TITLE 34.PUBLIC FINANCE

Part 1. COMPTROLLER OF PUBLIC ACCOUNTS

Chapter 3. TAX ADMINISTRATION

Subchapter O. STATE SALES AND USE TAX

34 TAC §3.286

The Comptroller of Public Accounts proposes an amendment to §3.286, concerning seller's and purchaser's responsibilities. The amendment incorporates recent statutory changes. House Bill 1098, 77th Legislature, 2001, amended Tax Code, §151.052, effective September 1, 2001, to allow a printer to accept a multistate exemption certificate from a purchaser if the printed materials are produced by a web offset or rotogravure printing process and the materials are delivered by the printer to a fulfillment house or the United States Postal Service for distribution to third parties located both in Texas and outside of Texas. The purchaser who gives the certificate is then responsible for reporting and paying sales or use taxes to the comptroller on those printed materials that are subject to tax. The proposed rule incorporates this change in subsections (d)(7) and (f)(4). Senate Bill 1123, 77th Legislature, 2001, amended Tax Code, Chapters 111 and 151, effective September 1, 2001, to provide certain penalties for various criminal offenses. The proposed rule addresses criminal offenses and penalties in subsections (b)(4), (h)(3), (i)(5), (j)(4), (n), and (o) and references a new rule concerning criminal offenses and penalties. Senate Bill 640, 77th Legislature, 2001, added Tax Code, §111.0625 and §111.0626, which require taxpayers who remitted $100,000 or more in sales or use tax during the preceding state fiscal year to file sales or use tax returns and payments electronically. Subsection (e)(4) of the proposed rule addresses these changes and references §3.9 of this title (relating to Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers). In addition to the legislative changes, subsections (a)(3), (b)(3), and (d)(6) of the proposed amendment provide specific information regarding the sales or use tax responsibilities of direct sales organizations and their independent salespersons. This information reflects long-standing comptroller policy. Finally, various subsections of the proposed rule are amended for the purposes of clarity.

James LeBas, Chief Revenue Estimator, has determined that for the first five-year period the rule will be in effect, there will be no significant fiscal impact on the state or units of local government.

Mr. LeBas also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be in providing taxpayers with additional information regarding their tax responsibilities. This rule is adopted under the Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposal may be submitted to Bryant K. Lomax, Manager, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711.

This amendment is proposed under Tax Code, §111.002, which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

The amendment implements Tax Code, §§111.024, 111.0625, 111.0626, 151.052, 151.7032, 151.708, 151.7102, and 151.714.

§3.286.Seller's and Purchaser's Responsibilities.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Engaged in business--A retailer is engaged in business in Texas if the retailer[ is ]:

(A) maintains, occupies, or uses, [ maintaining, occupying, or using, ] permanently or temporarily, directly or indirectly, or through an agent, by whatever name called, an office, place of distribution, sales or sample room, warehouse or storage place, or other place of business;

(B) has [ having ] any representative, agent, salesperson, canvasser, or solicitor who operates [ operating ] in this state under the authority of the seller to sell, deliver, or take [ for the purpose of selling, delivering, or taking ] orders for any taxable items;

(C) promotes [ promoting ] a flea market, trade day, or other event that involves [ involving the ] sales of taxable items;

(D) uses [ utilizing ] independent salespersons in direct sales of taxable items;

(E) derives [ deriving ] receipts from a rental or lease of tangible personal property that is located in this state;

(F) allows [ allowing ] a franchisee or licensee to operate under its trade name if the franchisee or licensee is required to collect Texas sales or use tax; or

(G) conducts [ conducting ] business in this state through employees, agents, or independent contractors.

(2) Place of business of the seller--For tax permit requirement purposes , the term means an established outlet, office, or location that [ operated by ] the seller, his agent, or employee operates for the purpose of receipt of [ receiving ] orders for taxable items. A warehouse, storage yard, or manufacturing plant is not [ may not be considered ] a "place of business of the seller" for tax permit requirement purposes unless the seller receives three or more orders [ are received by the seller ] in a calendar year at the warehouse, storage yard, or manufacturing plant.

(3) Seller--Every retailer, wholesaler, distributor, manufacturer, or any other person who sells, leases, rents, or transfers ownership of taxable items for a consideration. A promoter of a flea market, trade day, or other event that involves [ involving ] the sales of taxable items is a seller and is responsible for the collection and remittance of the sales tax that [ collected by ] dealers, salespersons, or individuals collect at such events , unless the participants hold active sales tax permits that [ issued by ] the comptroller has issued . A direct sales organization that is engaged in business as defined in paragraph (1)(D) of this subsection is a seller and is responsible for the collection and remittance of the sales tax on all sales of taxable items [ collected ] by the independent salespersons who sell [ selling ] the organization's product. Pawnbrokers, storagemen, mechanics, artisans, or others who sell [ selling ] property to enforce a lien are also sellers. An auctioneer who does not receive payment for the item sold, does not issue a bill of sale or invoice to the purchaser of the item, and who does not issue a check or other remittance to the owner of the item sold by the auctioneer is not considered a seller responsible for the collection of the tax. In this instance, it is the owner's responsibility to collect and remit the tax. Auctioneers should refer to §3.311 of this title (relating to Auctioneers, Brokers, and Factors).

[(4) Special purpose district--A district or other local taxing jurisdiction funded by a sales tax that is governed by the County Sales and Use Tax Act, Chapter 323.]

(b) Permits required.

(1) Each [ Every ] seller must apply to the comptroller and obtain [ for ] a tax permit for each place of business.

(2) Each [ Every ] out-of-state seller who is engaged in business in this state must apply to the comptroller and obtain [ for ] a tax permit. An out-of-state seller who [ that ] has been engaged in business in Texas continues to be responsible for collection of [ collecting ] Texas use tax on sales made into Texas for 12 months after the seller ceases to be engaged in business in Texas.

(3) Independent salespersons of direct sales organizations are not [ will not be ] required to hold sales tax permits to sell taxable items for direct sales organizations . Direct [ It is the responsibility of the direct ] sales organizations [ to ] hold responsibility to maintain Texas permits and [ to ] collect Texas tax on all sales of taxable items by their independent salespersons. See subsection (d)(6) of this section for collection and remittance of tax by direct sales organizations .

(4) A person who engages in business in this state as a seller of tangible personal property or taxable services without a tax permit required by Tax Code, Chapter 151, commits a criminal offense. Each day that a person operates a business without a permit is a separate offense. See §3.305 of this title (relating to Criminal Offenses and Penalties).

(c) To obtain [ Obtaining ] a permit.

(1) A person must complete an [ An ] application that [ will be furnished by ] the comptroller furnishes [ and must be filled out completely. After the application is filled out and returned ] and must return that application to the comptroller, together with [ whatever ] bond or other security that may be [ is ] required by §3.327 of this title (relating to Taxpayer's Bond or Other Security) . A [ , a ] separate permit under the same account is [ will be ] issued to the applicant for each place of business. The permit is issued without charge.

(2) Each legal entity (corporation, partnership, sole proprietor, etc.) must apply for its own permit. The permit cannot be transferred from one owner to another. The permit [ It ] is valid only for the person to whom it was issued and for the transaction of business only at the address that is shown on the permit. If a person operates two or more types of business at the same location [ under the same roof ], then only one permit is required [ needed ].

(3) The permit must be conspicuously displayed at the place of business for which it is issued. A permit holder that [ However, a person who ] has traveling salesmen who operate [ operating ] from one central office needs only one permit, which must be displayed at the central office.

(4) All permits of the seller will have the same taxpayer number; however, each business location will have a different outlet number. The outlet numbers assigned may not necessarily correspond to the number of business locations owned by a taxpayer.

(d) Collection and remittance of the tax.

(1) Each seller must collect the tax on each separate retail sale in accordance with the statutory bracket system in the Tax Code, §151.053. Copies of the bracket system should be displayed in each place of business so both the seller and the customers may easily use them. The tax is a debt of the purchaser to the seller until collected. A seller who is a printer should see paragraph (7) of this subsection for an exception to the collection requirement.

(2) The sales tax applies to each total sale, not to each item of each sale. For example, if two items are purchased at the same time and each item is sold for [ , each costing ] $.07, then the seller must collect the tax on the total sum [ selling price ] of $.14. Tax must be reported and remitted to the comptroller as provided by the Tax Code, §151.410. When tax is collected properly under the bracket system, the seller is not required to remit any amount that is collected in excess of the tax due. [ any over-collection need not be remitted by the seller. ] Conversely, when the tax collected under the bracket system is less than the tax due on the seller's total receipts, the seller is required to remit tax on the [ responsible for remitting tax on ] total receipts even though the seller did not collect tax [ not collected ] from customers.

(3) The amount of the sales tax must be separately stated on the bill, contract, or invoice to the customer or there must be a written statement to the customer that the stated price includes sales or use taxes. Contracts, bills, or invoices that merely state [ stating ] that "all taxes" are included are not specific enough to relieve either party to the transaction of its sales and use tax responsibilities. The total amount that is shown on such documents is [ will be ] presumed to be the taxable item's sales price, without tax included. The seller or customer may overcome the presumption by using the seller's records to show that tax was included in the sales price. Out-of-state sellers must identify the tax as Texas sales or use tax.

(4) A [ It is unlawful for any ] seller who advertises or holds [ to advertise or hold ] out to the public that the seller will assume, absorb, or refund any portion of the tax, or that the seller will not add the tax to the sales [ selling ] price of [ the ] taxable items commits a criminal offense. See §3.305 of this title [ being sold ].

(5) The practice of rounding off the amount of tax that is due on the sale of a taxable item is prohibited. Tax must be added to the sales price according to the statutory bracket system.

(6) Direct sales organizations must collect and remit tax from independent salespersons as follows.

(A) If an independent salesperson purchases a taxable item from a direct sales organization after the customer's order has been taken, then the direct sales organization must collect and remit sales tax on the actual sales price of the taxable item.

(B) If an independent salesperson purchases a taxable item before the customer's order is taken, then the direct sales organization must collect and remit the tax from the salesperson based on the suggested retail sales price of the taxable item.

(C) Taxable items that are sold to an independent salesperson for the salesperson's use are taxed based on the actual price for which the item was sold to the salesperson at the tax rate that was in effect for the salesperson's location.

(7) A printer is a seller of printed materials and is required to collect tax on sales. However, a printer who is engaged in business in Texas is not required to collect tax if:

(A) the printed materials are produced by a web offset or rotogravure printing process;

(B) the printer delivers those materials to a fulfillment house or to the United States Postal Service for distribution to third parties who are located both in Texas and outside of Texas; and

(C) the purchaser issues an exemption certificate that contains the statement that the printed materials are for multistate use and the purchaser agrees to pay to Texas all taxes that are or may become due to the state on the taxable items that are purchased under the exemption certificate. See subsection (f)(4) of this section for additional reporting requirements.

(e) Payment of the tax.

(1) Each seller , or purchaser who owes [ owing ] tax that was not collected by a seller , must remit tax on all receipts from the sales or purchases of taxable items less any applicable deductions. On or before the 20th day of the month following each reporting period, each person who is subject to the tax shall file a consolidated return together with the tax payment for all businesses that operate [ operating ] under the same taxpayer number. Reports and payments that are due [ to be submitted on due dates occurring ] on Saturdays, Sundays, or legal holidays may be submitted on the next business day.

(2) The returns must be signed by the person who is required to file the report or by the person's duly authorized agent, but need not be verified by oath.

(3) The returns must [ will ] be filed on forms that [ prescribed by ] the comptroller prescribes . The fact that the seller or purchaser does not receive the [ form or does not receive the ] correct forms from the comptroller [ for the filing of the return ] does not relieve the seller or purchaser of the responsibility to file [ of filing ] a return and to pay [ paying ] the required tax.

