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Jamie C. Yesnowitz
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The 87th Texas Legislature concluded on May 31, 2021, passing several bills with important and favorable tax consequences for taxpayers. The legislation ends the “pay to play” policy for taxpayer lawsuits, extends the delay to access information related to pending audits, extends the time taxpayers have to comply with sales and use tax audit requests for exemption certificates, allows oil and gas severance tax filers to directly obtain sales tax refunds, and expands taxpayers’ rights to immediately access the courts on tax controversies.1
The close of the legislative session also means that the Texas Comptroller’s adoption of local sales tax sourcing rules is set to become effective on Oct. 1, 2021.2
End of ‘pay to play’ for taxpayer suits
On June 7, 2021, Texas enacted legislation, H.B. 2080, making it unlawful to require taxpayers filing protest suits to first pay the amount under protest. This law becomes effective Sept. 1, 2021.3
The new legislation eliminates Texas’ “pay to play” system for judicial review of tax cases by easing the financial burden on taxpayers who wish to protest their taxes.4
The Comptroller is no longer allowed to collect the disputed amounts while the suit is pending, but still has the power to assert tax liens.5
Taxpayers seeking judicial relief who do pay the disputed amount under protest will no longer be required to deposit their funds in the Comptroller’s suspense account to accrue interest during the litigation.6
Accrued penalties and interest will still attach to any unpaid disputed amounts that are determined to be due in a final judgment.7
Extended delay in audit notification and release of information
On June 16, 2021, Texas enacted H.B. 2857, with an effective date of Sept. 1, 2021.8
Taxpayer information related to current pending audits is required to be released by the Comptroller to the public. Currently, a person seeking to obtain information about pending audits must wait six days from the date that the notice of intent to audit the taxpayer is sent.9
The new legislation will delay the release of taxpayer information until the 20th day after the notice of intent to audit the taxpayer is mailed out.10
This legislation seeks to remedy unsolicited and premature outreach from third parties that is prevalent under the current tax code provision.
Extended deadline for resale and exemption certificates
On June 7, 2021, Texas enacted S.B. 296, amending the date that a seller must provide resale and exemption certificates to the Comptroller during a sales and use tax audit. As the bill received more than a two-thirds majority vote, this bill became effective on the date of passage.11
Historically, the Tax Code mandated that a taxpayer was required to be in possession of the resale or exemption certificates at the time of the transaction, or within 60 days of receipt of notice requiring possession of the certificates from the Comptroller in order to receive any deductions.12
The new legislation extends the timeline from 60 days to 90 days to deliver the certificates to the Comptroller after receipt of notice requiring possession of the certificates, also allowing the Comptroller and the taxpayer the ability to extend the 90-day deadline by mutual agreement.13
While the Comptroller may evaluate the reasons for exemption and allow deductions, the Comptroller will disallow the deductions if it receives the certificates after the 90-day or mutually extended period expires.14
Expanded access to sales and use tax refund claims
On May 30, 2021, Texas enacted legislation, S.B. 833, authorizing certain oil and gas producers who file severance tax returns but do not hold sales tax permits to file refund claims directly with the Comptroller for sales and use tax paid to vendors.15
This law becomes effective September 1, 2021.16
Currently, only purchasers with a sales and use tax permit are allowed to file a refund claim for overpaid sales and use taxes directly with the Comptroller.17
As a result, producer taxpayers are required to obtain refund assignments from their vendors, which must be executed by a corporate officer for each vendor, before they can file a refund with the Comptroller. The new legislation will eliminate the need for assignment of refunds for severance tax filers and thus provides a more efficient process for all parties involved that will result in speedier refunds.
