Part 1. COMPTROLLER OF PUBLIC ACCOUNTS

Chapter 3. TAX ADMINISTRATION

Subchapter J. PETROLEUM PRODUCTS DELIVERY FEE

34 TAC §3.151

The Comptroller of Public Accounts proposes an amendment to §3.151, concerning imposition, collection, and bonds or other security of the fee. The change is necessary to reflect current comptroller policy providing that the fee not be assessed on petroleum products withdrawn from a bulk facility and exported from this state or delivered into the fuel supply tanks of vessels or boats, provided that the fuel is not stored prior to export. An additional change is necessary to reflect current comptroller policy providing entities exempt from the fee the option of seeking a refund from the permitted bulk facility from which the petroleum products were withdrawn or seeking a refund directly from the comptroller. A new subsection (k) is added, with the remaining subsections renumbered.

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

Mr. Heleman 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 new information regarding tax responsibilities. This rule is adopted under 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 78711-3528.

This amendment is proposed under Tax Code, §111.002 and §111.0022, which provide 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, and taxes, fees, or other charges which the comptroller administers under other law.

The amendment implements Water Code, §26.3574.

§3.151.Imposition, Collection, and Bonds or Other Security of the Fee.

(a) The Texas Petroleum Products Delivery Fee is imposed, collected, and paid to the state by operators of bulk facilities. The fee is assessed when petroleum products are withdrawn from the bulk facility and delivered into a cargo tank or barge or imported into this state in a cargo tank or barge for delivery to another location for distribution or sale. The fee is not assessed when the fuel is destined for delivery to another bulk facility, an electrical generating plant, a common carrier railroad for its exclusive use, or is to be exported from the state prior to being placed into intermediate storage tanks .

(b) For the purposes of this section, withdrawals from a bulk facility into a cargo tank or barge are not subject to the fee when the entire withdrawal is delivered into the fuel supply tanks of vessels or boats prior to being placed into intermediate storage tanks .

(c) The fee is collected by the operator of a bulk facility from the person ordering the withdrawal. The fee is computed as follows:

(1) For each delivery into a cargo tank or barge having a capacity of less than 2,500 gallons:

(A) $10 for each delivery made after August 31, 2003, and before September 1, 2005;

(B) $5 for each delivery made after August 31, 2005, and before September 1, 2006;

(C) $2 for each delivery made after August 31, 2006, and before September 1, 2007;

(D) the fee is repealed effective September 1, 2007.

(2) For each delivery into a cargo tank or barge having a capacity of 2,500 gallons or more but less than 5,000 gallons:

(A) $20 for each delivery made after August 31, 2003, and before September 1, 2005;

(B) $10 for each delivery made after August 31, 2005, and before September 1, 2006;

(C) $4 for each delivery made after August 31, 2006, and before September 1, 2007;

(D) the fee is repealed effective September 1, 2007.

(3) For each delivery into a cargo tank or barge having a capacity of 5,000 gallons or more but less than 8,000 gallons:

(A) $30 for each delivery made after August 31, 2003, and before September 1, 2005;

(B) $15 for each delivery made after August 31, 2005, and before September 1, 2006;

(C) $6 for each delivery made after August 31, 2006, and before September 1, 2007;

(D) the fee is repealed effective September 1, 2007.

(4) For each delivery into a cargo tank or barge having a capacity of 8,000 gallons or more but less than 10,000 gallons:

(A) $40 for each delivery made after August 31, 2003, and before September 1, 2005;

(B) $20 for each delivery made after August 31, 2005, and before September 1, 2006;

(C) $8 for each delivery made after August 31, 2006, and before September 1, 2007;

(D) the fee is repealed effective September 1, 2007.

(5) For each increment of 5,000 gallons or any part thereof delivered into a cargo tank or barge having a capacity of 10,000 gallons or more:

(A) $20 for each delivery made after August 31, 2003, and before September 1, 2005;

(B) $10 for each delivery made after August 31, 2005, and before September 1, 2006;

(C) $4 for each delivery made after August 31, 2006, and before September 1, 2007;

(D) the fee is repealed effective September 1, 2007.

(d) In determining the amount of fee due for motor gasoline, other alcohol blended fuels, and aviation gasoline, each net temperature corrected withdrawal of 7,000 gallons or more but less than 10,000 gallons shall be presumed to have been a delivery into a cargo tank having a capacity of 8,000 gallons or more but less than 10,000 gallons and the fee shall be collected as provided by subsection (c)(4) of this section.

(e) In determining the amount of fee due on all withdrawals not covered by subsection (d) of this section, it shall be presumed that the capacity of the cargo tank or barge is equal to the total net temperature corrected quantity of product withdrawn.

(f) For the purposes of this section, a bulk facility is a refinery terminal or any other terminal or facility which receives petroleum products by pipeline, rail, or barge, and delivers the products into a cargo tank or barge.

(g) For the purposes of this section, the operator of a bulk facility is the person who first invoices petroleum products withdrawn from the facility. An exchange statement is not considered an invoice.

(h) For the purposes of this section, an electrical generating facility is a plant operated for the primary purpose of generating electricity for sale to consumers.

(i) Persons exempt from the petroleum products delivery fee, including persons operating barges who make withdrawals from a permitted bulk facility for delivery into the fuel supply tanks of vessels or boats prior to intermediate storage , shall request in writing a letter of exemption from the comptroller. The letter of exemption issued by the comptroller, or a copy, must be furnished to the seller each time purchases exempt from the petroleum products delivery fee are made.

(j) If the person making the sale to the exempt purchaser does not hold a petroleum products delivery fee permit, the purchaser must also furnish to the seller a statement listing the date of purchase, number of gallons purchased per delivery, and destination of the product. For the seller to receive credit for exempt sales, this documentation must be presented to the permitted bulk facility from which the product was purchased.

(k) As an alternative to subsection (j) of this section, an exempt purchaser may elect to seek refund directly from the comptroller. When an exempt purchaser elects to use this option, the purchaser must use this option with the vendor for all petroleum products purchased during the refund claim period for which the fee has been paid. The exempt purchaser must furnish to the comptroller:

(1) a letter declaring that the exempt purchaser did not provide the seller with a comptroller issued petroleum products delivery fee exemption letter and will not seek a refund from the seller or bulk facility from which the petroleum products were withdrawn;

(2) a copy of the comptroller issued petroleum products delivery fee exemption letter;

(3) documentation showing that the petroleum products delivery fee was paid; and

(4) any other information the comptroller deems necessary to validate the refund.

(l) [ (k) ] The amount of the petroleum products delivery fee must be listed as a separate item on the invoice or cargo manifest issued by the person holding a permit to collect the fee upon the withdrawal of product from a bulk facility.

(m) [ (l) ] Only persons who hold a petroleum products delivery fee permit may charge and collect the fee on the basis of the bracket system established in this section. No other persons selling fuel may list the fee as a separate item on invoices or manifest except:

(1) when required to do so by another governmental agency; or

(2) when an amount is clearly identified as reimbursement. An amount collected as reimbursement may not exceed the amount of fee actually paid by the person issuing the manifest or invoice.

(n) [ (m) ] The comptroller may require a bulk facility operator to post a bond or other security to protect the revenues of the state.

(o) [ (n) ] When determining the security required of a bulk facility operator, the comptroller will take into consideration the amount of fee that has or is expected to become due from the person, any past history of the person as a distributor or supplier of fuel, and the necessity to protect the state against the failure to pay the fee as it becomes due.

(p) [ (o) ] The comptroller may require a bond equal to two times the highest amount of fees that will accrue during a reporting period. The minimum bond is $30,000. The maximum bond is $600,000 unless the comptroller believes there is undue risk of loss of fee revenues, in which event he may require one or more bond or securities in a total amount exceeding $600,000.

(q) [ (p) ] If the comptroller determines that a bulk facility operator has for four consecutive years continuously complied with the conditions of the bond or other security on file, the operator is entitled on request to have the comptroller return, refund, or release the bond or security. However, if the comptroller determines that the revenues of the state would be jeopardized by the return, refund, or release of the bond or security, the comptroller may elect not to return, refund, or release the bond or security. The comptroller may reimpose a requirement of a bond or other security if necessary to protect the revenues of the state.

(r) [ (q) ] A bond must be a continuing instrument, must constitute a new and separate obligation in the penal sum named in the bond for each calendar year or portion of a year while the bond is in force, and must remain in effect until the surety on the bond is released and discharged.

(s) [ (r) ] In lieu of filing a surety bond, an applicant for a permit may substitute the following security:

(1) cash in the form of United States currency in an amount equal to the required bond, to be deposited in the suspense account of the state treasury;

(2) an assignment to the comptroller of a certificate of deposit in any bank or savings and loan association in Texas that is a member of the FDIC in an amount equal to the bond amount required; or

(3) an irrevocable letter of credit to the comptroller from any bank or savings and loan association in Texas that is a member of the FDIC in an amount of credit at least equal to the bond amount required.

(t) [ (s) ] If the amount of an existing bond becomes insufficient or a security becomes unsatisfactory or unacceptable, the comptroller may require the filing of a new or of an additional bond or security.

(u) [ (t) ] No surety bond or other form of security may be released until it is determined by examination or audit that no fee, penalty, or interest liability exists. The cash or securities shall be released within 60 days after the comptroller determines that no liability exists.

(v) [ (u) ] The comptroller may use the cash or certificate of deposit security to satisfy a final determination of delinquent liability or a judgment secured in any action by this state to recover fees, cost, penalties, and interest found to be due this state by a person in whose behalf the cash or certificate security was deposited.