(4) A seller, or a purchaser who owes tax that was not collected by a seller, who remitted $100,000 or more in sales and use tax to the comptroller during the preceding state fiscal year (September 1 through August 31) must file returns and transfer payments electronically as provided by Tax Code, § 111.0625 and § 111.0626. For further information about electronic filing of returns and payment of tax, see §3.9 of this title (relating to Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers).

(f) Reporting period.

(1) Sellers, and purchasers who owe [ owing ] tax that was not collected by sellers, who have less than $1,500 in state tax per quarter to report may file returns quarterly. The quarterly reporting periods end on March 31 [ 31st ], June 30 [ 30th ], September 30 [ 30th ], and December 31 [ 31st ]. The returns must [ are to ] be filed on or before the 20th day of the month following the period ending date.

(2) Sellers, and purchasers who owe [ owing ] tax that was not collected by sellers, who have [ having ] less than $1,000 state tax to report during a calendar year [ and with authorization from the comptroller's office ] may file yearly returns upon authorization from the comptroller .

(A) Authorization to file returns on a yearly basis is [ will be ] conditioned upon [ on ] the correct and timely filing of prior returns.

(B) Authorization to file returns on a yearly basis will be denied if a taxpayer's liability exceeded $1,000 in the prior calendar year.

(C) A taxpayer who files [ filing ] on a yearly basis without authorization is [ will be ] liable for applicable penalty and interest on any previously unreported quarter.

(D) Authority to file on a yearly basis is automatically revoked if a taxpayer's state sales and use tax liability is greater than $1,000 during a calendar year. The taxpayer must file a return for that month or quarter, depending on the amount, in which the tax remittance or liability is greater than $1,000. On that report, the taxpayer must report all taxes that are collected and all accrued liability for the year , and must file monthly or quarterly, as appropriate, so [ as ] long as the yearly tax liability is greater than $1,000.

(E) Once each year , the comptroller reviews all accounts [ will be reviewed ] to confirm yearly filing status and to authorize permit holders who meet the filing requirements to file [ begin filing ] yearly returns.

(F) Yearly filers must report on a calendar year basis. The return and payment are due on or before January 20 [ 20th ] of the next calendar year.

(3) Sellers, and purchasers who owe [ owing ] tax that was not collected by sellers, who have $1,500 or more in state tax per quarter to report must file monthly returns except for sellers who prepay the tax.

(4) A printer who is not required to collect tax on the sale of printed materials because the transaction meets the requirements of subsection (d)(7) of this section must file a quarterly special use tax report with the comptroller on or before the last day of the month following the quarter. The special use tax report must contain the name and address of each purchaser with the sales price and date of each sale. The printer is still required to file sales and use tax returns to report and remit taxes that the printer collected from purchasers on transactions that do not meet the requirements of subsection (d)(7) of this section.

(5) [ (4) ] Each [ Every ] taxpayer who is required to file a city, county, special purpose district (SPD), or metropolitan transit authority/city transit department [ and Metropolitan Transit Authority/City Transit Department ] (MTA/CTD) sales and use tax return [ returns ] must file the return [ them ] at the same time that the state sales and use tax return is [ returns are ] filed.

(6) [ (5) ] State agencies. State agencies that deposit taxes directly with the comptroller's office according to Accounting Policy Statement Number 8 [ 12 ] are not required to file a separate tax return. A fully completed deposit request voucher is deemed to be the return filed by these agencies. Paragraphs (1)-(3) of this subsection [ Subsection (f)(1)-(3) of this section ] do not apply to these state agencies. Taxes must be deposited with the comptroller's office within the time period otherwise specified by law for deposit of state funds.

(g) Filing the return; prepaying the tax; discounts; penalties.

(1) The comptroller makes [ will make ] forms available to all persons who are required to file returns. The failure of the taxpayer to obtain the forms does [ will ] not relieve that taxpayer from the requirement to file and remit the tax timely. Each taxpayer may claim a discount for timely filing and payment as reimbursement for the expense of collection of [ collecting ] the tax. The discount is equal to 0.5% of the amount of tax due. Certain sellers and purchasers are required to file returns and pay tax electronically, as provided in subsection (e)(4) of this section.

(2) The return for each reporting period must reflect the total sales, taxable sales, and taxable purchases for each outlet. The 0.5% discount for timely filing and payment may be claimed on the return for each reporting period and computed on the amount timely reported and paid with that return.

(3) Prepayments may be made by taxpayers who file monthly or quarterly returns. The amount of the prepayment must [ should ] be a reasonable estimate of the state and local tax liability for the entire reporting period. "Reasonable estimate" means at least 90% of the total amount due or an amount equal to the actual net tax liability due and paid for the same reporting period of the immediately preceding year.

(A) A taxpayer who makes a timely prepayment based upon a reasonable [ an ] estimate of tax liability may retain an additional discount of 1.25% of the amount due.

(B) The monthly prepayment is due on or before the 15th day of the month for which the prepayment is made

(C) The quarterly prepayment is due on or before the 15th day of the second month of the quarter for which the tax is due.

(D) On or before the 20th day of the month that follows [ following ] the quarter or month for which a prepayment was made, the taxpayer must file a return showing the actual liability and remit any amount due in excess of the prepayment. If there is an additional amount due, the taxpayer may retain the 0.5% reimbursement provided that both the return and the additional amount due are timely filed. If the prepayment exceeded the actual liability, the taxpayer will be mailed an overpayment notice or refund warrant.

(4) Remittances that [ which ] are less than a reasonable estimate as required by paragraph (3) of this subsection are not [ will not be ] regarded as prepayments [ a prepayment ]. The 1.25% discount will not be allowed. If the taxpayer owes more than $1,500 in a calendar quarter, the taxpayer is [ will be ] regarded as a monthly filer. All monthly reports that are not filed because of the invalid prepayment are [ will be ] subject to late filing penalty and interest.

(5) If a taxpayer does not file a [ quarterly or monthly ] return together with payment on or before the due date, the taxpayer forfeits all discounts and incurs a mandatory 5.0% penalty. After the first 30 days delinquency, an additional mandatory penalty of 5.0% is assessed against the taxpayer, and after the first 60 days delinquency, interest begins to accrue at the prime rate, as published in the Wall Street Journal on the first business day of each calendar year, plus 1.0%. For taxes that are due on or before December 31, 1999, interest is assessed at the rate of [ rate of ]12% annually .

(6) Permit holders are required to file sales and use tax returns[ monthly, quarterly, or yearly as set out in subsection (f) of this section ]. A permit holder must file a [ The ] sales and use tax return [ returns must be filed ] even if the permit holder has no sales or [ there is no ] tax to report for the reporting period. A person who has failed to file timely reports on two or more previous occasions must pay an additional penalty of $50 for each subsequent report that is not filed timely. The penalty is due regardless of whether the person subsequently files the report or whether no taxes are due for the reporting period.

(h) Records required.

(1) Records must be kept for four years, unless the comptroller authorizes in writing a shorter retention period. Exemption and resale certificates must be kept for four years following the completion of the last sale covered by the certificate. See §3.281 of this title (relating to Records Required; Information Required) and §3.282 of this title (relating to Auditing Taxpayer Records).

(2) The comptroller or an authorized representative has the right to examine , copy, and photograph any records or equipment of any person who is liable for the tax in order to verify the accuracy of any return [ made ] or to determine the tax liability in the event that no return is filed.

(3) A person who intentionally or knowingly conceals, destroys, makes a false entry in, or fails to make an entry in, records that are required to be made or kept under Tax Code, Chapter 151, commits a criminal offense. See § 3.305 of this title.

(i) Resale and exemption certificates.

(1) Any person who sells [ selling ] taxable items in this state must collect sales and use [ a ] tax on [ the ] taxable items that are [ so ] sold unless a valid and properly completed resale certificate , exemption certificate , direct payment exemption certificate, or maquiladora exemption certificate is received from the purchaser. Simply having permit numbers on file without properly completed certificates does not relieve the seller from the responsibility for collecting tax.

(2) A seller may accept a resale certificate only from a purchaser who is in the business of reselling the taxable items within the geographical limits of the United States of America, its territories and possessions, or in the United Mexican States. See §3.285 of this title (relating to Resale Certificate; Sales for Resale). To be valid, the resale certificate must show the 11-digit number from the purchaser's Texas tax permit or the out-of-state registration number of the out- of-state purchaser. A Mexican retailer who claims a resale exemption must show the Federal Taxpayers Registry (RFC) identification number for Mexico on the resale certificate and give a copy of the Mexican Registration Form to the Texas seller.

(3) A seller may accept an exemption certificate in lieu of the tax on sales of items that will be used in an exempt manner or on sales to exempt entities. See §3.287 of this title (relating to Exemption Certificates). There is no exemption number. An exemption certificate does not require a number to be valid.

(4) A purchaser who claims [ claiming ] an exemption from the tax must issue to the seller a properly completed resale or exemption certificate. The seller must act in good faith when accepting the resale or exemption certificate. If a seller has actual knowledge that the exemption claimed is invalid, the seller must collect the tax.

(5) A person who intentionally or knowingly makes, presents, uses, or alters a resale or exemption certificate for the purpose of evading sales or use tax is guilty of a criminal offense . See §3.305 of this title. [ : ]

[(A) if the tax evaded by the invalid certificate is less than $20, the offense is a Class C misdemeanor;]

[(B) if the tax evaded by the invalid certificate is $20 or more but less than $200, the offense is a Class B misdemeanor;]

[(C) if the tax evaded by the invalid certificate is $200 or more but less than $750, the offense is a Class A misdemeanor;]

[(D) if the tax evaded by the invalid certificate is $750 or more but less than $20,000, the offense is a felony of the third degree;]

[(E) if the tax evaded by the invalid certificate is $20,000 or more, the offense is a felony of the second degree.]

(6) Direct payment permit holders are entitled to issue [ an ] exemption certificates [ certificate ] when purchasing all taxable items, other than those purchased for resale. The direct payment exemption certificate must show the purchaser's direct payment permit number. See §3.288 of this title (relating to Direct Payment Procedures and Qualifications).

(7) Maquiladora export permit holders are entitled to issue [ a ] maquiladora exemption certificates when they purchase [ certificate when purchasing ] tangible personal property, other than that purchased for resale. Maquiladora export permit holders should refer to §3.358 of this title (relating to Maquiladoras).

(8) The seller should obtain a properly executed resale or exemption certificate at the time a transaction occurs. All certificates obtained on or after the date the auditor actually begins work on the audit at the seller's place of business or on the seller's records are subject to verification. All incomplete certificates will be disallowed regardless of when they were obtained. The seller has 60 days from the date on which the seller receives written notice [ is received by the seller ] from the comptroller of the seller's duty [ in which ] to deliver certificates to the comptroller. For the purposes of this section, written notice given by mail is presumed to have been received by the seller within three business days from the date of deposit in the custody of the United States Postal Service. The seller may overcome the presumption of three business days for mail delivery by submitting proof from the United States Postal Service or by providing other competent evidence that shows [ showing ] a later delivery date. Any certificates that are delivered to the comptroller during the 60-day period are [ will be ] subject to verification by the comptroller before any deductions are [ will be ] allowed. Certificates that are delivered to the comptroller after the 60-day period will not be accepted and the deduction will not be granted. See §3.285 of this title (relating to Resale Certificate; Sales for Resale), §3.287 of this title (relating to Exemption Certificates), §3.288 of this title (relating to Direct Payment Procedures and Qualifications) and §3.282 of this title (relating to Auditing Taxpayer Records).

