe services used to cleanup an oil spill because the invoice did not indicate where the cleanup service occurred. Oil spill cleanup services can be taxable or nontaxable, depending on where they are performed. For example, if the service is performed at a plant or on land not at the well site, then it is a taxable real property service. (Decision, Hearing No. 100,619, Texas Comptroller of Public Accounts, October 15, 2009, released January 2010)

(03/01/2010)

A manufacturer of shampoos, conditioners, and other cosmetics was denied a manufacturing exemption on its purchases of bar code verifiers. The manufacturer contended that they were used in used in an exempt quality control process to ensure that bar codes on packaged products could be read by store scanners. However, it was determined that the bar code verifiers were not used to ensure that the product met the specifications of the ultimate consumers, but to ensure that the packaged items met the inventory control needs of the stores. Therefore, the scanners were used in the taxpayer's overall inventory control system and not for exempt quality control in manufacturing. (Decision, Hearing No. 49,528, Texas Comptroller of Public Accounts, October 9, 2009, released January 2010)

(03/01/2010)

The Texas Comptroller discusses the taxability of charges made by a taxpayer who provides its customers a secure location within a building (a “co-location space”) to store the customer's equipment or to utilize as a disaster workforce and recovery back-up facility.

The letter discusses the taxability of recurring, managed, and other services provided by the taxpayer including: (1) leasing rack or cabinet space to customers for customer-owned servers; (2) electricity charges; (3) cross-connection and bandwidth services; (4) monitoring network equipment; (5) repair, remodel, restoration, or maintenance of tangible personal property and the installation of monitoring software; (6) installation of fiber optic and copper cabling and power strips; (7) unpacking, moving, and installation of customer's equipment; (8) tracing and labeling of data and power cables; (9) powering down equipment and then powering it up again; (10) installation of software patches and software modifications; (11) troubleshooting equipment or databases; (12) tape rotation and storage; (13) migration consultation and design and moving services; (14) different types of backup and storage services; (15) purchase and installation of software used to backup customer's data; (16) shipping and receiving services; (17) physical inspection of customer's space (Letter No. 200908438L, Texas Comptroller of Public Accounts, August 3, 2009)

(01/28/2010)

The Texas Comptroller indicated that an aircraft transaction that qualifies as a tax free exchange exempt from federal taxation under IRC- Section 1031 does not impact the taxability of a transaction for Texas sales and use tax. The sale or lease of an aircraft by a dealer engaged in business in Texas is subject to Texas state and local sales tax based on the total consideration paid for the aircraft. The total consideration may be adjusted for the value of a trade-in if (1) the title to the trade-in (aircraft) must pass to the seller of the new aircraft; (2) the aircraft being traded in must be separately identified to the purchaser of the new aircraft on an invoice, billing, sales slip or ticket, or contract; and (3) the seller's books and records must reflect the acceptance of the trade-in, the credit allowance for the trade-in, and the sale of the trade-in to a third party. (Letter No. 200903447L, Texas Comptroller of Public Accounts, March 30, 2009, received September 2009)

(10/20/2009)

A taxpayer, who operates retail convenience stores (company stores) and franchises others to third parties (franchise stores), was entitled to a partial refund of sales tax paid on its purchase of financial software for its out-of-state stores. The taxpayer contended that the software was used to provide the franchise stores data processing services like payroll and should therefore qualify for the resale exemption. The Court agreed that the transfer of the software to the franchise stores would qualify for the resale exemption because a “sale for resale” includes the sale of tangible personal property to a purchaser who acquires the property for the purpose of transferring it as an integral part of a taxable service. The State argued that the taxpayer should not be allowed the resale exemption because the taxpayer cannot derive any direct benefit and must show evidence that tax was actually charged to the franchise stores. Both arguments were rejected because the resale exemption statute does not restrict a taxpayer from obtaining benefit when tangible personal property is transferred as an integral part of a taxable service. In addition, the statute does not require that the reseller actually collect sales tax on the taxable item, noting the resale transactions that occur between contractors and the federal government.

As far as the software transferred to company stores out-of-state, neither the state nor the taxpayer was granted a summary judgment in its favor. Both parties were unable to establish what happened to the software between the time it was removed from the tax-free inventory to the time it was installed in an out-of-state location. Evidence that the software was eventually installed out-of-state was not proof that it was never used in Texas. Therefore, this portion of the case was remanded to the trail court for further proceedings. (7-Eleven, Inc v. Combs, Texas Court of Appeals, Third District, No. 03-08-00212-CGV, August 31, 2009)

(10/05/2009)

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