(w) [ (v) ] A surety on a bond furnished by a permittee shall be released and discharged from liability to the state accruing on the bond after the expiration of 30 days after the date on which the surety files with the comptroller a written request to be released and discharged. The request does not relieve, release, or discharge the surety from a liability already accrued, or that accrues before the expiration of the 30-day period. Promptly after receipt of the request, the comptroller shall notify the permittee who furnished the bond, and unless the permittee, before the expiration date of the existing security, files with the comptroller a satisfactory new bond or other security, the comptroller shall cancel the permit.

(x) [ (w) ] The comptroller shall notify immediately the issuer of a letter of credit of a final determination of the bulk facility operator's delinquent liability or a judgment secured in any action by this state to recover fees, cost, penalties, and interest found to be due this state by a bulk facility operator in whose behalf the letter of credit was issued. A letter of credit accepted as security shall contain a statement that the issuer agrees to respond to the comptroller's notice of liability with amounts sufficient to satisfy the comptroller's delinquency claim against the bulk facility operator.

(y) [ (x) ] An examination or audit may be requested to obtain release of the security when the permit holder relinquishes the permit or desires to substitute one form of security for an existing one.

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 January 24, 2005.

TRD-200500306

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.182

The Comptroller of Public Accounts proposes an amendment to §3.182, concerning motor fuel transporting documents The change is necessary to reflect the correct reference to the Water Code in subsection (c)(14).

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

Mr. Heleman 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 new information regarding tax responsibilities. This rule is adopted under 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 78711-3528.

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, §153.004 and §153.227

§3.182.Motor Fuel Transporting Documents.

(a) This rule applies only to motor fuel transactions that take place prior to January 1, 2004. Motor fuel transactions that occur on or after January 1, 2004, will be governed by sections in Texas Administrative Code, Title 34, Part 1, Chapter 3, Subchapter S.

(b) Manifest requirements. The transportation of motor fuel as cargo shall be recorded on a cargo manifest or shipping document that is issued at the time the motor fuel is delivered into a cargo tank. The manifest or shipping document shall accompany the cargo until the motor fuel is resold or removed from the cargo tank, and shall be retained for four years for audit purposes.

(c) Information required. The cargo manifest or shipping document shall be issued in not less than duplicate and shall contain the following information:

(1) the type of motor fuel being transported, and if dyed diesel fuel is being transported, a notice that states "Dyed Diesel Fuel, Nontaxable Use Only, Penalty for Taxable Use";

(2) the name and the federal employer identification number or social security number of the carrier. If the federal identification number or social security number of the carrier is not printed on the cargo manifest or shipping document, that information must be in the records of the terminal or bulk plant operator and made available for review when requested;

(3) the quantity of motor fuel in gross gallons;

(4) the temperature and quantity in temperature adjusted gallons when the fuel is loaded at a terminal for export or import or when the sale of gasoline or diesel fuel must comply with §3.190 of this title (relating to Temperature Adjustment Conversion Table);

(5) the percentage of ethanol or methanol contained in the motor fuel;

(6) the types and percentages of cosolvents contained in the motor fuel, if methanol has been added;

(7) the date of loading or movement;

(8) the name and physical address or Terminal Code Number assigned by the United States Internal Revenue Service of the terminal or bulk plant at which the cargo was loaded;

(9) the destination of the cargo;

(10) the name of the seller, consignor, or shipper;

(11) the name, federal employer identification number, permit number if applicable, and physical address of the purchaser or consignee (the federal identification number, permit number, and physical address of the purchaser or consignee must be in the records of the terminal or bulk plant operator and available for review if not printed on the shipping document);

(12) the method of transportation:

(A) if by truck, the license or unit number;

(B) if by barge or boat, the name of the vessel;

(C) if by railway, the rail car number and initial;

(13) the name of the person responsible for payment of the tax, if different from the permitted supplier or distributor. If this information is not printed on the manifest or shipping document, it must be in the records of the terminal operator and made available for review when requested;

(14) the amount of delivery fee assessed under Water Code, §26.3574 [ §27.3574 ]; and

(15) any other information the comptroller deems necessary for the proper administration of Tax Code, Chapter 153.

(d) Waybills or bill of lading. If a carrier transports motor fuel for which a waybill is required under the regulations of the Texas Railroad Commission, or a bill of lading is required under the regulations of the United States Department of Transportation, or if other similar documentation is required by another regulatory agency, these documents may be used in lieu of the manifest or shipping document prescribed in this section, so long as the waybill, bill of lading, or similar document lists the information described in subsection (c) of this section.

(e) Delivery of cargo manifest or shipping document. One copy of the transporting document shall be delivered to the purchaser at the time of fuel delivery, and the seller shall retain one copy. If a common carrier or contract carrier delivers the fuel, the carrier must also retain one copy.

(1) If the cargo is being loaded at different locations, a notation of the fuel loaded at each location must be made on the cargo manifest, or a separate manifest that covers the fuel or blend material loaded at each location must be issued.

(2) If the cargo is being off-loaded at various locations, then at the time the off-loading is accomplished, a notation of the fuel off-loaded shall be made on the required cargo manifest, or a customer invoice that indicates the location and amount of motor fuel that has been off-loaded at each place shall be prepared. If invoices are used instead of notations on the manifest, the invoices must be attached or cross referenced to the manifest for record purposes. The cargo manifest or a copy of the customer invoice shall be retained with the transporting vehicle until the motor fuel is removed from the cargo tank.

(3) A cargo manifest is not required on motor fuel that an end user purchases on a signed statement and transports in the user's own cargo tank.

(4) If the delivery fee assessed under Water Code, §26.3574, is not shown on the cargo manifest, it must be shown on the invoice that covers the delivery, and be cross referenced to the manifest for record purposes.

(f) Deliveries at different locations. Deliveries to the same purchaser at different locations may be construed to be single deliveries and qualify for temperature adjustment if the total of all deliveries to that customer is 5,000 gallons or more, and if:

(1) the fuel off-loaded at different locations is the same product type (gasoline or diesel fuel);

(2) the delivery is accomplished from the same cargo tank;

(3) proper notations are made on the cargo manifest or customer invoices, or delivery tickets are prepared and kept with the cargo manifest; and

(4) the off-loading occurs within a reasonable time that allows for transit from one location to another.

(g) Separate deliveries. Deliveries from more than one cargo tank are presumed to be separate deliveries. This presumption may be overcome if:

(1) the seller is unable to make the requested delivery in a single cargo tank;

(2) the delivery of all the requested fuel was completed within a reasonable time (usually within 24 hours);

(3) the customer would have been able to accept the entire amount requested at one time; and

(4) the customer has previously requested deliveries of 5,000 or more gallons of the type of requested fuel, or the customer has changed business operations and now requires deliveries of 5,000 or more gallons of the type of requested fuel.

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 January 24, 2005.

TRD-200500307

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

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 2424, 78th Legislature, Regular Session, 2003, amended Tax Code, §111.046, effective October 1, 2003, to allow the comptroller to establish by rule a minimum age for a person to be eligible for a permit or license to be issued by the comptroller. Subsection (c)(2) of the proposed section is being amended to establish a minimum age of 18 for an individual to obtain a sales and use tax permit unless the comptroller allows an exception. House Bill 109, 78th Legislature, 2003, amended Tax Code, §151.406, effective January 1, 2004, to require retailers to report the amount of sales tax refunded based on customs broker certifications. The proposed section adds subsection (f)(7) requiring retailers to file supplemental reports with their sales and use tax returns showing the total amount of sales tax refunded for exports based on customs broker certifications.

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

Mr. Heleman 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 additional information regarding tax responsibilities. This rule is adopted under 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, Chapter 151.

§3.286.Seller's and Purchaser's Responsibilities (Tax Code, §§111.0046, 151.008, 151.024, 151.051, 151.053, 151.054, 151.103, 151.107, 151.202, 151.203, 151.410, 151.703, 151.707).

(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:

(A) maintains, occupies, or uses, 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 any representative, agent, salesperson, canvasser, or solicitor who operates in this state under the authority of the seller to sell, deliver, or take orders for any taxable items;

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

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

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

(F) allows 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 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 the seller, his agent, or employee operates for the purpose of receipt of orders for taxable items. A warehouse, storage yard, or manufacturing plant is not a "place of business of the seller" for tax permit requirement purposes unless the seller receives three or more orders 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 the sales of taxable items is a seller and is responsible for the collection and remittance of the sales tax that dealers, salespersons, or individuals collect at such events, unless the participants hold active sales tax permits that 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 by the independent salespersons who sell the organization's product. Pawnbrokers, storagemen, mechanics, artisans, or others who sell 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).

(b) Permits required.

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

(2) Each out-of-state seller who is engaged in business in this state must apply to the comptroller and obtain a tax permit. An out-of-state seller who has been engaged in business in Texas continues to be responsible for collection of 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 required to hold sales tax permits to sell taxable items for direct sales organizations. Direct sales organizations hold responsibility to maintain Texas permits and 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 a permit.

(1) A person must complete an application that the comptroller furnishes and must return that application to the comptroller, together with bond or other security that may be required by §3.327 of this title (relating to Taxpayer's Bond or Other Security). A separate permit under the same account is 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. An individual or sole proprietor must be at least 18 years of age unless the comptroller allows an exception from the age requirement. The permit cannot be transferred from one owner to another. The permit 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, then only one permit is required.

(3) The permit must be conspicuously displayed at the place of business for which it is issued. A permit holder that has traveling salesmen who operate 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 $.07, then the seller must collect the tax on the total sum 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. 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 total receipts even though the seller did not collect tax 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 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 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 seller who advertises or holds 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 price of taxable items commits a criminal offense. See §3.305 of this title.

(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 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 under the same taxpayer number. Reports and payments that are due 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 be filed on forms that the comptroller prescribes. The fact that the seller or purchaser does not receive the correct forms from the comptroller does not relieve the seller or purchaser of the responsibility to file a return and to pay 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).