(j) Suspension of permit.

(1) If a person fails to comply with any provision of the Tax Code, Title 2, or with the rules issued by the comptroller under those statutes, the comptroller may suspend the person's permit or permits.

(2) Before a seller's permit is suspended, the seller is entitled to a hearing before the comptroller to show cause why the permit or permits should not be suspended. The comptroller shall give the seller at least 20 days notice, which shall be in accordance with the requirements of §1.14 of this title (relating to Notice of Setting).

(3) After a permit has been suspended, a new permit will not be issued to the same seller until the seller has posted sufficient security and satisfied the comptroller that the seller will comply with both the provisions of the law and the comptroller's rules and regulations.

(4) A person who operates a business in this state as a seller of tangible personal property or taxable services after the permit has been suspended commits a criminal offense. Each day that a person operates a business with a suspended permit is a separate offense. See §3.305 of this title.

(k) Refusal to issue permit. The comptroller is required by the Tax Code, §111.0046, to refuse to issue any permit to a person who:

(1) is not permitted or licensed as required by law for a different tax or activity administered by the comptroller; or

(2) is currently delinquent in the payment of any tax or fee collected by the comptroller.

(l) Cancellation of sales tax permits with no reported business activity.

(1) Permit cancellation due to abandonment. Any holder of a sales tax permit who reported no business activity in the previous calendar year is [ hereby ] deemed to have abandoned the permit, and the [ permit is hereby canceled by the ] comptroller may cancel the permit . "No Business Activity" means zero total sales, zero taxable sales, and zero taxable purchases.

(2) Re-application. If a permit is cancelled, the person may reapply and obtain [ Nothing herein shall prohibit any applicant from receiving ] a new sales tax permit upon request provided the issuance is not prohibited by subsection (k)(1) or (2) of this section, or by [ the ] Tax Code, §111.0046.

(m) Direct payment. Yearly and quarterly filing requirements, prepayment procedures and discounts for timely filing do not apply to holders of direct payment permits. See §3.288 of this title (relating to Direct Payment Procedures and Qualifications). Direct payment returns and remittances are due monthly on or before the 20th day of the month following the end of the calendar month for which payment is made.

(n) Liability related to acquisition of a business or assets of a business. Tax Code, §111.020 and §111.024, provides that the comptroller may impose a tax liability on a person who acquires a business or the assets of a business. See §3.7 of this title (relating to Successor Liability: Liability Incurred by Purchase of a Business).

(o) Criminal penalties. Tax Code, Chapter 151, imposes criminal penalties for certain prohibited activities or for failure to comply with certain provisions under the law. See §3.305 of this title.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on April 19, 2002.

TRD-200202431

Martin Cherry

Deputy General Counsel for Taxation

Comptroller of Public Accounts

Earliest possible date of adoption: June 2, 2002

For further information, please call: (512) 463-3699


Chapter 7. PREPAID HIGHER EDUCATION TUITION PROGRAM

Subchapter A. GENERAL RULES

34 TAC §7.1

The Comptroller of Public Accounts proposes an amendment to §7.1, concerning general statement of purpose. Section 7.1 is amended to add the board's new responsibilities to develop, implement, and administer the higher education savings plan, as reflected in the Education Code, Chapter 54, Subchapter G.

James LeBas, chief revenue estimator, has determined that for the first five-year period the rule is in effect there will be no significant revenue impact on state or local governments as a result of enforcing or administering the rule.

Mr. LeBas also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rules will include informing the public about the new Texas higher education savings plan, conforming the rules to federal tax law changes, providing more flexibility to individuals in the mechanisms available in Texas to help fund a college education, and allowing individuals the opportunity to utilize a Texas higher education savings plan to take advantage of the federal income tax benefits provided by § 529, Internal Revenue Code of 1986, as amended. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Mr. LeBas also has determined that the proposed rule will not have an adverse economic effect on small or micro businesses.

Written comments on the proposal may be addressed to Andrew Ruth, Director, Special Programs, P.O. Box 13407, Austin, Texas 78711-3407, phone: 1-800-531-5441 ext. 62094. If a person wants to ensure that the board considers a comment made about this proposal, then the person must ensure that the board receives the comment not later than the 30th day after the issue date of the Texas Register in which this proposal appears. If the 30th day is a state or national holiday, Saturday, or Sunday, then the first workday after the 30th day is the deadline.

The amendment is proposed under Education Code, Chapter 54, Subchapter F, §54.602 which authorizes the board to administer the higher education savings plan, §54.618 which authorizes the board to adopt rules necessary for the implementation of the Prepaid Higher Education Tuition Program, and §54.632 which requires the board to comply with §529 of the Internal Revenue Code of 1986.

The amendment implements Education Code, Chapter 54, Subchapter F and Subchapter G.

§7.1.General Statement of Purpose.

(a) Pursuant to the Education Code, Chapter 54, Subchapter F, the Prepaid Higher Education Tuition Board is responsible for developing the Prepaid Higher Education Tuition Program to increase access to higher education for Texas families. The program will provide a mechanism through which the cost of tuition and required fees may be paid in advance of enrollment in an institution of higher education or a private or independent institution of higher education. Promulgation of these rules will inform the public and provide an orderly procedure to accomplish the responsibilities provided by law.

(b) Higher Education Savings Plan.

(1) The board develops, implements, and administers the higher education savings plan under Education Code, §54.602(b) and Education Code, Chapter 54, Subchapter G.

(2) The higher education savings plan enables individuals to contribute to an account that is established for the purpose of meeting the qualified higher education expenses of a beneficiary.

(3) This subchapter and subchapter K of this chapter inform the public about the savings plan.

(c) Board. This chapter provides an orderly procedure to accomplish the board's responsibilities.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on April 19, 2002.

TRD-200202422

Martin Cherry

Deputy General Counsel for Taxation

Comptroller of Public Accounts

Earliest possible date of adoption: June 2, 2002

For further information, please call: (512) 475-0387


34 TAC §7.2

The Comptroller of Public Accounts proposes an amendment to §7.2, concerning definitions. The amendment deletes the definition of required penalty to reflect changes in federal law applicable to prepaid higher education tuition programs.

James LeBas, chief revenue estimator, has determined that for the first five-year period the rule is in effect there will be no significant revenue impact on state or local governments as a result of enforcing or administering the rule.

Mr. LeBas also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will include informing the public about the new Texas higher education savings plan, conforming the rules to federal tax law changes, providing more flexibility to individuals in the mechanisms available in Texas to help fund a college education, and allowing individuals the opportunity to utilize a Texas higher education savings plan to take advantage of the federal income tax benefits provided by §529, Internal Revenue Code of 1986, as amended. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Mr. LeBas also has determined that the proposed rule will not have an adverse economic effect on small or micro businesses.

Written comments on the proposal may be addressed to Andrew Ruth, Director, Special Programs, P.O. Box 13407, Austin, Texas 78711-3407, phone: 1-800-531-5441 ext. 62094. If a person wants to ensure that the board considers a comment made about this proposal, then the person must ensure that the board receives the comment not later than the 30th day after the issue date of the Texas Register in which this proposal appears. If the 30th day is a state or national holiday, Saturday, or Sunday, then the first workday after the 30th day is the deadline.

The amendment is proposed under Education Code, Chapter 54, Subchapter F, §54.602 which authorizes the board to administer the higher education savings plan, §54.618 which authorizes the board to adopt rules necessary for the implementation of the Prepaid Higher Education Tuition Program, and §54.632 which requires the board to comply with §529 of the Internal Revenue Code of 1986.

The amendment implements Education Code, Chapter 54, Subchapter F and Subchapter G.

§7.2.Definitions.

The following words, terms, and phrases, when used in this chapter, shall have the following meanings. Terms used in this chapter and defined in the Education Code, §54.601, shall have the meaning ascribed therein.

(1) Average amount of tuition and required fees--The average amount of tuition and required fees among all institutions within the plan selected by the purchaser.

(2) Comptroller--The Comptroller of Public Accounts for the state of Texas.

(3) Enrollment period--The designated period in each calendar year during which the board will accept applications for enrollment in the program.

(4) Person--Includes an individual or corporation, organization, government or governmental subdivision or agency, business trust, estate, trust, partnership, association, and any other legal entity.

(5) Required fees--Those fees imposed on all students as a condition of enrollment at a particular institution of higher education or private or independent institution of higher education. Required fees do not include fees such as laboratory fees or equipment usage fees required for particular courses, charges for room and board, book costs, or any optional fees.

[ (6) Required penalty--An amount to be retained by the fund, as provided in this chapter or in a prepaid tuition contract, out of a refund or other amount payable under a prepaid tuition contract. The amount of a required penalty shall be equal to 10% of the portion of such refund or payment that represents undistributed earnings on the contract.]

(6) [ (7) ] Staff--Employees of the comptroller selected by the comptroller to serve as staff of the board and assist in the performance of duties delegated to the comptroller by the board.

(7) [ (8) ] Tuition--The charges imposed by an institution of higher education or private or independent institution of higher education on undergraduates as a condition of enrollment, as identified by such institution. Where applicable, a reference to tuition shall be deemed a reference to resident tuition rates unless otherwise specified.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on April 19, 2002.

TRD-200202423

Martin Cherry

Deputy General Counsel for Taxation

Comptroller of Public Accounts

Earliest possible date of adoption: June 2, 2002

For further information, please call: (512) 475-0387


34 TAC §7.3

The Comptroller of Public Accounts proposes an amendment to §7.3, concerning tax exempt status requirements. The amendment deletes references to a required penalty for refunds made under a prepaid tuition contract to reflect changes in federal law.

James LeBas, chief revenue estimator, has determined that for the first five-year period the rule is in effect there will be no significant revenue impact on state or local governments as a result of enforcing or administering the rule.

Mr. LeBas also has determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rule will include informing the public about the new Texas higher education savings plan, conforming the rules to federal tax law changes, providing more flexibility to individuals in the mechanisms available in Texas to help fund a college education, and allowing individuals the opportunity to utilize a Texas higher education savings plan to take advantage of the federal income tax benefits provided by §529, Internal Revenue Code of 1986, as amended. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Mr. LeBas also has determined that the proposed rule will not have an adverse economic effect on small or micro businesses.

Written comments on the proposal may be addressed to Andrew Ruth, Director, Special Programs, P.O. Box 13407, Austin, Texas 78711-3407, phone: 1-800-531-5441 ext. 62094. If a person wants to ensure that the board considers a comment made about this proposal, then the person must ensure that the board receives the comment not later than the 30th day after the issue date of the Texas Register in which this proposal appears. If the 30th day is a state or national holiday, Saturday, or Sunday, then the first workday after the 30th day is the deadline.

The amendment is proposed under Education Code, Chapter 54, Subchapter F, §54.602 which authorizes the board to administer the higher education savings plan, §54.618 which authorizes the board to adopt rules necessary for the implementation of the Prepaid Higher Education Tuition Program, and §54.632 which requires the board to comply with §529 of the Internal Revenue Code of 1986.

The amendment implements Education Code, Chapter 54, Subchapter F and Subchapter G.

§7.3.Tax Exempt Status Requirements.

(a) The provisions of this section are intended to meet the requirements of the Internal Revenue Code, §529.

(b) All payments of amounts due to the fund for a prepaid tuition contract must be made in cash. No person may make payments to the fund in excess of the amounts required to be paid under the prepaid tuition contract selected by the purchaser.

(c) A separate accounting shall be maintained for each beneficiary.

(d) The purchaser of a prepaid tuition contract and the beneficiary of the contract shall have no ability to directly or indirectly control or direct the investment of the payments made under the contract or any earnings of the fund.

