Hiya people! 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:

1. sharing an adjoining wall or roofline, or joined by an intervening structure with walls or a ceiling that allows passage between buildings; or
2. located on a lot that:
3. shares any portion of the boundary line with the lot on which the qualified convention center facility or the qualified hotel is located, and
4. 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.

[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.”)

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