(5) A non-permitted purchaser who owes sales or use tax that was not collected by a seller must remit the tax to the comptroller on or before the 20th of the month following the month in which the taxable event occurs.

(f) Reporting period.

(1) Sellers, and purchasers who owe 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, June 30, September 30, and December 31. The returns must be filed on or before the 20th day of the month following the period ending date.

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

(A) Authorization to file returns on a yearly basis is conditioned upon 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 on a yearly basis without authorization is 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 long as the yearly tax liability is greater than $1,000.

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

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

(3) Sellers, and purchasers who owe 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) Each taxpayer who is required to file a city, county, special purpose district (SPD), or metropolitan transit authority/city transit department (MTA/CTD) sales and use tax return must file the return at the same time that the state sales and use tax return is filed.

(6) State agencies. State agencies that deposit taxes directly with the comptroller's office according to Accounting Policy Statement Number 8 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 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.

(7) Retailers must report the total amount of sales tax refunded for sale of merchandise exported beyond the territorial limits of the United States and documented by licensed customs broker certifications under Tax Code §151.307(b)(2). Retailers who refund tax on exports based on customs broker certifications must file the supplemental report on a form prescribed by the comptroller. Retailers file the supplemental reports at the same time and for the same reporting period as the retailer's state sales and use tax return.

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

(1) The comptroller makes forms available to all persons who are required to file returns. The failure of the taxpayer to obtain the forms does 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 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 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 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 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 are less than a reasonable estimate as required by paragraph (3) of this subsection are not regarded as prepayments. The 1.25% discount will not be allowed. If the taxpayer owes more than $1,500 in a calendar quarter, the taxpayer is regarded as a monthly filer. All monthly reports that are not filed because of the invalid prepayment are subject to late filing penalty and interest.

(5) If a taxpayer does not file a 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 12% annually.

(6) Permit holders are required to file sales and use tax returns. A permit holder must file a sales and use tax return even if the permit holder has no sales or 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 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 taxable items in this state must collect sales and use tax on taxable items that are 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 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.

(6) Direct payment permit holders are entitled to issue exemption certificates 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 maquiladora exemption certificates when they purchase 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 from the comptroller of the seller's duty 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 a later delivery date. Any certificates that are delivered to the comptroller during the 60-day period are subject to verification by the comptroller before any deductions are 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 deemed to have abandoned the permit, and 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 a new sales tax permit upon request provided the issuance is not prohibited by subsection (k)(1) or (2) of this section, or by 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 January 24, 2005.

TRD-200500309

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.295

The Comptroller of Public Accounts proposes an amendment to §3.295, concerning natural gas and electricity. The proposed amendment implements legislative changes made by House Bill 1194, 78th Legislature, 2003. New subsection (i) is added to address pipeline safety fees that are not subject to sales and use tax.

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

Mr. Heleman 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 additional information regarding tax responsibilities. This rule is adopted under 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 Utilities Code, §121.211.

§3.295.Natural Gas and Electricity.

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

(1) Electric utility--Any entity owning or operating for compensation in this state equipment or facilities for producing, generating, transmitting, distributing, selling, or furnishing electricity whose rates for the sale of electric power are set by the Public Utilities Commission under the Public Utility Regulatory Act. The term does not include:

(A) a qualifying small power producer or qualifying co-generator, as defined in the Federal Power Act, §3(17)(D) and §3(18)(C), as amended (16 United States Code §796(17)(D) and §796(18)(C)); or

(B) any person not otherwise a public utility that owns or operates in this state equipment or facilities for producing, generating, transmitting, distributing, selling, or furnishing electric energy to an electric utility, if the equipment or facilities are used primarily for the production and generation of electric energy for the person's own consumption.

(2) Fabrication--To make, build, create, produce, or assemble components of tangible personal property, or to make tangible personal property work in a new or different manner.

(3) Manufacturing--Every operation commencing with the first stage of production of tangible personal property and ending with the completion of tangible personal property. The first production stage means the first act of production and it does not include acts in preparation for production. For example, a manufacturer gathering, arranging, or sorting raw material or inventory is preparing for production. When production is completed, maintaining the life of tangible personal property or preventing its deterioration is not a part of the manufacturing process. Tangible personal property is complete when it has the physical properties, including packaging, if any, that it has when transferred by the manufacturer to another. Also see §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing).

(4) Remodeling--To make tangible personal property belonging to another over again without causing a loss of its identity, or without causing the property to work in a new or different manner.

(5) Processing--The physical application of the materials and labor necessary to modify or to change the characteristics of tangible personal property. The property being processed may belong either to the processor or the customer, the only tests being whether the property is processed and whether it will ultimately be sold. Direct use of natural gas or electricity in processing will be referred to as exempt use. Processing does not include remodeling or any action taken to prolong the life of tangible personal property or to prevent a deterioration of the tangible personal property being held for sale. The repair of tangible personal property belonging to another by restoring it to its original condition is not considered processing of that property. The mere packing, unpacking, or shelving of a product to be sold will not be considered to be processing of that product.

(6) Residential use--Use in a family dwelling or in a multifamily apartment complex or housing complex or nursing home or in a building or portion of a building occupied as a home or residence when the use is by the owner of the dwelling, apartment, complex, home, or building or part of the building occupied. Residential use also includes use in a dwelling, apartment, complex, house, or building or part of a building occupied as a home or residence when the use is by a tenant who occupies the dwelling, apartment, complex, house, or building or part of a building under a contract for an express initial term of more than 29 consecutive days. Absent a contract, only the period exceeding 29 consecutive days will be considered residential use, when supported by valid documentation (i.e., receipts, canceled checks, etc.). For purposes of the exemption for residential use of natural gas and electricity, nursing homes qualify for exemption only for periods beginning after December 31, 1987.

(b) Sales tax applicable. The furnishing of natural gas or electricity is a sale of tangible personal property. All the provisions in the Tax Code, Chapter 151, applying to the sale of tangible personal property, apply to the sale of natural gas or electricity.

(c) Gas and electricity are exempted from the taxes imposed by this chapter when sold for:

(1) residential use;

(2) use in agriculture, including dairy or poultry operations and pumping for farm or ranch irrigation;

(3) direct or indirect use or consumption, including electricity lost in the lines, by an electric utility engaged in the purchase of electricity for resale;

(4) direct use in:

(A) powering equipment that qualifies for exemption under Tax Code, §151.318, (including equipment that is permanently affixed to or incorporated into realty) to process tangible personal property for sale as tangible personal property, other than preparation of or the storage of food for immediate consumption;

(B) lighting, cooling and heating in the manufacturing area during the actual manufacturing or processing of tangible personal property for sale as tangible personal property, other than preparation or storage of food for immediate consumption;

(C) exploring for, producing, or transporting a material extracted from the earth;

(D) electrical processes, such as electroplating, electrolysis, and cathodic protection;

(E) the off-wing processing, overhaul, or repair of a jet turbine engine or its parts for a certificated or licensed carrier of persons or property; or

(F) providing, under contract with or on behalf of the United States government or foreign governments, defense or national security-related electronics, classified intelligence data processing and handling systems, or defense-related platform modifications or upgrades;

(G) the repair, maintenance, or restoration of rolling stock.

(d) Use of gas or electricity in an exempt manner by an independent contractor engaged by the purchaser of the gas or electricity to perform one or more of the activities described in subsection (c)(4) of this section is considered use by the purchaser of the gas or electricity.

(e) Predominant use.

(1) Natural gas or electricity used during a regular monthly billing period for both exempt and taxable purposes under a single meter is totally exempt or taxable based upon the predominant use of the natural gas or electricity measured by that meter. A person who performs a processing, manufacturing, or other exempt function continually must establish predominant use on 12 consecutive months of use.

(2) If, in the regular course of business, a person performs a processing, manufacturing, or other exempt function only part of the year and a nonprocessing, nonmanufacturing, or other taxable function for the remainder of the year, the predominant use may be established for that period of time the processing, manufacturing, or other exempt function occurs based on the predominant use during that period.

(3) When determining the predominant use of natural gas or electricity, utilities used to operate machinery exempt under subsection (c)(4)(A) of this section and for lighting, cooling, and heating in the manufacturing area during actual manufacturing or processing of tangible personal property for sale are exempt. Gas and electricity used to operate lighting, cooling, and heating in manufacturing support areas are taxable. Manufacturing support areas include, but are not limited to, storage, engineering, office and accounting areas, research and development, and break, eating, and restroom facilities. Utilities used in an area open to the public for the purpose of marketing a product ready for sale are taxable. Utilities used to operate other nonproduction machinery or equipment are taxable.

(f) Determining predominant use: utility studies.

(1) Persons claiming a sales tax exemption because the predominant use of natural gas and electricity through a single meter is for processing, manufacturing, fabricating, or other nontaxable [ taxable ] use must have performed a utility study to establish this predominant exempt use. The study must list all uses of the utility, both exempt and taxable, the times of usage, the energy used, and whether the use was taxable or exempt. Twelve consecutive months of utility usage must be a part of the study. The kilowatt rating or BTU rating, duty factor, where needed for cycling equipment, and electrical or natural gas computations must be certified by a registered engineer or a person with an engineering degree from an accredited engineering college. The owner of the business must certify that all items using natural gas or electricity (depending on which utility is covered by the study) are listed and that the hours of use for each item are correct. The certification of both the engineer and the owner must appear on the face of the study. If the owner of the business appoints an agent to act on the owner's behalf, the power of attorney must clearly state that the agent is attempting to qualify the principal for a sales tax exemption, and if a refund of sales tax is involved, the power of attorney must also state that a sales tax refund will be made by the state through the utility company. A person in business less than 12 consecutive months may still apply for a sales tax exemption if a registered engineer or a person with an engineering degree performs a study based upon projected uses which shows the predominant use as exempt. A person claiming an exemption based upon estimated use must be able to support the claimed exemption with a study of actual use after 12 consecutive months of operation if so requested by the comptroller.