(e) The purchaser of a prepaid tuition contract and the beneficiary of the contract cannot use any interest in the contract as security for a loan or other obligation.

(f) The board shall make such reports as the Secretary of the Treasury shall require.

[ (g) Required penalties shall be imposed on refunds and other payments under a prepaid tuition contract as provided in this chapter or in the prepaid tuition contract. The amount of any refund or other payment to which a person is otherwise entitled under a prepaid tuition contract shall be reduced by the amount of any required penalty thereon.]

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on April 19, 2002.

TRD-200202424

Martin Cherry

Deputy General Counsel for Taxation

Comptroller of Public Accounts

Earliest possible date of adoption: June 2, 2002

For further information, please call: (512) 475-0387


Subchapter G. BENEFICIARIES

34 TAC §7.63

The Comptroller of Public Accounts proposes an amendment to §7.63, concerning change of beneficiary. The amendment deletes references to a required penalty for refunds made under a prepaid tuition contract to reflect changes in federal law.

James LeBas, chief revenue estimator, has determined that for the first five-year period the rule is in effect there will be no significant revenue impact on state or local governments as a result of enforcing or administering the rule.

Mr. LeBas also has determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rule will include informing the public about the new Texas higher education savings plan, conforming the rules to federal tax law changes, providing more flexibility to individuals in the mechanisms available in Texas to help fund a college education, and allowing individuals the opportunity to utilize a Texas higher education savings plan to take advantage of the federal income tax benefits provided by §529, Internal Revenue Code of 1986, as amended. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Mr. LeBas also has determined that the proposed rule will not have an adverse economic effect on small or micro businesses.

Written comments on the proposal may be addressed to Andrew Ruth, Director, Special Programs, P.O. Box 13407, Austin, Texas 78711-3407, phone: 1-800-531-5441 ext. 62094. If a person wants to ensure that the board considers a comment made about this proposal, then the person must ensure that the board receives the comment not later than the 30th day after the issue date of the Texas Register in which this proposal appears. If the 30th day is a state or national holiday, Saturday, or Sunday, then the first workday after the 30th day is the deadline.

The amendment is proposed under Education Code, Chapter 54, Subchapter F, §54.618, which authorizes the board to adopt rules necessary for the implementation of the Prepaid Higher Education Tuition Program, and §54.632, which requires the board to comply with §529 of the Internal Revenue Code of 1986 in imposing penalties for refunds.

This amendment implements Education Code, Chapter 54, Subchapter F.

§7.63.Change of Beneficiary.

(a) The purchaser of a prepaid tuition contract may substitute one beneficiary for another subject to the following conditions:

(1) the new beneficiary must meet the requirements of a qualified beneficiary on the date the designation is changed, including residency requirements;

(2) the new beneficiary is a member of the family of the original beneficiary who meets the requirements of the Internal Revenue Code of 1986, §529 so that the change of beneficiary is not treated as a distribution under that law;

(3) documentation must be submitted evidencing the relationship of the beneficiaries;

(4) the purchaser must pay any amounts that would have been paid under the contract originally had the new beneficiary been designated at the time the original beneficiary was designated, plus any required fees specified in the board's fee schedule; and

(5) the original beneficiary has not used any contract benefits.

(b) Amounts paid before the beneficiary is changed shall be credited against amounts due at the time of the change. If the amount due at the time of the change is less than the amount paid prior to the change, such amount shall be credited against other amounts due through the term of the contract. If the amount paid prior to change exceeds the amounts due through the term of the contract, the amount in excess of the amounts due shall be refunded to the purchaser [ subject to a required penalty under §7.3(g) of this title (relating to Tax Exempt Status Requirements) ].

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on April 19, 2002.

TRD-200202425

Martin Cherry

Deputy General Counsel for Taxation

Comptroller of Public Accounts

Earliest possible date of adoption: June 2, 2002

For further information, please call: (512) 475-0387


Subchapter H. CONVERSION

34 TAC §7.71

The Comptroller of Public Accounts proposes an amendment to §7.71, concerning conversions. The amendment deletes references to a required penalty for refunds made under a prepaid tuition contract to reflect changes in federal law.

James LeBas, chief revenue estimator, has determined that for the first five-year period the rule is in effect there will be no significant revenue impact on state or local governments as a result of enforcing or administering the rule.

Mr. LeBas also has determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rules will include informing the public about the new Texas higher education savings plan, conforming the rules to federal tax law changes, providing more flexibility to individuals in the mechanisms available in Texas to help fund a college education, and allowing individuals the opportunity to utilize a Texas higher education savings plan to take advantage of the federal income tax benefits provided by §529, Internal Revenue Code of 1986, as amended. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Mr. LeBas also has determined that the proposed rule will not have an adverse economic effect on small or micro businesses.

Written comments on the proposal may be addressed to Andrew Ruth, Director, Special Programs, P.O. Box 13407, Austin, Texas 78711-3407, phone: 1-800-531-5441 ext. 62094. If a person wants to ensure that the board considers a comment made about this proposal, then the person must ensure that the board receives the comment not later than the 30th day after the issue date of the Texas Register in which this proposal appears. If the 30th day is a state or national holiday, Saturday, or Sunday, then the first workday after the 30th day is the deadline.

The amendment to §7.71 is proposed under Education Code, Chapter 54, Subchapter F, §54.618, which authorizes the board to adopt rules necessary for the implementation of the Prepaid Higher Education Tuition Program, and §54.632, which requires the board to comply with Section 529 of the Internal Revenue Code of 1986 in imposing penalties for refunds.

The amendment implements Education Code, Chapter 54, Subchapter F.

§7.71.Conversion.

(a) Plans are designed to be flexible and to allow beneficiaries to attend their choice of institutions of higher education or private or independent institutions of higher education.

(b) A purchaser may convert a prepaid tuition contract from one plan to another plan during the annual enrollment period specified by the board and upon payment of any additional amounts due under the plan to which the contract is converted plus any required fees specified in the board's fee schedule. The value at the time of conversion of the contract under the original plan shall be credited against amounts due upon conversion. Such value shall be the present lump sum actuarial value of the average amount of tuition and required fees for junior college plans, junior/senior college plans, and senior college plans and the estimated amount of private tuition and required fees for the private college plan. For contracts that are paid in full, the payment of additional amounts for conversion is determined by applying the value at the time of the conversion of the contract purchased under the original plan to the cost of the new plan. For contracts that are not paid in full, the payment of additional amounts for conversion is determined by applying the pro rata amount of the value at the time of conversion of the contract purchased under the original plan to the cost of the new plan, such pro rata amount determined by the number of payments paid under the contract under the original plan by the purchaser to the number of payments required to pay the contract under the original plan in full. If the amount due under the plan to which the contract is converted is less than the value at the time of conversion of the contract under the original plan, such excess amounts shall be credited against other amounts due through the term of the contract. If the amount to be credited under the preceding sentence exceeds the amount due through the term of the contract, such excess shall be refunded to the purchaser less any applicable fees [ and less a required penalty under §7.3(g) of this title (relating to Tax Exempt Status Requirements) ].

(c) A purchaser may transfer ownership of a prepaid tuition contract to another eligible purchaser, provided the transfer is accomplished without consideration and, if the beneficiary is a nonresident of Texas, the substitute purchaser meets the applicable residency requirements.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on April 19, 2002.

TRD-200202426

Martin Cherry

Deputy General Counsel for Taxation

Comptroller of Public Accounts

Earliest possible date of adoption: June 2, 2002

For further information, please call: (512) 475-0387


34 TAC §7.72

(Editor's note: The text of the following section proposed for repeal will not be published. The section may be examined in the offices of the Comptroller of Public Accounts or in the Texas Register office, Room 245, James Earl Rudder Building, 1019 Brazos Street, Austin.)

The Comptroller of Public Accounts proposes the repeal of §7.72, concerning required penalties on certain payments. The rule is repealed to reflect changes in federal law which no longer requires the penalties.

James LeBas, chief revenue estimator, has determined that the repeal of the rule will not result in any fiscal implications to the state or to units of local governments.

Mr. LeBas also has determined that the repeal will not have an adverse economic effect on small or micro businesses.

Written comments on the repeal may be addressed to Andrew Ruth, Director, Special Programs, P.O. Box 13407, Austin, Texas 78711-3407, phone: 1-800-531-5441 ext. 62094.

This repeal is proposed under Education Code, Chapter 54, Subchapter F, §54.618, which authorizes the board to adopt rules necessary for the implementation of the Prepaid Higher Education Tuition Program, and §54.632, which requires the board to comply with §529 of the Internal Revenue Code of 1986 in imposing penalties for refunds.

This repeal implements Education Code, Chapter 54, Subchapter F.

§7.72.Required Penalties on Certain Payments.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on April 19, 2002.

TRD-200202427

Martin Cherry

Deputy General Counsel for Taxation

Comptroller of Public Accounts

Earliest possible date of adoption: June 2, 2002

For further information, please call: (512) 475-0387


Subchapter I. REFUNDS, TERMINATION

34 TAC §7.81

The Comptroller of Public Accounts proposes an amendment to §7.81, concerning refunds. The amendment deletes references to a required penalty for refunds made under a prepaid tuition contract to reflect changes in federal law.

James LeBas, chief revenue estimator, has determined that for the first five-year period the rule is in effect there will be no significant revenue impact on state or local governments as a result of enforcing or administering the rule.

Mr. LeBas also has determined that for each year of the first five years the rule is in effect the public benefit anticipated as a result of enforcing the rules will include informing the public about the new Texas higher education savings plan, conforming the rule to federal tax law changes, providing more flexibility to individuals in the mechanisms available in Texas to help fund a college education, and allowing individuals the opportunity to utilize a Texas higher education savings plan to take advantage of the federal income tax benefits provided by §529, Internal Revenue Code of 1986, as amended. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Mr. LeBas also has determined that the proposed rule will not have an adverse economic effect on small or micro businesses.

Written comments on the proposal may be addressed to Andrew Ruth, Director, Special Programs, P.O. Box 13407, Austin, Texas 78711-3407, phone: 1-800-531-5441 ext. 62094. If a person wants to ensure that the board considers a comment made about this proposal, then the person must ensure that the board receives the comment not later than the 30th day after the issue date of the Texas Register in which this proposal appears. If the 30th day is a state or national holiday, Saturday, or Sunday, then the first workday after the 30th day is the deadline.

The amendment to §7.81 is proposed under Education Code, Chapter 54, Subchapter F, §54.618, which authorizes the board to adopt rules necessary for the implementation of the Prepaid Higher Education Tuition Program, and §54.632, which requires the board to comply with §529 of the Internal Revenue Code of 1986 in imposing penalties for refunds.

This amendment implements Education Code, Chapter 54, Subchapter F.

§7.81.Refunds.

(a) Refunds shall be made in accordance with provisions of these rules and the prepaid tuition contract, in a manner that will not adversely affect the tax status of the program under applicable provisions of the Internal Revenue Code, as amended from time to time. Refunds shall be governed by these rules as amended and as in effect on the date the request for refund is submitted to the board. In general, it is the board's intent that the amount of any refund shall be the sum of all payments made under the contract for tuition and required fees, less fees due and payable to the program under the board's fee schedule and less any amounts paid by the program pursuant to the prepaid tuition contract prior to the refund.

(b) Refunds shall be made to the purchaser of the prepaid tuition contract unless otherwise designated by the purchaser in writing to the board in the event of the purchaser's death.

(c) Should a beneficiary terminate his/her student status on or after the date on which the institution denies refunds to students withdrawing for a particular semester, no refund shall be paid under the prepaid tuition contract for amounts relating to such semester.

(d) Examples of circumstances under these rules in which refunds may be made include, but are not limited to, the following.