Texas administrative hearing bypass legislation
On June 7, 2021, Texas enacted legislation, S.B. 903, permitting taxpayers to bypass the Comptroller’s administrative hearing process after receiving a denial of refund letter from the Comptroller and proceed directly to district court. This law has an effective date of Sept. 1, 2021.18
Historically, taxpayers were prohibited from appealing directly to district court, and were required to follow procedures for refund claims by first participating in the administrative hearing process.19
Under the legislation, taxpayers will have 60 days after receiving the denial of refund letter to file a notice of intent to bypass the hearing, unless the Comptroller agrees to a later date.20
The notice of intent to bypass must assert the material facts, list each specific legal basis for which the refund claim is being submitted, and include the refund amount claimed.21
Within 30 days of the notice filing date, the Comptroller may notify the taxpayer that a conference between the Comptroller’s office and the taxpayer is required prior to the taxpayer filing suit in court, in order to clarify any of the facts and legal issues in the notice, or to require additional documentation from the taxpayer.22
Local sales tax sourcing rules for online orders
While the end of the Texas legislative session is separate from the special sessions that are scheduled for the coming months,23
it is relatively unlikely that the special sessions will address sales tax provisions. However, given that the Comptroller recently announced a projected $7.85 billion budget surplus for the 2022-23 fiscal year, it is possible that tax cut legislation may be considered during the special sessions.24
Without further legislative changes, the Comptroller’s previously adopted changes to an administrative rule dealing with local sales and use taxes pertaining to online orders should become effective on Oct. 1, 2021.25
Currently, internet orders received by sellers with a place of business in Texas are considered consummated at the place of business where the order was received, regardless of where the orders are fulfilled.26
Beginning in October, a new set of sourcing rules with respect to internet orders will apply. Generally, internet orders will not be considered to be received at a place of business of the seller in Texas.27
However, internet orders placed using a seller’s device at the seller’s place of business are sourced to the ordering, not fulfillment, location.28
Internet orders fulfilled from a place of business of the seller in Texas are sourced to the fulfillment location.29
Internet orders fulfilled from a location in Texas that is not a place of business of the seller in Texas are sourced to the shipping / delivery location in Texas, or the location at which the customer takes possession of the item.30
Finally, for internet orders fulfilled from a location outside Texas and shipped into Texas, the sale is not sourced to the Texas location, but local use tax is due to the shipping / delivery location, or the location at which the customer takes possession of the item.31
Changes have also been made to the definition of the seller’s place of business, which may impact the location to which orders will be sourced. A seller’s place of business is considered any place that the seller uses for the purpose of selling taxable items to any persons not affiliated with the seller, where the seller receives three or more orders during the taxable year.32
Orders placed and received online will no longer qualify for purposes of the “place of business” definition.33
Therefore, if a Texas seller does not have a qualifying place of business, the taxable order received by the seller will be sourced to the destination location.
The Texas legislature has enacted taxpayer-friendly legislation to address several tax relief procedures which will aid taxpayers throughout the tax compliance, audit and controversy process. With these laws, taxpayers will be afforded the opportunity to seek and file refund claims under a more streamlined process. The end of “pay to play” legislation has lifted the precondition of paying the protested amount, so that taxpayers will only need to pay the undisputed amount before filing a protest, allowing for a less burdensome and more economical path to challenge an audit assessment. The delay in the release of information to the public on pending Comptroller tax audits will protect taxpayers from immediate unwanted solicitations regarding such audits. The extension of time for taxpayers to find and present resale and exemption certificates to the Comptroller affords taxpayers a better opportunity to comply during a sales and use tax audit. Additionally, oil and gas producer taxpayers who file severance tax returns will now be eligible to file for a refund for overpayment alongside sales tax permit holders. Finally, the option to bypass the administrative hearing process will reduce litigation expenses and expedite the time in which taxpayer refund claims are pending.
With respect to the Comptroller’s regulation governing online orders, the Comptroller delayed implementation of the rule changes to give the Texas legislature the opportunity to intervene and provide its own set of sourcing rules. If the legislature does not act during the upcoming special sessions, the Comptroller’s rule change is set to become effective on Oct. 1, 2021. The proposed changes to the local sales tax sourcing rule which redefine a place of business may disqualify former qualifying businesses as a place of business. Taxpayers whose businesses solely receive online orders should particularly be aware of these changes.
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