(2) The study must be completed and on file at the location of the person claiming the exemption at the time an exemption certificate is submitted to the utility company. Without the study, the claim for exemption will be presumed to be invalid. Persons obtaining a sales tax refund without a valid study will be assessed tax, penalty, and interest by the comptroller on the full amount of the refund, if the exemption is not proved. If the exemption certificate is fully completed with all information required by this section and bears an original seal of a registered engineer or is attached to a signed statement with an original signature from the owner of the business and a person with an engineering degree from an accredited engineering college, as required by paragraph (1) of this subsection, the utility company is not required to make any additional inquiry before honoring the exemption request.

(3) The comptroller may request a copy of the study for review, either before or after the sales tax exemption is granted. Neither the comptroller by reviewing a study nor the utility company by accepting an exemption certificate is confirming the study's accuracy. Tax, penalty, and interest will be assessed on the business owner if the study is proven to be incomplete or inaccurate to the extent that the predominant use of the natural gas or electricity is taxable.

(4) If a sales tax refund is being claimed retroactively, the study must take into account any changes in equipment or other items using utilities, any changes in business activities, and any changes in square footage being served by the meter.

(5) This subsection does not apply to persons whose use of natural gas or electricity is for processing, manufacturing, or other exempt function if an industry-wide study for that particular industry reflects that the natural gas or electricity used would always qualify as exempt use. The industry-wide study must be submitted to the comptroller's office for review and approval. A subsequent study may be required, in the future, if factors relative to the original study change.

(g) Exemption certificates.

(1) Exempt users must issue exemption certificates to the utility company to claim a sales tax exemption or to obtain a refund of sales tax. The exemption certificate must be specific as to the reason for the claimed exemption. For example, if a person is claiming that the predominant use of the utility is for processing, the reason for the exemption must state, "A valid and complete study has been performed which shows that (insert the actual exempt percentage) of the natural gas or electricity is for processing tangible personal property for sale in the regular course of business."

(2) The exemption is valid only as long as the person continues to use natural gas and electricity in a manner which is for predominantly exempt purposes. At the time the uses of the utilities change so that the predominant use is taxable, it is the person's responsibility to immediately notify the utility company in writing that the exemption is no longer valid.

(3) Persons whose use of natural gas or electricity is solely in family dwellings will not be required to furnish exemption certificates.

(4) A person whose use of natural gas and electricity is in multifamily apartment complexes, housing complexes, nursing homes, or other residential buildings may be required to issue an exemption certificate if one is necessary for the utility company to distinguish exempt residential use from taxable use.

(h) Transportation of a material extracted from the earth.

(1) Sales or use tax is not due on natural gas or electricity used to transport a material or its components extracted from the earth. Examples of materials or components extracted from the earth would be oil, natural gas, coal or coal slurry, crushed stone, sand and gravel, and water.

(2) Sales or use tax is due on natural gas or electricity used to transport a product which was manufactured from a material extracted from the earth. Products which were manufactured from a material extracted from the earth include substances which do not exist in nature or are not components of crude oil, natural gas, coal, or other minerals extracted from the earth.

(3) A material will not be considered to be manufactured when an additive is combined with a material for ancillary reasons, for example, odorant added to natural gas.

(i) Pipeline safety fees. Sales or use tax is not due on any surcharge for pipeline safety fees added to the existing rates of each investor-owned and municipally owned natural gas distribution company and each natural gas master meter operator pursuant to Texas Utilities Code, §121.211.

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 January 24, 2005.

TRD-200500310

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.303

The Comptroller of Public Accounts proposes an amendment to §3.303, concerning transportation and delivery charges. The proposed amendment clarifies that separately stated postage charges will not be subject to sales and use tax when incurred by the seller at the request of a client to distribute both taxable tangible personal property and taxable services to third party recipients as designated by the client. Subsection (d) is amended accordingly.

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

Mr. Heleman 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 additional information regarding tax responsibilities. This rule is adopted under 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 §151.005 and §151.007.

§3.303.Transportation and Delivery Charges.

(a) Transportation charges for taxable items. The sales tax applies to all transportation or delivery charges to a customer when a taxable item is sold, leased or rented on or after October 1, 1987, and delivery charges are billed by the seller or lessor to the purchaser or lessee. The charges for transportation or delivery, both before and after the sale, are taxable even if stated separately from the sales price of a taxable item. These charges are considered to be services or expenses connected to the sale.

(b) Charges by third party carriers. A third party carrier (separate legal entity) will not be responsible for collecting or remitting tax as long as the third party carrier only provides transportation and does not sell the taxable item being delivered.

(c) Common terminology. The term "transportation and delivery charges' includes all other terms used by common or contract carries to describe transportation, such as freight, shipping, delivery, or postage.

(d) Postage charges. Separately stated charges for postage are not taxable when billed by the seller to a client if the cost of the postage was incurred by the seller at the request of the client to distribute taxable items [ tangible personal property ] to third party recipients designated by the seller's client.

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 January 24, 2005.

TRD-200500311

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.323

The Comptroller of Public Accounts proposes an amendment to §3.323, concerning imports and exports. This section is being amended to implement House Bill 109, 78th Regular Session of the Texas Legislature. Effective January 1, 2004, the legislation amends Tax Code §151.157, §151.158, §151.307, and adds §151.1575 regarding customs broker export certifications. Subsection (c)(2) of the proposed section contains information about this change and references §3.360, concerning customs brokers, which is being amended to reflect the new customs broker certification requirements. New subsection (g) explains the reporting requirements for retailers who refund sales tax based on licensed customs broker certifications. Other amendments to the language of the proposed section are for the purposes of clarity.

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

Mr. Heleman 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 additional information regarding tax responsibilities. This rule is adopted under 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, Chapter 151.

§3.323.Imports and Exports (Tax Code §151.157, 151.1575, 151.158, 151.307, 151.3071, 151.330).

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

(1) Air forwarder--A licensed International Air Transportation Association freight forwarder.

(2) Consignee--The person named in a bill of lading to whom or to whose order the bill promises delivery.

(3) Consignor--The person named in a bill of lading as the person from whom the goods have been received for shipment.

(4) Licensed and certificated carrier--A person authorized by the appropriate United States agency or by the appropriate state agency within the United States to operate an aircraft, vessel, train, motor vehicle, or pipeline as a common or contract carrier. Certificates of inspection or airworthiness certificates are not the appropriate documents for authorizing a person to operate as a common or contract carrier. These documents relate to the carrier device itself rather than a person's right to operate a carrier business.

(5) Licensed customs broker--A person who is licensed by the United States Customs Service to act as a custom house broker and who holds a Texas Customs Broker's License issued by the comptroller as provided in §3.360 of this title (relating to Customs Brokers).

(6) Ocean forwarder--A licensed Federal Maritime Commission freight forwarder.

(b) United States Constitution. On the basis of the import and export clause of the United States Constitution, Article 1, §10, clause 2, tangible personal property imported into or exported from Texas is exempt from taxation by the Tax Code, §151.307 and §151.330, so long as the property retains its character as an import or export.

(c) Exports.

(1) When an exemption is claimed because tangible personal property is exported beyond the territorial limits of the United States, proof of export may be shown only by:

(A) a copy of a bill of lading issued by a licensed and certificated carrier of persons or property that shows the seller as consignor, the buyer as consignee, and a delivery point outside the territorial limits of the United States;

(B) documentation that is valid under §3.360 of this title (relating to Customs Brokers) provided by a licensed customs broker certifying that the property will be exported [ delivery was made ] to a point outside the territorial limits of the United States;

(C) formal entry documents from the country of destination showing that the property was imported into a country other than the United States. For the country of Mexico, the formal entry document would be the pedimento de importaciones document with a computerized, certified number issued by Mexican customs officials, or an alternative type of formal entry document also used by Mexican customs officials, such as the boleta;

(D) a copy of the original airway, ocean, or railroad bill of lading issued by a licensed and certificated carrier that describes the property being exported and a copy of the air forwarder's, ocean forwarder's, or rail freight forwarder's receipt if an air, ocean, or rail freight forwarder takes possession of the property in Texas; or

(E) a maquiladora exemption certificate issued by an organization of the type defined in §3.358 of this title (relating to Maquiladoras). The maquiladora must also provide a copy of its maquiladora export permit issued by the comptroller.

(2) The retailer is responsible for obtaining proof of exportation. Only one type of proof relating to a particular piece of property is necessary. For example, a furniture store sells a table and collects sales tax. The purchaser returns to the store a week later with a valid pedimento de importaciones showing that the table was imported into Mexico. The retailer may accept the pedimento, alone, as proof of export and refund the tax. It is not necessary for the retailer to also obtain an export certification form issued by a licensed customs broker. Except as provided in §3.358 of this title (relating to Maquiladoras), exemption certificates, affidavits, or statements from the purchaser that the property will be or has been exported are not sufficient to exempt the sale as an export. The [ Texas proof of export form, which differs from ]the certification form provided by a licensed Texas customs broker as provided in §3.360 of this title (relating to Customs Brokers), is[ no longer ] acceptable as proof of export. A passport number taken by a seller from a passport issued by a foreign country is not acceptable as proof of export. For information concerning resale certificates given by Mexican retailers, see §3.285 of this title (relating to Resale Certificate; Sales for Resale).

(3) Storing property in Texas by the owner prior to exportation is a use of that property in Texas. Property stored or otherwise used or consumed in Texas by the owner loses its exemption as an export. For example, clothing or jewelry actually worn by the purchaser in Texas is used in Texas; automotive parts (not including electronic audio equipment) installed on the purchaser's motor vehicle in Texas are used in Texas if the vehicle is subsequently driven in Texas; and food ready for immediate consumption that is purchased in Texas is presumed to be used in Texas. By law, electronic audio equipment retains the exemption even if installed in a motor vehicle that is driven in Texas prior to export. Sufficient time will be allowed to arrange for shipping. Property in Texas longer than 30 days from date of purchase will be presumed to have been stored. Any use of the property in Texas by the owner prior to export also causes the loss of the export exemption. Property in the hands of a freight forwarder is not covered by this provision.