(1) Under any plan if the beneficiary receives a full scholarship for tuition and required fees, the amount of tuition and required fees that would have been paid under the plan selected may be refunded. Under a junior college plan, junior/senior college plan, or a senior college plan, the amount of such refund shall not exceed the tuition scholarship amount. Refund payments may be issued each academic term as long as the scholarship is effective. The purchaser of the prepaid tuition contract shall be entitled to such refund. Proof of scholarship must be submitted in a form acceptable to the board.

(2) Under the junior college plan, junior/senior college plan or senior college plan, if a beneficiary receives a partial scholarship for tuition and required fees, the tuition scholarship amount may be refunded. Under the private college plan, if a beneficiary receives a partial scholarship, a refund may be made in an amount equal to the excess of the estimated average private tuition and required fee amounts, over the actual tuition and required fee amounts less the scholarship amount. [ Such amount will be subject to a required penalty under §7.3(g) of this title (relating to Tax Exempt Status Requirements). ] Refund payments up to the amount determined in accordance with this paragraph may be issued each academic term as long as the scholarship is effective. The purchaser of the prepaid tuition contract shall be entitled to such refund. Proof of scholarship must be submitted in a form acceptable to the board.

(3) If the beneficiary dies or becomes disabled (within the meaning of the Internal Revenue Code, §529(b)(3)) while attending an institution of higher education or a private or independent institution of higher education, the amount of benefits remaining available under the prepaid tuition contract, less any applicable fees, may be refunded. A lump sum refund may be made within 60 days of the date the program is notified of the death or disability to the purchaser of the prepaid tuition contract, provided proof of death or disability is submitted in a form acceptable to the board.

(4) If the beneficiary dies or becomes disabled (within the meaning of the Internal Revenue Code, §529(b)(3)) after having graduated from high school but prior to attending an institution of higher education or a private or independent institution of higher education, a refund may be issued or the benefits under such contract may be transferred to another qualified beneficiary. If a change of beneficiary is not requested, a lump sum refund may be made within 60 days of the date the program is notified of the death or disability to the purchaser of the prepaid tuition contract, provided proof of death or disability is submitted in a form acceptable to the board. Under the junior college plan, junior/senior college plan, or senior college plan, the refund will equal the average amount of tuition and required fees in effect at the time the refund is requested. Under the private college plan, the refund will equal the estimated average of private tuition and required fees as determined annually by the board.

(5) If the beneficiary dies or becomes disabled before the contract is paid in full, a refund may be issued or the benefits under such contract may be transferred to another qualified beneficiary. If a change of beneficiary is not requested, a lump sum refund may be made within 60 days of the date the program is notified of the death or disability to the purchaser of the prepaid tuition contract, provided proof of death or disability is submitted in a form acceptable to the board. For junior college plans, junior/senior college plans, or senior college plans, the refund amount will be equal to a pro rata amount of the average amount of tuition and required fees in effect at the time the refund is requested, such pro rata amount determined by the number of payments made under the contract by the purchaser to the number of payments required to pay the contract in full. For private college plans, the refund amount will be equal to a pro rata amount of the estimated amount of private tuition and required fees set forth in the prepaid tuition contract, such pro rata amount determined by the number of payments made under the contract by the purchaser to the number of payments required to pay the contract in full.

(6) If a prepaid tuition contract is terminated under §7.82(c) of this title (relating to Termination of Prepaid Tuition Contract), such contract may be refunded in an amount equal to the present lump sum actuarial value, as of the date of termination, of the average amount of tuition or the estimated amount of private tuition and required fees of junior college plans, junior/senior college plans or the estimated amount of private tuition and required fees for the private college plan, less [ the required penalty under §7.3(g) of this title (relating to Tax Exempt Status Requirements); ]a cancellation fee; and any other applicable fee. In no case shall a refund be made in an amount less than the total amount paid by the purchaser under the contract less any applicable administrative fees or amounts previously distributed.

(7) If the purchaser who selected the junior college plan, junior/senior college plan, or senior college plan dies or becomes disabled and payments cease before the contract is paid in full, and unless otherwise directed by the purchaser in writing, a refund may be made. The refund amount will be equal to a percentage of the average amount of tuition and required fees in effect at the time the refund is requested, determined by reference to the percentage of payments made under the contract by the purchaser[ , and such amount will be subject to a required penalty under §7.3(g) of this title (relating to Tax Exempt Status Requirements) ]. If the purchaser who selected the private college plan dies or becomes disabled and payments cease before the contract is paid in full, a refund may be made. The refund amount will be equal to a percentage of the estimated amount of private tuition and required fees set forth in the prepaid tuition contract, determined by reference to the percentage of payments made under the contract by the purchaser[ , and such amount will be subject to a required penalty under §7.3(g) of this title ]. A lump sum refund may be made within 60 days to the purchaser of the prepaid tuition contract unless otherwise specified in writing by the purchaser as described in this paragraph. In the alternative, contract benefits may be converted to a plan with reduced benefits. Proof of death or disability shall be in a form acceptable to the board. Notwithstanding any other provision of this paragraph, the purchaser, in a writing to the board, and providing such other information as the board may request, may designate a person who shall have a right of survivorship with respect to purchaser's rights and obligations pursuant to a prepaid tuition contract; provided that such designation shall in no way affect the purchaser's ability to modify or terminate the contract and receive a refund without the consent or authorization of the designee.

(8) Refunds may be made for other reasons as approved by the board[ subject to required penalties as determined by the board under §7.3(g) of this title (relating to Tax Exempt Status Requirements) ]. By way of example, such refunds may be made in an amount equal to the lowest amount of tuition and required fees of all institutions under the plan selected, less a cancellation fee[ and less a required penalty under §7.3(g) of this title ]. Refund payments may be made in semiannual installments to the purchaser of the prepaid tuition contract.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on April 19, 2002.

TRD-200202428

Martin Cherry

Deputy General Counsel for Taxation

Comptroller of Public Accounts

Earliest possible date of adoption: June 2, 2002

For further information, please call: (512) 475-0387


Subchapter K. HIGHER EDUCATION SAVINGS PLAN

34 TAC §§7.101 - 7.111

The Comptroller of Public Accounts proposes new §§7.101-7.111, concerning the Higher Education Savings Plan. These rules establish administrative and procedural guidelines for a new Higher Education Savings Plan which will allow individuals to make contributions to a higher education savings account, while taking advantage of federal income tax benefits under Internal Revenue Code of 1986, §529, as amended. The new rules will reside under Texas Administrative Code, Title 34, Part 1, Chapter 7, new Subchapter K: Higher Education Savings Plan.

James LeBas, chief revenue estimator, has determined that for the first five-year period the rule is in effect there will be no significant revenue impact on state or local governments as a result of enforcing or administering the rule.

Mr. LeBas also has determined that for each year of the first five years the rules are in effect, the public benefit anticipated as a result of enforcing the rules will include informing the public about the new Texas Higher Education Savings Plan, conforming the rules to federal tax law changes, providing more flexibility to individuals in the mechanisms available in Texas to help fund a college education, and allowing individuals the opportunity to utilize a Texas Higher Education Savings Plan to take advantage of the federal income tax benefits provided by Internal Revenue Code of 1986, §529, as amended. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Mr. LeBas also has determined that the proposed rule will not have an adverse economic effect on small or micro businesses.

Written comments on the proposal may be addressed to Andrew Ruth, Director, Special Programs, P.O. Box 13407, Austin, Texas 78711-3407, phone: 1-800-531-5441 ext. 62094. If a person wants to ensure that the board considers a comment made about this proposal, then the person must ensure that the board receives the comment not later than the 30th day after the issue date of the Texas Register in which this proposal appears. If the 30th day is a state or national holiday, Saturday, or Sunday, then the first workday after the 30th day is the deadline.

The new rules are proposed under Education Code, Chapter 54, Subchapter F, §54.618, which authorizes the board to adopt rules to implement Subchapter F, and Education Code, Chapter 54, Subchapter G, §§54.702, 54.708, and 54.710, which authorize the board to adopt rules governing the Higher Education Savings Plan.

The new rules implement Education Code, Chapter 54, Subchapter G.

§7.101.Definitions.

The following words, terms, and phrases, when used in this subchapter, shall have the following meanings.

(1) Beneficiary--The designated individual whose qualified higher education expenses are expected to be paid from a savings trust account.

(2) Financial institution--A bank, trust company, savings and loan association, credit union, broker-dealer, mutual fund, insurance company, or other similar financial institution that is authorized to transact business in this state.

(3) Nonqualified withdrawal--A withdrawal from a savings trust account other than:

(A) a qualified withdrawal;

(B) a withdrawal that is made as the result of the death or disability of the beneficiary of the account; or

(C) a withdrawal that is made as a result of the receipt of a scholarship or an allowance or payment that is described in Internal Revenue Code of 1986, §135(d)(1)(B) or (C), as amended, and that the beneficiary has received, to the extent that the amount of the withdrawal does not exceed the amount of the scholarship, allowance, or payment, in accordance with federal law.

(4) Owner--The individual, trust, estate, Uniform Gift to Minors Act (UGMA) custodian or Uniform Transfer to Minors Act (UTMA) custodian, guardian, corporation, non-profit entity, or other legal entity, or any combination thereof that results from transfers by operation of law, that owns a savings trust account under a savings trust agreement between the board and that individual, trust, estate, UGMA or UTMA custodian, guardian, corporation, non-profit entity, or other legal entity, or any combination thereof.

(5) Plan manager--A financial institution that is under contract with the board to serve as a plan administrator.

(6) Qualified higher education expenses--Tuition, fees, books, supplies, and equipment that are required for the enrollment or attendance of a beneficiary at an eligible educational institution as defined by Internal Revenue Code of 1986, §529, as amended, and including in certain instances the following:

(A) In the case of a special needs beneficiary, "qualified higher education expenses" include expenses for special needs services that are incurred in connection with enrollment or attendance of the beneficiary at an eligible educational institution; and

(B) To the extent permitted by Internal Revenue Code of 1986, §529, as amended, beneficiaries who live off-campus and not at home may include in "qualified higher education expenses" a reasonable room and board allowance as determined by the eligible educational institution, and beneficiaries who live on campus may include in "qualified higher education expenses" the actual invoice amount that is charged for room and board, if that amount is greater than the allowance.

(7) Qualified withdrawal--A withdrawal from a savings trust account to pay the qualified higher education expenses of the beneficiary of the account.

(8) Savings trust account--An account that an owner establishes through the savings plan under this subchapter and Education Code, Chapter 54, Subchapter G, on behalf of a beneficiary for the purpose of applying distributions from the account toward qualified higher education expenses at eligible educational institutions.

(9) Savings trust agreement--The agreement between the owner that establishes a savings trust account and the board, which may be amended over time.

(10) Special needs beneficiary--A beneficiary who, because of a physical, mental, or emotional condition, including a learning disability, requires additional time to complete education courses or degree requirements. This definition shall be automatically amended from time to time to conform with the definition of special needs beneficiary in any proposed, temporary, or final Treasury Department regulations. The board may adopt policies and procedures by which a beneficiary's status as a special needs beneficiary will be determined.

§7.102.General Provisions.

(a) Applicability of this subchapter. This subchapter applies to each savings trust agreement.

(b) Rights of owners and beneficiaries. The rights of an owner or a beneficiary under a savings trust agreement are subject to:

(1) Education Code, Chapter 54, Subchapter G;

(2) this subchapter; and

(3) the terms and conditions of that agreement.

(c) Composition and content of savings trust agreements.