(4) The sale of property to military personnel is taxable unless proof of export is maintained as outlined in paragraph (1) of this subsection.

(5) If a seller delivers property to a purchaser in Texas, the seller must collect tax at the time of sale unless the sale is exempt for a reason other than export and the seller accepts a properly completed resale or exemption certificate. Tax may not be refunded until the property has actually been exported from the territorial limits of the United States and the seller has received valid proof of export as described in this subsection. There is a rebuttable presumption that an export certification form issued by a licensed customs broker who complies with §3.360 of this title (relating to Customs Brokers) is valid. Tax not collected will be assessed against the seller. This paragraph does not apply when proof of export is provided to the seller at the time of sale by a maquiladora according to the terms of paragraph (1)(E) of this subsection.

(d) Imports. Property imported into Texas from another country is exempt from Texas use tax as long as the property retains its character as an import. When transit ceases in Texas, the import becomes subject to the Texas use tax.

(e) Refunds.

(1) A retailer who collects sales tax on tangible personal property that qualifies for exemption under subsection (b) of this section may refund the tax to the original purchaser or the original purchaser's assignee upon receipt of export documentation as required by subsection (c) of this section.

(2) A retailer who receives documentation that is valid under subsection (c)(1)(B) of this section, must report the total amount of sales tax refunded as provided in subsection (g) of this section, may not refund the tax paid under this chapter on that purchase before:

(A) the 24th hour after the hour stated as the time of export on the documentation, if the retailer is located in a county that borders the United Mexican States; or

(B) the seventh day after the day stated as the date of export on the documentation, if the retailer is located in a county that does not border the United Mexican States.

(3) The refund may be made by certified check, company check, money order, credit memo, or cash. If the refund is made in cash, the retailer must receive at the time the refund is made a receipt showing a description of the property purchased, the amount and date of the refund, and the name, address, and signature of the purchaser and, if applicable, the purchaser's assignee. A retailer who issues a tax refund to the purchaser's assignee must also receive a copy of the purchaser's written assignment of the right to a refund. A retailer who makes a refund before the time prescribed by subsection (e)(2)(A) or (B) of this section or makes a refund that is undocumented or improperly documented is liable for the tax refunded plus interest.

(4) A copy of the certified check, company check, money order, credit memo, or signed cash receipt and a copy of the written assignment of the purchaser's right to a refund, if applicable, must be attached to the original export documents and maintained in the seller's files.

(5) In an audit, the auditor must be able to tie the export documents to the original taxable transaction. The seller must retain the original invoice of the sale. Cash register receipts and other records of the original taxable transaction that do not include a detailed, specific description of the items purchased are not sufficient to tie the export documents to the original taxable transaction. Refunds made pursuant to undocumented or improperly documented export exemptions will be assessed against the seller.

(f) Records. Please refer to §3.281 of this title (relating to Records Required; Information Required), §3.282 of this title (relating to Auditing Taxpayer Records), and §3.360 of this title (relating to Customs Brokers).

(g) Reports. Retailers are required to report the total amount of sales tax refunded for items exported beyond the territorial limits of the United States based on licensed customs broker certifications on a supplemental sales tax report prescribed by the comptroller at the same time and for the same reporting period as the retailer's state sales and use tax return.

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 January 24, 2005.

TRD-200500312

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.325

The Comptroller of Public Accounts proposes an amendment to §3.325, concerning refunds, interest, and payments under protest. The proposed amendment readopts, as subsection (c)(3), a provision that was inadvertently deleted from the most recent version of this rule. Paragraph (c)(2)(B) is clarified, a new subsection (c)(3) relating to the statute of limitations for refund claims filed pursuant to a deficiency determination is added to implement longstanding agency policy, and the remaining subsections are renumbered accordingly.

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

Mr. Heleman 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 additional information regarding tax responsibilities. This rule is adopted under 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 §111.104(d).

§3.325.Refunds, Interest, and Payments Under Protest (Tax Code §111.104(d)) .

(a) A person who has paid tax in error to the state or to a permitted seller may request a refund of tax paid in error.

(1) A person who does not have a sales and use tax permit and who has paid tax in error to a permitted seller may request a refund from only the permitted seller to whom the tax was paid. The permitted seller who refunds tax to a purchaser may claim a refund with the comptroller as provided by subsection (b) of this section .

(2) A sales and use tax permit holder who has paid tax in error directly to the comptroller may request from the comptroller a refund of the tax paid in error.

(3) A sales and use tax permit holder who has paid tax in error to another permitted seller may request from the comptroller or the seller a refund of tax paid in error.

(4) A person who requests a refund from the comptroller must:

(A) submit a claim made in writing and must state fully and in detail the specific grounds upon which the claim is based;

(B) indicate the period for which the claimed overpayment was made;

(C) submit the claim within the applicable limitations period as provided subsection (c) of this section ; and

(D) submit supporting documentation required by the comptroller.

(b) The following procedures must be used to request a refund from the comptroller.

(1) Seller who requests a refund from the comptroller.

(A) Before a seller refunds to a purchaser tax collected in error, the seller must obtain from the purchaser a properly completed exemption or resale certificate that meets all the requirements of §3.285 of this title (relating to Resale Certificate; Sales for Resale [ Sales for Resale; Resale Certificate ]) and §3.287 of this title (relating to Exemption Certificates). The seller must retain the certificate to document the basis for the refund.

(B) After the seller has refunded or, with the purchaser's written consent, credited the tax to the account of the purchaser, the seller may then seek reimbursement from the state in accordance with the procedures that are outlined in subsection (a) of this section or take a credit on the seller's next return in the amount refunded or credited to the account of the purchaser.

(2) A permitted purchaser who requests a refund from the comptroller.

(A) A permitted purchaser who requests a refund from the comptroller must submit to the comptroller a written request that states the basis for the refund and includes the following information:

(i) the seller's name, address, and either the sales tax permit number or information that will enable the comptroller to identify the seller's sales tax permit number;

(ii) the invoice number, if applicable;

(iii) the date of purchase;

(iv) a description of the item purchased;

(v) the specific basis for the refund;

(vi) information that identifies the local taxing authorities for which tax was paid; and

(vii) a statement or reasonable estimate of the amount of the tax refund requested.

(B) The comptroller may require a person to submit additional information to verify the refund claim. The person must show to the satisfaction of the comptroller that the refund is due and make available to the comptroller any documentation that the comptroller requires to process the refund.

(C) A permitted purchaser may amend the return for the period in which the overpayment was made or file a refund claim with the comptroller for sales tax paid in error to a seller. The refund claim must identify the period in which the tax was originally paid. The purchaser must retain, for the period required in Tax Code, Chapter 111, all documentation that is necessary to support the credit.

(c) A claim for refund must be made within the limitations periods.

(1) A claim for refund must be made within four years from the date on which the tax was due and payable as provided by Tax Code, §151.401 [ §151.401, Tax Code ].

(2) A claim for refund for tax paid pursuant to a deficiency determination must be made by the later of:

(A) four years from the date on which the tax was due and payable; or

(B) six months after the date on which the deficiency determination for the periods becomes final , and is subject to the restriction imposed by subsection (c)(3) of this section .

(3) A refund claim filed within six months after the date on which a deficiency determination becomes final is within the limitations period for all items included in the deficiency determination. A refund claim for all other items is subject to the limitations period in subsection (c)(1) of this section.

(4) [ (3) ] If the comptroller and a taxpayer have agreed in writing to extend the limitations period, then a claim for refund must be made before the expiration of the extended period in the agreement. An extension of the statute of limitations applies only to the periods that are specified in the agreement. An expired agreement to extend the statue of limitations has no effect and the statue of limitations for subsequent assessments and refund requests is determined as if no extension had been authorized. For the limitations period for assessments, see §3.339 (relating to Statute of Limitations).

(5) [ (4) ] A redetermination or refund proceeding does not toll the statute of limitations, except for the issues contested.

(6) [ (5) ] Failure to file a claim within the limitations prescribed by this section constitutes a waiver of any demand against the state on account of the overpayment.

(d) Interest.

(1) Except as provided by paragraphs (2) and (3) of this subsection, in a comptroller's final decision on a claim for refund or in an audit, interest accrues at the rate that is set in Tax Code, §111.060, on the amount that is found to be erroneously paid:

(A) beginning on the later of 60 days after the date of payment or the due date of the tax report; and

(B) ending on, as determined by the comptroller, either:

(i) the date of allowance of credit that results from a final decision that the comptroller has issued, or from an audit; or

(ii) a date that is not more than 10 days before the date of the refund warrant.

(2) The interest rate for a refund that is granted for a period for which a report is due after December 31, 1999, is the rate set in Tax Code, §111.060. A refund for a period for which a report is due before January 1, 2000, does not accrue interest.

(3) Credits taken by a taxpayer on the taxpayer's return do not accrue interest.

(4) No taxes, penalties, or interest will be refunded to a person who has collected the taxes from another person until all taxes are first refunded to the party from whom they were collected.

(e) Denial of refund.

(1) If the comptroller determines that the claim for refund cannot be granted either partially or fully, then the comptroller will notify the claimant of the denial. Claimant may request a refund hearing within 30 days of the denial.

(2) A person may not refile a refund claim for the same transaction or item, tax type, period, and ground or reason that was previously denied by the comptroller.

(f) Payments under protest. A person who intends to file suit under Tax Code, Chapter 112, Subchapter B, must submit to the comptroller a letter of protest with the payment of the tax that is the subject of the protest. See subsection (e) of §3.9 of this title (relating to Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers). The letter of protest must state fully and in detail every reason that the taxpayer contends that the assessment is unlawful or unauthorized, and must accompany the payment. If the payment and letter of protest do not accompany one another, the payment will not be deemed to have been made under protest. For the taxpayer's convenience, the comptroller will advise the taxpayer of the amount of payment under protest that the comptroller has received and the date of the payment.

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 January 24, 2005.

TRD-200500313

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.365

The Comptroller of Public Accounts proposes an amendment to §3.365, concerning sales of clothing and footwear during a three-day period in August. The proposed amendment implements the repeal of the opt out provision for local taxing authorities made by House Bill 2425, 78th Legislature, 2003. Subsection (q) is deleted accordingly. Subsections (f)(1), (n)(1), and (n)(2) are amended for clarity.

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

Mr. Heleman 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 additional information regarding tax responsibilities. This rule is adopted under 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 §151.326.

§3.365.Sales of Clothing and Footwear During a Three-day Period in August.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise. Clothing or footwear - An article of apparel that the article manufacturer designs for wear on or about the human body. For the purposes of this section, the term does not include accessories, such as jewelry, handbags, purses, briefcases, luggage, wallets, watches, and similar items that are carried on or about the human body, without regard to whether the item is worn on the body in a manner that is characteristic of clothing.

(b) Exempt sales.

(1) Sales or use tax is not due on the sale of an article of clothing or footwear if:

(A) the sales price of the article is less than $100; and

(B) the sale takes place during the period that begins at 12:01 a.m. on the first Friday in August and ends at 12:00 a.m. (midnight) of the following Sunday.

(2) The exemption applies to each article of clothing or footwear that sells for less than $100, regardless of how many items are sold on the same invoice to a customer. For example, if a customer purchases two shirts for $80 each, then both items qualify for the exemption, even though the customer's total purchase price ($160) exceeds $99.99.

(3) The exemption does not apply to the first $99.99 of an article of clothing or footwear that sells for more than $99.99. For example, if a customer purchases a pair of pants that costs $110, then sales tax is due on the entire $110.

(c) Taxable sales. This exemption does not apply to:

(1) any special clothing or footwear that the manufacturer primarily designed for athletic activity or protective use and that is not normally worn except when used for the athletic activity or protective use for which the manufacturer designed the article. For example, golf cleats and football pads are primarily designed for athletic activity or protective use and are not normally worn except when used for those purposes; therefore, they do not qualify for the exemption. However, tennis shoes, jogging suits, and swimsuits are commonly worn for purposes other than athletic activity and thus qualify for the exemption;

(2) accessories, such as jewelry, handbags, purses, briefcases, luggage, umbrellas, wallets, watches, and similar items that are carried on or about the human body, without regard to whether the item is worn on the body in a manner that is characteristic of clothing;

(3) the rental of clothing or footwear. For example, this exemption does not apply to the rental of formal wear, costumes, uniforms, diapers, or bowling shoes;

(4) taxable services that are performed on the clothing or footwear, such as repair, remodeling, or maintenance services, and cleaning or laundry services. For example, sales tax is due on alterations to clothing, even though the alterations may be sold or invoiced, and the customer pays such invoice, at the same time as the clothing is being altered. If a customer purchases a pair of pants for $90 and pays $15 to have the pants cuffed, then the $90 charge for the pants is exempt, but tax is due on the $15 alterations charge; and

(5) purchases of items that are used to make or repair clothing or footwear, including fabric, thread, yarn, buttons, snaps, hooks, and zippers.

(d) Articles normally sold as a unit. Articles that are normally sold as a unit must continue to be sold in that manner; they cannot be priced separately and sold as individual items in order to obtain the exemption. For example, if a pair of shoes sells for $150, then the pair cannot be split in order to sell each shoe for $75 to qualify for the exemption. If a suit is normally priced at $225 on a single price tag, the suit cannot be split into separate articles so that any of the components may be sold for less than $100 in order to qualify for the exemption. However, components that are normally priced as separate articles may continue to be sold as separate articles and qualify for the exemption if the price of an article is less than $100.

(e) Sales of sets containing both exempt and taxable items.

(1) When exempt clothing or footwear is sold together with taxable merchandise as a set or single unit, the full price is subject to sales tax unless the price of the exempt clothing or footwear is separately stated. For example, if a boxed gift set that consists of a French-cuff dress shirt, cufflinks, and a tie tack is sold for a single price of $95, the full price of the boxed gift set is taxable because the cufflinks and tie tack are taxable and the sales price of the shirt is not separately stated.

(2) When exempt clothing is sold in a set that also contains taxable merchandise as a free gift and no additional charge is made for the gift, the exempt clothing may qualify for this exemption. For example, a boxed set may contain a tie and a free tie tack. If the price of the set is the same as the price of the tie sold separately, the item that is being sold is the tie, which is exempt from tax if the tie is sold for less than $100 during the exemption period. Note: When a retailer gives an item away free of charge, the retailer owes sales or use tax on the purchase price that the retailer paid for the item.

(f) Discounts and coupons.

(1) A retailer may offer discounts to reduce the sales price of an item. If the discount reduces the sales price of an item to $99.99 or less, the item may qualify for the exemption. For example, a customer buys a $150 dress and a $100 blouse from a retailer who offers a 10% discount. After application of the 10% discount, the final sales price of the dress is $135, and the blouse is $90. The dress is taxable (its price is over $99.99), and the blouse is exempt (its price is less than $100.00 [ $99.99 ]).

(2) When retailers accept coupons as a part of the sales price of any taxable item, the value of the coupon is excludable from the tax as a cash discount, regardless of whether the retailer is reimbursed for the amount that the coupon represents. Therefore, a coupon can be used to reduce the sales price of an item to $99.99 or less in order to qualify for the exemption. For example, if a customer purchases a pair of shoes priced at $110 with a coupon worth $20, the final sales price of the shoes is $90, and the shoes qualify for the exemption.

(g) Buy one, get one free or for a reduced price. The total price of items that are advertised as "buy one, get one free," or "buy one, get one for a reduced price," cannot be averaged in order for both items to qualify for the exemption. The following examples illustrate how such sales should be handled.

(1) A retailer advertises pants as "buy one, get one free." The first pair of pants is priced at $120; the second pair of pants is free. Tax is due on $120. Having advertised that the second pair is free, the store cannot register the charge for each pair of pants at $60 in order for the items to qualify for the exemption. However, if the retailer advertises and sells the pants for 50% off, and sells each pair of $120 pants for $60, each pair of pants qualifies for the exemption. Note: When a retailer gives an item away free of charge, the retailer owes sales or use tax on the purchase price that the retailer paid for the item.

(2) A retailer advertises shoes as "buy one pair at the regular price, get a second pair for half price." The first pair of shoes is sold for $100; the second pair is sold for $50 (half price). Tax is due on the $100 shoes, but not on the $50 shoes. Having advertised that the second pair is half price, the store cannot ring up each pair of shoes for $75 in order for the items to qualify for the exemption. However, if the retailer advertises the shoes for 25% off, and thereby sells each pair of $100 shoes for $75, then each pair of shoes qualifies for the exemption.

(h) Rebates. Rebates occur after the sale and do not affect the sales price of an item purchased. For example, a customer purchases a sweater for $110 and receives a $12 rebate from the manufacturer. The retailer must collect tax on the $110 sales price of the sweater.

(i) Layaway sales. A layaway sale is a transaction in which merchandise is set aside for future delivery to a customer who makes a deposit, agrees to pay the balance of the purchase price over a period of time, and, at the end of the payment period, receives the merchandise. An order is accepted for layaway by the retailer when the retailer removes the goods from normal inventory or clearly identifies the items as sold to the customer. A sale of eligible clothing under a layaway sale qualifies for exemption when either:

(1) final payment on a layaway order is made by, and the merchandise is given to, the customer during the exemption period; or

(2) the customer selects the item and the retailer accepts the order for the item during the exemption period, for immediate delivery upon full payment, even if delivery is made after the exemption period.

(j) Rain checks. Eligible items that customers purchase during the exemption period with use of a rain check will qualify for the exemption regardless of when the rain check was issued. However, issuance of a rain check during the exemption period will not qualify an eligible item for the exemption if the item is actually purchased after the exemption period.

(k) Exchanges.

(1) If a customer purchases an item of eligible clothing or footwear during the exemption period, but later exchanges the item for an item of a different size, different color, or other feature, no additional tax is due even if the exchange is made after the exemption period.

(2) If a customer purchases an item of eligible clothing or footwear during the exemption period, but after the exemption period has ended, the customer returns the item and receives credit on the purchase of a different item, the appropriate sales tax is due on the sale of the newly purchased item.

(3) If a customer purchases an item of eligible clothing or footwear before the exemption period, but during the exemption period the customer returns the item and receives credit on the purchase of a different item of eligible clothing or footwear, no sales tax is due on the sale of the new item if the new item is purchased during the exemption period.

(4) Examples:

(A) A customer purchases a $35 shirt during the exemption period. After the exemption period, the customer exchanges the shirt for the same shirt in a different size. Tax is not due on the $35 price of the shirt.

(B) A customer purchases a $35 shirt during the exemption period. After the exemption period, the customer exchanges the shirt for a $35 jacket. Because the jacket was not purchased during the exemption period, tax is due on the $35 price of the jacket.

(C) During the exemption period, a customer purchases a $90 dress that qualifies for the exemption. Later, during the exemption period, the customer exchanges the $90 dress for a $150 dress. Tax is due on the $150 dress. The $90 credit from the returned item cannot be used to reduce the sales price of the $150 item to $60 for exemption purposes.