(1) The savings trust agreement between the board and an owner consists of:

(A) the application for enrollment that the owner submitted to the plan manager that has custody of the owner's savings trust account; and

(B) the master agreement for the savings plan, except when the agreement irreconcilably conflicts with Education Code, Chapter 54, Subchapter G; Internal Revenue Code of 1986, §529, as amended; regulations thereunder; or this subchapter.

(2) The savings trust agreement between the board and an owner is governed by:

(A) the terms of the agreement;

(B) this subchapter;

(C) Education Code, Chapter 54, Subchapter G, and any other applicable law of this state; and

(D) Internal Revenue Code of 1986, §529, as amended, regulations thereunder, and any other applicable federal law.

(3) The savings trust agreement between the board and an owner must contain the information that is required by Education Code, §54.707(c) and §54.709(d).

(d) Conflicts between Education Code, Chapter 54, Subchapter G, and the Internal Revenue Code of 1986, §529, as amended, or this subchapter and the master agreement. To the extent of irreconcilable conflict, the provisions of Internal Revenue Code of 1986, §529, as amended, and regulations thereunder; Education Code, Chapter 54, Subchapter G; and this subchapter prevail over the master agreement for the savings plan. The agreement is at all times subject to this subchapter. Any amendment to Internal Revenue Code of 1986, §529; Education Code, Chapter 54, Subchapter G; or this subchapter that would apply to the savings plan, a savings trust agreement, or a savings trust account will automatically constitute an amendment to the savings trust agreement.

(e) Disclosures and promotion of the plan.

(1) Every savings trust agreement, deposit slip, or similar document that is used in connection with a contribution to a savings trust account must clearly indicate that:

(A) the account is not insured by this state; and

(B) neither the principal that is deposited nor the investment return is guaranteed by this state.

(2) The promotional material or other savings plan information that is distributed to an owner or beneficiary shall disclose that:

(A) no money that is invested in the savings plan is insured by this state; and

(B) neither the principal that is deposited nor the investment return is guaranteed by this state.

(3) The promotional material or other savings plan information that is provided to the public, an owner, or a beneficiary must disclose the administrative fees and service charges that are imposed under Education Code, Chapter 54, Subchapter G.

(4) The promotion of or other form of disclosure of information about the savings plan to an owner or a beneficiary must be done in a manner that is consistent with:

(A) Education Code, Chapter 54, Subchapter G; and

(B) Internal Revenue Code of 1986, §529, as amended.

(5) No plan manager, financial institution, or person who acts on behalf of either shall make any representation that is inconsistent with the requirements and limitations of this subchapter, or that is otherwise misleading with respect to any attribute of the savings plan, a savings trust agreement, or a savings trust account.

§7.103.Tax Benefits and Securities Laws Exemptions.

(a) Intent to satisfy tax exempt requirements. This subchapter, the savings plan, each savings trust agreement, and each savings trust account hereunder are intended to satisfy all requirements of:

(1) Internal Revenue Code of 1986, §529, as amended, and regulations thereunder; and

(2) federal securities laws.

(b) Media for making payments to savings trust accounts. Any payment of an amount due to a savings trust account under a savings trust agreement must be made in cash or by electronic funds transfer.

(c) Excess contributions prohibited.

(1) The owner of a savings trust account may not contribute to the account any sum that would cause the balance of the account to exceed the amount that is required to pay the qualified higher education expenses of the beneficiary of the account. Contributions to a savings trust account may not be made if, as a result thereof, the balance of the savings trust account would exceed the sum of four times the cost of one year of undergraduate tuition, fees, books, supplies, and room and board at the most expensive educational institution that is eligible for the savings plan, and three times the cost of one year of graduate school tuition, fees, books, supplies, and room and board at the most expensive graduate school that is eligible for the savings plan, which amount will be determined and published annually by the board. Contributions to a savings trust account during a calendar year shall be limited to the amount, if any, by which the foregoing sum exceeds the balance of that savings trust account (together with the balance of all other savings trust accounts that are maintained under the savings plan for the beneficiary of that savings trust account) as of the end of the immediately preceding year. Any contribution that exceeds that limit will be promptly refunded, without interest or earnings, to the account's owner.

(2) A plan manager shall monitor contributions to each savings trust account that is in the manager's custody, to ensure compliance with any applicable limits on contributions.

(3) In application of these rules, the plan manager must determine whether the beneficiary of a savings trust account is the beneficiary of any other qualified tuition program under Internal Revenue Code of 1986, §529, as amended, that is maintained by the state, and must enforce the foregoing limitation on contributions by incorporating all other such accounts into calculations of allowed contributions.

(d) Separate accountings. A plan manager shall maintain a separate accounting for each savings trust account in the manager's custody.

(e) Investment and earnings control prohibited. Except as provided in §7.106(f) of this title (relating to investment alternatives), neither the owner of a savings trust account nor the beneficiary of that account may control or direct the investment of:

(1) the principal of the account; or

(2) any earnings of the account.

(f) Pledge of interest as security prohibited. Neither the owner of a savings trust account nor the beneficiary of that account may:

(1) assign any interest in the account for the benefit of a creditor;

(2) use any interest in the account as security or collateral for a loan or other obligation; or

(3) otherwise alienate, sell, transfer, assign, pledge, encumber, or charge any interest in the account.

(g) Reports. A plan manager shall make reports that are required by:

(1) Internal Revenue Code of 1986, §529, as amended; and

(2) any other applicable tax law.

(h) Policies and procedures. Except where in conflict with Education Code, Chapter 54, Subchapter G, or this subchapter, the board may adopt any policy or procedure, and such policy or procedure automatically amends each outstanding savings trust agreement as necessary for:

(1) the savings plan to obtain or maintain qualification as a qualified tuition program under Internal Revenue Code of 1986, §529, as amended;

(2) owners and beneficiaries to obtain or maintain the federal income tax benefits or favorable treatment that is provided by Internal Revenue Code of 1986, §529, as amended; or

(3) the savings plan to obtain or maintain exemption from registration under federal securities laws.

§7.104.Enrollment.

(a) Enrollment period. The savings plan will have an open, continuous enrollment period.

(b) Date on which applications for enrollment are considered to have been received. For purposes of this section:

(1) if an application for enrollment has an official postmark date that is affixed by the United States Postal Service, a plan manager is considered to have received the application on the earlier of:

(A) the official postmark date; or

(B) the date that is reflected on the date stamp to the application or equivalent documentation that evidences actual receipt of the application by the plan manager; or

(2) if an application for enrollment does not have an official postmark date that is affixed by the United States Postal Service, a plan manager is considered to have received the application on the date that is reflected on the date stamp to the application or equivalent documentation that evidences actual receipt of the application by the plan manager.

(c) Limitations on enrollment. The board may limit enrollment in the savings plan as the board considers necessary.

(d) Opening of savings trust account. A prospective owner may open a savings trust account if:

(1) the prospective owner enters into a savings trust agreement with the board;

(2) the prospective owner makes the minimum contribution that the plan manager that has custody of the account requires; and

(3) the maintenance and funding of the account would not cause excess contributions in violation of §7.103(c) of this title (relating to Excess Contributions Prohibited).

§7.105.Administrative Fees and Service Charges.

To be determined in consultation with the selected plan manager(s).

§7.106.Plan Managers.

(a) Access to books and records. A plan manager shall provide the comptroller with access to the books and records of the manager as the comptroller determines necessary to assess the manager's compliance with Education Code, Chapter 54, Subchapter G, this subchapter, the savings trust agreement, or the contract between the board and the manager.

(b) Savings trust accounts. A plan manager shall hold each savings trust account in trust. Notwithstanding the foregoing, the Texas Trust Code shall not apply to a savings trust agreement or a savings trust account.

(c) Investments. A plan manager shall ensure that each investment by the manager is made with the judgment and care that a person of prudence, discretion, and intelligence would exercise in the management of the property of another, not in regard to speculation but in regard to the permanent disposition of funds, with consideration of the probable income as well as the probable safety of capital.

(d) Marketing of savings plan.

(1) A plan manager shall develop a strategy to market the savings plan and present the strategy to the board for review. If the board approves the strategy, the manager shall fully implement that strategy.

(2) A plan manager may contract with a financial institution to market the savings plan on behalf of the manager.

(e) Account services. A plan manager may contract with a financial institution to provide account services to the owner of a savings trust account that the manager administers. The institution may charge a fee or commission for those services.

(f) Investment alternatives. The plan manager may formulate a variety of alternative investment strategies for savings trust accounts, so long as such strategies are consistent with the requirements and limitations of Internal Revenue Code of 1986, §529, as amended, and the regulations thereunder. An owner is entitled to select a strategy from among such alternatives, as permitted by Internal Revenue Code of 1986, §529, as amended.

(g) Board review. From time to time, and in accordance with procedures that the board establishes, the board shall review, monitor, and audit the actions of the plan manager and financial institutions, as described in subsections (c), (d), (e), and (f) above, and without impairment to any other right that the board may have to terminate a contract with a plan manager, may terminate the contract with a plan manager or withdraw its approval to any of the above matters, if in its judgment the board finds that continuation of that contract or the continued approval is not in the best interests of the owners and beneficiaries, so long as such action is consistent with rights and obligations of the board under the savings trust agreement.

§7.107.Beneficiaries.

Any individual may be the beneficiary of a savings trust account, including the owner of that account.

§7.108.Roll-Overs.

In the case of a roll-over contribution from another qualified tuition plan into a savings trust account, the board shall require that the owner provide additional information and certifications to confirm that the contribution is a qualified roll-over under Internal Revenue Code §529, as amended, and to properly specify that portion of the contribution that is attributable to the investment in the account that was maintained under the previous qualified tuition program and that portion of the contribution that is attributable to earnings that were accumulated in that account.

§7.109.Owners.

A savings trust account may only be established with one owner at the time it is opened, and thereafter shall have only one owner except when owned by more than one individual, trust, estate, or UGMA/UTMA custodian, guardian, corporation, non-profit entity, or other legal entity (or any combination thereof) as a result of a transfer by operation of law.

§7.110.Replacement of Beneficiary.

(a) Criteria for being a qualified replacement beneficiary. An individual may be the qualified replacement beneficiary of a savings trust agreement if:

(1) the individual is a member of the family of the former beneficiary who satisfies the requirements of Internal Revenue Code of 1986, §529(e)(2), as amended, so that the change of beneficiary is not treated as a distribution under that law; and

(2) documentation that evidences the relationship between the individual and the former beneficiary is submitted to the plan manager that has custody of the savings trust account.

(b) Conditions for replacement of beneficiary. The owner of a savings trust agreement may replace the beneficiary of that agreement with another individual only if:

(1) the individual is a qualified replacement beneficiary as described in subsection (a) of this section; and

(2) the owner pays to the plan manager that has custody of the savings trust account any fees that are required under the board's administrative fee and service charge schedule.

§7.111.Withdrawals.

(a) General provisions. The owner of a savings trust account may withdraw any amount from that account if:

(1) the withdrawal is made in accordance with Education Code, Chapter 54, Subchapter G; this subchapter; and the applicable savings trust agreement;

(2) the owner certifies to the appropriate plan manager the portion, if any, of the withdrawal that constitutes a nonqualified withdrawal; and

(3) the withdrawal would not adversely affect the tax status of the savings plan under applicable provisions of Internal Revenue Code of 1986, as amended. Notwithstanding the owner's certifications that are described in clause (2) above, the board may independently determine the extent to which any withdrawal constitutes a nonqualified withdrawal.

(b) Responsibility of plan managers. A plan manager shall monitor withdrawals from each savings trust account in the manager's custody to ensure compliance with any applicable limitations on withdrawals.

(c) Examples of particular types of withdrawals. The circumstances under which a withdrawal is authorized include the following.