(D) During the exemption period, a customer purchases a $60 dress that qualifies for the exemption. Later, during the exemption period, the customer exchanges the $60 dress for a $95 dress. Tax is not due on the $95 dress because it was also purchased during the exemption period and otherwise meets the qualifications for the exemption.

(l) Returned merchandise. For a 30-day period after the temporary exemption period, when a customer returns an item that would qualify for the exemption, no credit for or refund of sales tax shall be given unless the customer provides a receipt or invoice that shows tax was paid, or the retailer has sufficient documentation to show that tax was paid on the specific item. This 30-day period is set solely for the purpose of designating a time period during which the customer must provide documentation that shows that sales tax was paid on returned merchandise. The 30-day period is not intended to change a retailer's policy on the time period during which the retailer will accept returns.

(m) Mail, telephone, e-mail, and Internet orders and custom orders. Under the Texas sales tax law, a sale of tangible personal property occurs when a purchaser receives title to or possession of the property for consideration. Therefore, an item of eligible clothing or footwear may qualify for this exemption if:

(1) the item is both delivered to and paid for by the customer during the exemption period; or

(2) the customer orders and pays for the item and the retailer accepts the order during the exemption period for immediate shipment, even if delivery is made after the exemption period. The retailer accepts an order when the retailer has taken action to fill the order for immediate shipment. Actions to fill an order include placement of an "in date" stamp on a mail order, or assignment of an "order number" to a telephone order. An order is for immediate shipment when the customer does not request delayed shipment. An order is for immediate shipment notwithstanding that the shipment may be delayed because of a backlog of orders or because stock is currently unavailable to, or on back order by, the company.

(n) Shipping and handling charges.

(1) Shipping and handling charges are included as part of the sales price of the clothing or footwear, whether separately stated [ or not ]. Except as provided in paragraph (2) of this subsection, if multiple items are shipped on a single invoice, the shipping and handling charge must be proportionately allocated to each item ordered, and separately identified on the invoice, to determine if any items qualify for the exemption. The following examples illustrate the way that these charges should be handled:

(A) A customer orders a jacket for $95. The shipping charge to deliver the jacket to the customer is $5.00. The sales price of the jacket is $100. Tax is due on the full sales price.

(B) A customer orders a suit for $285 and a shirt for $95. The charge to deliver the items is $15. The $15 shipping charge must be proportionately and separately allocated between the items: $285 / $380 = 75%; therefore, 75% of the $15 shipping charge, or $11.25, must be allocated to the suit, and separately identified on the invoice as such. The remaining 25% of the $15 shipping charge, or $3.75, must be allocated to the shirt, and separately identified on the invoice as such. The sales price of the shirt is $95 plus $3.75, which totals $98.75; therefore, the shirt qualifies for the exemption.

(C) A customer orders a suit for $285 and a shirt for $95. The charge to deliver the items is $20. The $20 shipping charge must be proportionately and separately allocated between the items: $285 / $380 = 75%; therefore, 75% of the $20 shipping charge, or $15, must be allocated to the suit, and separately identified on the invoice as such. The remaining 25% of the $20 shipping charge, or $5.00, must be allocated to the shirt, and separately identified on the invoice as such. The sales price of the shirt is $95 plus $5.00, which totals $100; because the sales price of the shirt exceeds $99.99, the purchase of the shirt is taxable.

(2) If the shipping and handling charge is a flat rate per package and the amount charged is the same regardless of how many items are included in the package, for purposes of this exemption the total charge may be attributed to one of the items in the package rather than proportionately and separately allocated between the items. For example, a customer orders five shirts, with four priced at $98 and one at $85. The retailer charges $10 for shipping and handling the order. The retailer would have charged the same amount for shipping and handling whether the customer ordered one shirt or five shirts. The retailer may choose [ chose ] to attribute the $10 shipping and handling charge to the shirt that was sold for $85 rather than allocate the charge proportionately and separately between the shirts. If the charge is attributed to the $85 shirt, the sales price of that shirt is $95, and all of the shirts will qualify for the exemption.

(o) Documenting exempt sales. The retailer is not required to obtain an exemption certificate on sales of eligible items during the exemption period. However, the retailer's records should clearly identify the type of item sold, the date on which the item was sold, and the sales price of the item.

(p) Reporting exempt sales. No special reporting procedures are necessary to report exempt sales made during the exemption period. Sales should be reported as currently required by law.

[ (q) Local taxes. The three-day exemption also applies to local taxes, unless the local taxing authority adopts an appropriate order such as an ordinance to repeal the application of the exemption in the manner provided by Tax Code, §326.003. A taxing authority that has repealed the application of the exemption under this section may reinstate the exemption in the same manner. The repeal of the application of the exemption or a reinstated exemption takes effect on the first day of the first calendar quarter that occurs after the expiration of the first complete calendar quarter that occurs after the date on which the comptroller receives a copy of the order adopted. State taxes on qualifying purchases are still not due.]

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 January 24, 2005.

TRD-200500314

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.367

The Comptroller of Public Accounts proposes an amendment to §3.367 relating to timber items. The amendment clarifies that persons who use off-road heavy-duty diesel equipment in timber operations may be exempt from the Texas Emissions Reduction Plan Surcharge imposed on that equipment. A new subsection (f) is added and the remaining subsections are renumbered accordingly.

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

Mr. Heleman 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 additional information regarding tax responsibilities. This rule is adopted under 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 §151.3162 and §151.0515.

§3.367.Timber Items (Tax Code, §151.3162 and §151.317).

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

(1) Equipment--An apparatus, device, hand tool, simple machine, or expendable supply item. Examples include axes, handsaws, ropes, tree measurement devices, harnesses for tree climbing, eye protection goggles, ear protection devices, components of above-ground sprinkler systems or underground sprinkler systems, boards or mats used for access to commercial timber sites, and expendable supplies such as lubricants, solvents, and rags. The term "equipment" includes repair, replacement parts, and accessories for equipment. A computer or software program may qualify, if it is used exclusively in the production of timber. For example, a computer used exclusively to measure or track the growth of the trees to determine harvest time is a timber item. However, computers and software used in business accounting, bookkeeping, word processing, preparation of payrolls and employee evaluations, or other non-production activities are not timber items. The term does not include furniture, office supplies, or office equipment.

(2) Machinery--A powered-operated machine. Examples include chain saws, chippers, machinery used to drill holes for planting, machinery used to fertilize, harvesters, slashers, merchandisers including total merchandising systems, debarkers, delimbers, grapples, log stackers, feller bunchers, loaders including knuckleboom loaders, skidders, tractors, bulldozers, welding machines, compressors, and generators. The term "machinery" includes repair, replacement parts, and accessories for machinery. The term does not include motor vehicles or repair, replacement parts, or accessories for motor vehicles except for motor vehicles that qualify as timber machines and timber trailers.

(3) Original producer--a person who:

(A) harvests timber that the person owns and continues to own until the timber is processed, packed, or marketed; or

(B) is the grower of the timber, exercises predominant operational control over the growth of the timber, and bears the risk of loss of investment in the timber.

(4) Pollution control equipment--Machinery and equipment that are used by an original producer to control pollution that results from the processing, packing, or marketing of timber products by the original producer.

(5) Production of timber--Activities to prepare the production site or to plant, cultivate, or harvest commercial timber that will be sold in the regular course of business. The term includes construction, repair, and maintenance of private roads and lanes exclusively used for access to commercial timber sites. Activities at a harvest site to cut down commercial timber, debark, delimb, chip, slash, and to prepare and load harvested timber qualify as the production of timber but are not manufacturing operations as described in subsection (f) of this section. The use of a timber trailer to haul the harvested logs or chips from the harvest site for delivery to a saw mill also qualifies as the production of timber. Transportation of timber products from a location other than a commercial timber harvest site does not qualify.

(6) Timber machine--A self-propelled motor vehicle specially adapted to perform a specialized function for use primarily in timber operations. Timber machine does not include any self-propelled motor vehicle specifically designed or adapted for the primary purpose of transporting timber or timber products including a self-propelled motor vehicle designed to transport cargo and adapted with a cargo loading device. For information concerning the exemption of a timber machine from motor vehicle sales tax under Chapter 152 of the Tax Code, see §3.72 of this title (relating to Farm Machines, Timber Machines and Trailers).

(7) Timber trailer--A trailer or semitrailer designed for and used primarily in a timber operation. For information concerning the exemption of a timber trailer from motor vehicle sales tax under Chapter 152 of the Tax Code, see §3.72 of this title (relating to Farm Machines, Timber Machines and Trailers).

(b) Qualifying items. Persons may claim a partial refund or credit for Texas sales or use taxes paid on purchases of the following items:

(1) seedlings of trees commonly grown for commercial timber. Examples of trees commonly grown for commercial timber include hardwood or pine trees;

(2) defoliants, desiccants, fertilizers, fungicides, herbicides, and insecticides that are exclusively used in the production of timber for sale;

(3) machinery or equipment that is exclusively used in the production of timber for sale, including accessories, repair or replacement parts, and lubricants for the machinery or equipment;

(4) tangible personal property sold or used as a component of an underground irrigation system that is exclusively used in the production of timber for sale. For example, a contractor who has a lump-sum contract to install an underground irrigation system as an improvement to realty is the consumer of the incorporated materials and must pay sales tax on purchases. As authorized by Tax Code, §151.3162(b)(2), the contractor may request a partial refund or credit for tax that the contractor paid on the qualifying components of the irrigation system. For further information on contracts to improve real property, see §3.291 of this title (relating to Contractors); and

(5) machinery or equipment, including pollution control equipment, that the original producer uses to process, pack, or market timber product, if the machinery or equipment meets the requirements enumerated in subsection (d)(1) of this section. Examples of eligible machinery and equipment include stacking sticks used to dry the lumber, forklifts, and conveyors.