(1) If the beneficiary of a savings trust agreement receives a full or partial scholarship for tuition and required fees, the owner of the agreement may withdraw the amount of the scholarship from the savings trust account. A withdrawal under this paragraph may occur:

(A) only as each academic term occurs; and

(B) only if proof of the scholarship is submitted to the plan manager that has custody of the account, in a form that is acceptable to the plan manager.

(2) If the beneficiary of a savings trust agreement dies or becomes disabled within the meaning of Internal Revenue Code of 1986, §529(b)(3)(B), as amended:

(A) The owner of the agreement may withdraw the entire balance of the savings trust account or replace the deceased or disabled beneficiary with a qualified replacement beneficiary as provided in §7.110 of this title (relating to Replacement of Beneficiary).

(B) If the owner of the agreement requests a withdrawal, the appropriate plan manager shall pay the withdrawal to the owner not later than the 60th day after the date on which the plan manager receives proof of the death or disability in a form that is acceptable to the plan manager.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on April 19, 2002.

TRD-200202429

Martin Cherry

Deputy General Counsel for Taxation

Comptroller of Public Accounts

Earliest possible date of adoption: June 2, 2002

For further information, please call: (512) 475-0387


Chapter 9. PROPERTY TAX ADMINISTRATION

Subchapter A. PRACTICE AND PROCEDURE

34 TAC §9.107

The Comptroller of Public Accounts proposes a new §9.107, concerning appraised value limitation and tax credit for certain qualified property. The new rule is proposed to implement House Bill 1200, 77th Legislature, 2001, effective January 1, 2002.

James LeBas, Chief Revenue Estimator, has determined that for the first five-year period the rule will be in effect, there will be no significant fiscal impact on the state or units of local government.

Mr. LeBas also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be in providing taxpayers with additional information regarding their tax responsibilities. The new rule would have no fiscal impact on small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposal may be submitted to Buddy Breivogel, Manager, Property Tax Division, P.O. Box 13528, Austin, Texas 78711-3528.

This new section is proposed under Tax Code, §313.031(a), which requires the comptroller to adopt rules and forms necessary for the implementation and administration of the provisions of the Tax Code, Chapter 313.

The new section implements Tax Code, Chapter 313.

§9.107.Appraised Value Limitation and Tax Credit for Certain Qualified Property.

(a) Appraised value limitation applicant restriction. Corporations and limited liability companies that are subject to franchise tax under Tax Code, §171.001, may apply to the governing body of a school district for a limitation on the appraised value of qualified property in a reinvestment zone subject to the requirements and restrictions in this section. Sole proprietorships, partnerships, and limited liability partnerships are not eligible to apply. Corporations and limited liability companies that qualify for a limitation on the appraised value may also be eligible for a tax credit.

(b) Definitions. The following phrases, words, and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise:

(1) Impact fee--A charge or assessment that is imposed against a qualified property to generate revenue for funding or recoupment of the costs of capital improvements or facility expansions for water, wastewater, or storm water services or for roads that are necessitated by or attributable to property that receives a limitation on appraised value under this section.

(2) Manufacturing--An establishment that is primarily engaged in activities that are described in categories 2011-3999 of the 1987 Standard Industrial Classification Manual that the federal Office of Management and Budget publishes.

(3) Qualified investment--Investment that an owner proposes to build or install and that will qualify the owner for a limitation in the appraised value of qualified property. The term does not include land, but means:

(A) tangible personal property that is described as Section 1245 property by Internal Revenue Code of 1986, §1245(a), and that is first placed in service in Texas during the applicable qualifying time period that begins after December 31, 2001;

(B) tangible personal property that is first placed in service in Texas during the applicable qualifying time period that begins after December 31, 2001, and that is used in connection with the manufacturing, processing, or fabrication in a cleanroom environment of a semiconductor product. For purposes of this subparagraph, tangible personal property is neither required to be affixed to or incorporated into real property, nor required to be actually located in the cleanroom environment. Examples include integrated systems, fixtures, and piping; property that is necessary or adapted to reduce contamination or to control environmental conditions (e.g. airflow, temperature, humidity, or chemical purity) or to control manufacturing tolerances; and production equipment and machinery, moveable cleanroom partitions, and cleanroom lighting;

(C) a building or a permanent, non-removable component of a building that is built or constructed during the applicable qualifying time period that begins after December 31, 2001, and that houses tangible personal property described by subparagraph (A) or (B) of this paragraph; or

(D) any property that is described in subparagraphs (A)-(C) of this paragraph that is leased under a capitalized lease, but excludes any property that is leased under an operating lease.

(4) Qualifying job--A new permanent full-time job that:

(A) requires at least 1,600 hours of work per year;

(B) is not transferred from one area in this state to another area in this state;

(C) is not created to replace a previous employee;

(D) is covered by a group health benefit plan, as defined by Government Code, §481.151, for which the business pays or offers to pay at least 80% of the premiums or other charges that are assessed for employee-only coverage under the plan; and

(E) pays at least 110% of the county average weekly wage for manufacturing jobs as computed by the Texas Workforce Commission for the county where the job is located.

(5) Qualified property--Property that is used either as an integral part, or as a necessary auxiliary part, in manufacturing, research and development, or renewable energy generation and consists of:

(A) a new building or other new improvement that does not exist before the date on which the owner applies for an appraised value limitation;

(B) land that is not subject to a tax abatement agreement into which a school district has entered under Tax Code, Chapter 312; and is located in an area that is designated as a reinvestment zone under Tax Code, Chapter 311 or Chapter 312, or as an enterprise zone under Government Code, Chapter 2303, on which the owner:

(i) proposes to construct, erect, or affix a new building or new improvement that does not exist before the date on which the owner applies for an appraised value limitation; and,

(ii) in connection with that new building or new improvement, also proposes to make at least the minimum amount of qualified investment required by this section; and,

(iii) proposes to create at least 10 new jobs if the land is in a rural school district or at least 25 new jobs if the land is in a school district that is not a rural school district.

(C) tangible personal property that is either first placed in service in the new building or in or on the new improvement that did not exist before the date on which the owner applies for an appraised value limitation (unless the property is considered a semiconductor fabrication cleanroom or equipment under Tax Code, §151.318(q)) or first placed in service on the land on which that new building or new improvement is located, if the personal property is ancillary and necessary to the business that is conducted in that new building or in or on that new improvement. To qualify, tangible personal property may not be subject to a tax abatement agreement into which a school district has entered under Tax Code, Chapter 312.

(6) Qualifying time period--The first two tax years that begin on or after the date on which the approval of an application for a limitation on appraised value occurs.

(7) Renewable energy electric generation--An establishment that is primarily engaged in activities that are described in category 221119 of the 1997 North American Industry Classification System.

(8) Research and development--An establishment that is primarily engaged in activities that are described in category 8731 of the 1987 Standard Industrial Classification Manual that the federal Office of Management and Budget publishes.

(9) Rural school district--A school district that has territory in a strategic investment area, as defined by Tax Code, §171.721, or in a county:

(A) that has a population of less than 50,000;

(B) that is not partially or wholly located in a metropolitan statistical area; and

(C) in which, from 1990 to 2000, according to the federal decennial census, the population remained the same; decreased; or increased, but at a rate of not more than 3.0% per annum.

(c) Forms.

(1) The comptroller adopts by reference the following model forms:

(A) Application For Appraised Value Limitation On Qualified Property (Form 50-296); and

(B) Application For Tax Credit On Qualified Property (Form 50-300).

(2) The comptroller will make available model forms that are adopted by reference in paragraph (1)of this subsection. Copies of the forms are available for inspection at the office of the Texas Register or may be obtained from the Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3528. After adoption of this rule, copies of the forms may be viewed or downloaded from the comptroller's Window on State Government website, at http://www.window.state.tx.us/taxinfo/taxforms/02-forms.html. Copies may also be requested by calling our toll-free number, 1-800-252-9121. In Austin, call (512) 305-9999. From a Telecommunications Device for the Deaf (TDD), call 1-800-248-4099, toll free. In Austin, the local TDD number is (512) 463-4621.

(3) In special circumstances, a school district may obtain prior approval in writing from the comptroller to use an application form that requires additional information, or sets out the required information in different language or sequence than that which this section requires.

(4) All school districts and appraisal districts shall make available copies of the comptroller model forms that are adopted by reference in paragraph (1) of this subsection for taxpayers to use in their applications for an appraised value limitation and for tax credit under this section. Subject to the prior written approval requirement that is provided in paragraph (3) of this subsection, if a school district uses a form other than the one that the comptroller has adopted, then the alternate form must also be made available for taxpayers to use.

(d) Requirements and restrictions.

(1) A property owner must file with a school district an application for appraised value limitation before September 4 in the year that precedes the first year in which the owner proposes its qualifying time period to begin, unless the property owner proposes an extension of the 120-day period that is allowed in subsection (f)(1)(H) for the school district to decide on the application, in which instance the property owner must file as many days in advance of September 4 as the number of days in the proposed extension.

(2) The application for appraised value limitation must be:

(A) made on the comptroller's Application For Appraised Value Limitation On Qualified Property ( Form 50-296) or an alternate form authorized by subsection (c)(3) of this section;

(B) properly completed;

(C) accompanied by the applicable attachments that are specified on the form; and

(D) accompanied by the applicable application fee.

(3) The applicant must identify and quantify the qualified investment that the applicant proposes to build or install in the reinvestment zone during the qualifying time period, and the information must be sufficient to allow the school district to determine whether the applicant will meet the minimum qualified investment amount that is required for the relevant school district category.

(4) To be eligible for a limitation on appraised value under this section, at least 80% of all the new jobs that the property owner has created must be qualifying jobs as defined in subsection (b)(4) of this section.

(5) Property that a person other than the applicant owns and that is pooled or proposed to be pooled with property that the applicant owns may not be included in determination of the amount of the applicant's qualifying investment.

(e) School district categories and minimum qualified investment requirements.

(1) The minimum amount of qualified investment that this section requires is based on the category in which the school district is classified.

(A) School districts other than rural school districts are categorized according to the district's most recent total taxable value of property that is determined under Government Code, Chapter 403, Subchapter M (identified as "T2" on the comptroller's print out entitled "School District Summary Worksheet"), as follows:

Figure: 34 TAC §9.107(e)(1)(A)

(B) Rural school districts are categorized according to the sum of the district's most recent market value of industrial real and personal property that is determined under Government Code, Chapter 403, Subchapter M (identified as "F2" and "L2" on the comptroller's print out entitled "School District Summary Worksheet"), less any applicable deductions that are allowed under Government Code, Chapter 403, Subchapter M, for industrial property, as follows:

Figure: 34 TAC §9.107(e)(1)(B)

(2) The minimum qualified investment requirement for each category of school districts other than rural school districts is:

Figure: 34 TAC §9.107(e)(2)

(3) The minimum qualified investment requirement for each category of rural school districts is:

Figure: 34 TAC §9.107(e)(3)

(f) Application review process.

(1) A school district may choose not to consider the application and must notify the applicant of its decision, but if a school district does consider the application, then the following procedures must be followed:

(A) the school district shall immediately send a copy of the application to the comptroller;

(B) the school district shall also send a copy of the application to each appraisal district that appraises property that is described in the application;

(C) the school district, in its discretion, may allow the applicant to supplement the application after the filing date to provide information that is required by the application form that was unavailable prior to the filing date, but must forward any supplemental information that the district has received immediately to the comptroller and the appraisal district;

(D) the school district shall hire a qualified third party to perform an economic impact evaluation. See subsection (g) for further information on economic impact evaluation;

(E) the school district may obtain assistance from the comptroller, Texas Economic Development, the Council on Workforce and Economic Competitiveness, and the Texas Workforce Commission;

(F) the school district shall obtain a recommendation from the comptroller on whether the application should be approved. The comptroller's recommendation shall be made no later than the 61st day from the date on which the comptroller receives a copy of the application from the school district. The comptroller may consider the reported economic evaluation information in the application or any other available information that the comptroller considers relevant, and the comptroller may make a recommendation that is contingent on the receipt of appropriate supplemental information;

(G) the school district must make a written finding on each economic impact evaluation criterion that is listed in this section before the district approves or disapproves the application, and the district shall deliver a copy of those findings to the applicant; and

(H) the school district shall review the application, including the economic impact evaluation, and the comptroller's recommendation, and must approve or disapprove the application within 120 calendar days from the filing date of the application, unless the governing body and the applicant agree to an extension.

(2) The school district may approve the application only if it finds that the information in the application is true and correct, finds that the applicant is eligible for the limitation on the appraised value, and determines that granting the application is in the best interest of the school district and this state.

(3) If a school district grants the application, it must provide written notice to the applicant, the comptroller, and each appraisal district that appraises property that is described in the application. The school district and the property owner shall enter into a written agreement to incorporate the obligations of each party and provide for the appraised value limitation. See subsection (h) of this section for further information on the agreement.

(g) Economic impact evaluation. As provided by subsection (f) of this section, a school district must hire a qualified third party to perform an economic impact evaluation that will analyze the investment proposed in the application for an appraised value limitation and that will assist the school district to determine whether an appraised value limitation would be in the best interest of the school district and this state. The written report must include:

(1) the comptroller's recommendation on the application;

(2) the relationship between the applicant's industry and the types of qualifying jobs to be created by the applicant, to the long-term economic growth plans of this state as described in the strategic plan for economic development that the Texas Strategic Economic Development Planning Commission has submitted under Government Code, §481.033, as that section existed before February 1, 1999;

(3) the relative level of the applicant's investment per qualifying job to be created by the applicant;

(4) the wages, salaries, and benefits to be offered by the applicant to qualifying job-holders;

(5) the ability of the applicant to locate or relocate in another state or another region of this state;

(6) the impact that the added infrastructure will have on the region, including revenue gains that would be realized by the school district, and subsequent economic effects on the local and regional tax bases;

(7) the economic condition of the region of the state at the time when the person's application is being considered;

(8) the number of new facilities that were built or expanded in the region during the two years that preceded the date of the application and that were eligible to apply for a limitation on appraised value under this subsection; and

(9) the effect of the applicant's proposal, if approved, on the number or size of the school district's instructional facilities, as defined by Education Code, §46.001.

(h) Agreement. The written agreement between the school district and the property owner for the appraised value limitation:

(1) must describe with specificity the qualified investment that the person will make on or in connection with the person's qualified property that is subject to the limitation on appraised value under this section. Property that is not specifically described in the agreement is not subject to the appraised valued limitation unless the school district, by official action, provides that other property of the owner is subject to the appraised value limitation;

(2) must incorporate each relevant provision of this section and, to the extent necessary, include provisions for the protection of future school district revenues through the adjustment of the minimum valuations, the payment of revenue offsets, and other mechanisms to which the property owner and the school district agree;

(3) must require the property owner to maintain a viable presence in the school district for at least three years after the date on which the limitation on appraised value of the owner's property expires;

(4) must provide for the termination of the agreement, the recapture of ad valorem tax revenue that is lost as a result of the agreement if the owner of the property fails to comply with the terms of the agreement, and payment of a penalty or interest or both on that recaptured ad valorem tax revenue;

(5) may specify any conditions the occurrence of which will require the district and the property owner to renegotiate all or any part of the agreement; and

(6) must specify the ad valorem tax years that the agreement covers.

(i) Appraised value limitation.

(1) An appraised value limitation applies only to the maintenance and operations portion of a school district's ad valorem tax rate.

(2) A school district may limit the appraised value on qualified property for eight tax years, beginning with the tax year that follows the applicable qualifying time period.

(3) For each tax year in which the appraised value limitation is in effect, the appraised value of the qualified property that is described in the written agreement between the school district and property owner for school district maintenance and operations ad valorem tax may not exceed the lesser of:

(A) the market value of the property; or

(B) the amount to which the school district has agreed, but such amount must be at least the minimum amount of limitation that is set for the applicable school district category and that is enumerated in paragraph (4) of this subsection.

(4) Minimum amount of limitation.

(A) For school districts other than rural school districts:

Figure: 34 TAC §9.107(i)(4)(A)

(B) For rural school districts:

Figure: 34 TAC §9.107(i)(4)(B)

(j) Fees.

(1) Application fee. A school district may establish a reasonable nonrefundable application fee to be paid by a person who applies for a limitation on the appraised value of the person's property under this section. The amount of an application fee may not exceed the school district's estimated cost to process and act on an application, including the cost of the economic impact evaluation that this section requires.

(2) Impact fee. Notwithstanding any other law, including Local Government Code, Chapter 395, a municipality or county may impose and collect from the owner of a qualified property a reasonable impact fee to pay for the cost of providing improvements that are associated with or attributable to property that receives a limitation on appraised value under this section.

(k) Appraisal district responsibility. When appraising a person's qualified property that is subject to a limitation on appraised value under this section, the chief appraiser shall determine the market value of the property and include both the market value and the limited value in the appraisal records.

(l) Property not eligible for tax abatement. Property that is subject to a limitation on appraised value in a tax year under this section is not eligible for tax abatement by a school district under Tax Code, Chapter 312, in that tax year.

(m) Confidential business information. Information that describes the specific processes or business activities to be conducted or the specific tangible personal property to be located on real property that the application that an applicant submits to a school district covers is confidential unless the school district approves the application under this section. A school district may not disclose confidential information to the public.

(n) Tax rate limitation. A school district may not adopt a tax rate that exceeds the school district's rollback tax rate under Tax Code, §26.08, for each tax year during the qualifying time period. If the school district approves a subsequent application for an appraised value limitation while the restriction on the school district's tax rate is in effect, the restriction on the school district's tax rate extends until the expiration of the second anniversary of the subsequent application approval date.

(o) Tax credit.

(1) An owner is entitled to a credit for part of the ad valorem taxes that were paid to a school district for each tax year during the qualifying time period in an amount that is equal to the difference between the amount of tax that was actually paid on the qualified property and the amount of tax that would have been paid based on the appraised value limitation to which the school district agreed, provided that the owner follows the procedures that this subsection requires. The school district tax collector must apply any approved tax credit in the manner and time that is provided in paragraph (3) of this subsection.

(2) To be eligible for a tax credit, an owner must submit an application for tax credit before September 1 of the year that immediately follows the applicable qualifying time period to the school district to which the ad valorem taxes were paid. The application for tax credit must be:

(A) made on the Application for Tax Credit on Qualified Property (Form 50-300) or an alternative form that is authorized by subsection (c)(3) of this section;

(B) accompanied by tax receipts from the collector of taxes for the school district that show full payment of school district ad valorem taxes on the qualified property for the applicable qualifying time period;

(C) accompanied by a copy of the agreement between the applicant and the school district under Tax Code, §313.027 or §313.051; and

(D) accompanied by any other document or information that the comptroller or the school district considers ne0cessary for a determination of the applicant's eligibility for the tax credit or the amount of the tax credit.

(3) A school district must determine the owner's eligibility for a tax credit before the 90th day after the date on which the application for a tax credit is received by the school district. If a school district determines that the owner is eligible for a tax credit and verifies the total tax credit that has been computed as provided by paragraph (1) of this subsection, then the school district shall direct its tax collector to apply the tax credit against any taxes that the school district imposes on the qualified property as follows:

(A) subject to the limitation that is imposed by subparagraph (B) of this paragraph, apply one- seventh of the total tax credit for seven tax years beginning with the tax year that follows the tax year in which the application for tax credit was approved, and for six tax years thereafter;

(B) the maximum amount of tax credit that may be applied in each tax year may not exceed 50% of the total amount of ad valorem school taxes that the school district imposes on the qualified property in that tax year;

(C) apply any tax credit that remains as a result of the application of the cap that is imposed by subparagraph (B) of this paragraph in the first tax year that begins on or after the date on which the owner's eligibility for the appraised value limitation expires under this section, but the maximum amount may not exceed the total amount of ad valorem school taxes that the school district has imposed on the qualified property in that tax year. Any remaining tax credit that is not used under this subparagraph expires.

(4) No tax credit will be allowed for either the tax year in which the owner relocates the business outside the school district or the tax years thereafter.

(5) If the comptroller and a school district determine that a person who received a tax credit was either not eligible for the credit or received more credit than the person was entitled, then the school district shall impose an additional tax on the qualified property that is equal to the amount of tax credit that was erroneously taken, plus interest at an annual rate of 7.0% calculated from the date on which the credit was issued.

(A) A tax lien attaches to the qualified property in favor of the school district to secure payment by the person of the additional tax and interest that are imposed and any penalties incurred.

(B) A person who is delinquent in the payment of an additional tax may not submit a subsequent application or receive a tax credit under this subsection in a subsequent year.

(p) Property list by chief appraiser. Each year, the chief appraiser shall compile and send to Texas Economic Development a list of properties, including both taxable real and personal property that a person owns at one site, that are in the appraisal district in that tax year that have a market value of $100 million or more or are subject to a limitation on appraised value under Tax Code, Chapter 313. The list shall include, at a minimum, the appraisal district name, the name of any other appraisal district that appraises the property, the appraisal district number that the comptroller has assigned, the name of each school district that taxes the property, each school district number that the education agency has assigned, each account number that the appraisal district has assigned, each taxpayer name, the market value of the taxable real and personal property that the taxpayer owns at that site, the taxable value of the taxable real and personal property that the taxpayer owns at that site, the tax year to which the listed information pertains, and the name and telephone number of a person at the appraisal district who is responsible for the information that is contained in the list.

(q) School district designation of reinvestment zone.

(1) The governing body of a school district may approve qualified land that is located in an area that is designated as a reinvestment zone under Tax Code, Chapter 311 or Chapter 312, or as an enterprise zone under Government Code, Chapter 2303, by the commissioners court of each county and the governing body of each municipality, provided that all the qualified land falls within this designated zone.

(2) The governing body of a school district, in the manner that is required for official action and for purposes of Tax Code, Chapter 313, Subchapter B or C, may designate an area that is entirely within the territory of the school district as a reinvestment zone under Tax Code, §312.0025, if the governing body finds that, as a result of the designation and the granting of a limitation on appraised value under Chapter 313, Subchapter B or C, for property that is located in the reinvestment zone, the designation is reasonably likely to:

(A) contribute to the expansion of primary employment in the reinvestment zone; or

(B) attract major investment in the reinvestment zone that would benefit property in the reinvestment zone and the school district, and contribute to the economic development of the region of this state in which the school district is located.

(3) The governing body of the school district may seek the recommendation of the commissioners court of each county and the governing body of each municipality that has territory in the school district before designating an area as a reinvestment zone under subsection (q)(2).

(r) Timeline. The following is an example of the timeline to be used for the appraised value limitation and tax credit under House Bill 1200, 77th Legislature, 2001. The timeline is intended as a visual aid to help the applicants' understanding of the overall appraised value limitation and tax credit process. Any conflict between this timeline and the specific language of this rule shall be resolved in favor of the specific language of the rule.

34 TAC 9.107(r)

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on April, 22, 2002.

TRD-200202463

Martin Cherry

Deputy General Counsel for Taxation

Comptroller of Public Accounts

Earliest possible date of adoption: June 2, 2002

For further information, please call: (512) 475-0387