(c) Partial refund or credit for sales or use tax paid on qualifying items. A person who, during the period beginning October 1, 2001, and ending December 31, 2007, pays Texas sales or use tax on the purchase, lease, or rental of a qualifying item as set out in subsection (b) of this section may either request a partial refund of the tax directly from the comptroller or take a credit on a sales tax return for a portion of the tax. The amount of the partial refund or credit is determined by the date that the qualifying item is purchased, leased, or rented, as provided in paragraphs (1)-(3) of this subsection. At the time of the purchase, lease, or rental, the purchaser must pay sales or use tax to the retailer and may not issue an exemption certificate to the retailer. A purchaser must accrue and pay use tax to the comptroller on qualifying items purchased out-of-state for use in Texas (see §3.346, concerning Use Tax). The purchaser may take the partial credit on the sales and use tax return when the purchaser reports and pays the tax to the comptroller. The amount of credit will be determined by the date on which the purchaser brings the qualifying items into this state.

(1) If a qualifying item is purchased, leased, or rented from October 1, 2001 through December 31, 2003, then the purchaser is entitled to a refund or credit in an amount equal to 33% of the tax paid on the item.

(2) If a qualifying item is purchased, leased, or rented from January 1, 2004 through December 31, 2005, then the purchaser is entitled to a refund or credit in an amount equal to 50% of the tax paid on the item.

(3) If a qualifying item is purchased, leased or rented from January 1, 2006 through December 31, 2007, then the purchaser is entitled to a refund or credit in an amount equal to 75% of the tax paid on the item.

(4) A purchaser may seek a refund or take a credit for tax paid on exempt timber items within the following limitations:

(A) A purchaser who elects to take a credit must claim the credit on a sales or use tax return for a report period that ends not later than the first anniversary of the date that the timber item was purchased, leased, or rented. For example, a quarterly filer who purchases and pays tax on a qualifying item on October 2, 2001, may take the 33% credit on any quarterly return up to and including the return for the quarter that ends September 30, 2002.

(B) A purchaser who elects to claim a refund directly from the comptroller must submit a written claim not later than December 31 of the calendar year immediately following the year in which the tax was paid. For example, a purchaser who purchases a timber item and pays tax on October 2, 2001, must submit a refund claim for 33% of tax paid by December 31, 2002.

(C) A purchaser who fails to take a credit on a return before the expiration of the limitation period provided in subparagraph (A) of this paragraph may still request a refund directly from the comptroller within the limitation period provided in subparagraph (B) of this paragraph.

(5) Interest. Sales or use taxes paid on timber items that are purchased, leased, or rented from October 1, 2001 through December 31, 2007, are not taxes paid in error, and no interest under Tax Code, §111.064, is due on partial refunds or credits taken on timber items.

(6) Taxable services. Sales or use taxes paid on maintenance, repair, or remodeling performed on qualifying machinery or equipment from October 1, 2001 through December 31, 2007, are not eligible for the partial refund or credit. A purchaser may claim a partial refund or take a credit for tax paid on separately stated charges for parts, accessories, and lubricants for qualifying machinery or equipment.

(7) Rentals and Leases. The amount of partial refund or credit will be determined by the date on which the lessee takes possession of the items. The lessee may not claim a refund or take credit until tax has been paid. The limitations in which the refund or credit must be claimed or taken, as provided in paragraph (4) of this subsection, are based on the date the lessee paid tax.

(d) Original producer.

(1) The original producer may qualify for the partial refund or credit only if:

(A) the processing, packing, or marketing occurs at or from a location operated by the original producer;

(B) at least 50% of the value of the timber products processed, packed, or marketed at or from the location during the most recent calendar year is attributable to products produced by the original producer and not purchased or acquired from others; and

(C) the original producer does not for consideration process, pack, or market timber products that belong to others, unless the value of the product that belongs to another person is 5.0% or less of the total value of the timber products processed, packed, or marketed by the original producer.

(2) Two or more corporations that operate timber activities on the same or adjacent tracts of land and that are entirely owned by the same individual or a combination of the individual, the individual's spouse, and the individual's children may qualify as an original producer for the purposes of this paragraph.

(e) Exemption for timber items. After December 31, 2007, the purchase, lease, or rental of timber items will be exempt from sales or use tax, and a purchaser may issue a retailer a properly completed exemption certificate in lieu of paying tax on qualifying items that are purchased, leased, or rented after December 31, 2007. After December 31, 2007, taxable services performed on qualifying items will be exempt under Tax Code, §151.3111.

(f) Exemption for off-road, heavy-duty diesel equipment. A person who uses off-road heavy-duty diesel equipment in timber operations may claim an exemption from the Texas Emissions Reduction Plan Surcharge imposed by Tax Code §151.0515 provided the equipment is exclusively used in the production of timber for sale.

(g) [ (f) ] Manufacturing. A person who processes or fabricates tangible personal property to be sold is a manufacturer and may be entitled to manufacturing exemptions provided by Tax Code, 151.318. See §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing) for information on tax exemptions for equipment and supplies used in manufacturing. For information regarding wrapping and packaging supplies purchased by manufacturers, see §3.314 of this title (relating to Wrapping, Packing, Packaging Supplies, Containers, Labels, Tags, [ and ] Export Packers ,and Stevedoring Materials and Suppliers ).

(h) [ (g) ] Gas and electricity exemption. Effective October 1, 2001, natural gas and electricity used in timber operations are exempt from sales and use taxes. See §3.295 of this title (relating to Natural Gas and Electricity) for further information regarding the exemption of natural gas and electricity.

(i) [ (h) ] Buildings. Buildings, structural components of buildings, and/or the materials used to build, construct, or fabricate buildings are not timber items and are taxable.

(1) Buildings include any structures or edifices enclosing a space within their walls, and usually are covered by a roof, the purpose of which may be to provide storage, shelter, or housing, or to provide work, office, or sales space. Examples of buildings include residential quarters, offices, storage facilities, and warehouses.

(2) A building or structure that is essentially an item of equipment or machinery necessary for timber production may be considered timber equipment if it is specifically designed for such use and cannot be economically used for any other purpose. For example, a commercial greenhouse is timber equipment if it is used to grow seedlings of trees commonly grown for commercial timber.

(3) Pollution control equipment and machinery or equipment used in processing, packing, or marketing by an original producer, may qualify even if the machinery and equipment are affixed to real property. For a timber producer to qualify for sales tax refunds or credits on qualifying items that are installed under a contract to improve real property, the timber producer must enter into a separated contract. Additionally, the contract must separately state the charges for the qualifying items from the charges for other tangible personal property. See §3.291 of this title (relating to Contractors) for information regarding new construction contracts. See §3.357 of this title (relating to Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance) for information regarding nonresidential real property repair, remodeling, or restoration.

(j) [ (i) ] Repeal of previous exemption. Effective October 1, 2001, the exemption in Tax Code, §151.3161, that took effect on October 1, 1995, is repealed. That provision allowed a tax exemption for the first $50,000 of the purchase price of each complete unit of machinery or equipment used exclusively in a commercial timber operation to prepare the site, plant, cultivate, or to harvest timber in the regular course of business.

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 January 24, 2005.

TRD-200500315

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.430

The Comptroller of Public Accounts proposes a new §3.430, concerning records required, information required. The new rule incorporates legislative changes in House Bill 2458, 78th Legislature, 2003, to add Tax Code, Chapter 162, relating to motor fuel taxes and the repeal of Tax Code, Chapter 153. The new rule sets out records required to be maintained by motor fuel tax license holders, unlicensed retail dealers of motor fuel, and unlicensed users of motor fuel claiming refund. The new rule also provides information required to obtain a motor fuel tax license or registration under Tax Code, Chapter 162.

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

Mr. Heleman 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 new information regarding tax responsibilities. This rule is adopted under 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.

The new rule 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 Tax Code, Title 2.

The new rule implements Tax Code, §§162.004, 162.012, 162.107, 162.108, 162.115, 162.127, 162.216, 162.208, 162.209, 162.229, and 162.309.

§3.430.Records Required, Information Required (Tax Code, §§162.004, 162.012, 162.107, 162.108, 162.115, 162.127, 162.216, 162.208, 162.209, 162.229, and 162.309).

(a) This rule applies only to motor fuel transactions that take place on or after January 1, 2004. Motor fuel transactions that occur prior to January 1, 2004, will be governed by sections in Texas Administrative Code, Title 34, Part 1, Chapter 3, Subchapter L.

(b) Records Required.

(1) A supplier and permissive supplier, as those terms are defined in Tax Code, §162.001, shall keep the shipping documents that relate to each receipt for distribution of gasoline or diesel fuel and shall keep records showing:

(A) the number of gallons of all gasoline or diesel fuel inventories on hand at the first of each month;

(B) the number of gallons of all gasoline or diesel fuel refined, compounded, or blended;

(C) the number of gallons of all gasoline or diesel fuel purchased or received, showing the name of the seller and the date of each purchase or receipt;

(D) the number of gallons of all gasoline or diesel fuel sold, distributed, or used, showing the name of the purchaser and the date of the sale, distribution, or use;

(E) the number of gallons of all gasoline or diesel fuel lost by fire, theft, or accident; and

(F) an itemized statement showing by load the number of gallons of all gasoline or diesel fuel:

(i) received during the preceding calendar month for export and the location of the loading;

(ii) exported from this state by destination state or country; and

(iii) imported during the preceding calendar month by state or country of origin.

(2) A supplier or permissive supplier when acting as a distributor, importer, exporter, blender, aviation fuel dealer, or motor fuel transporter is subject to the record keeping requirements of that license.

(3) A distributor of gasoline or diesel fuel, as that term is defined in Tax Code, §162.001, shall keep the shipping documents that relate to each receipt for distribution of gasoline or diesel fuel and shall keep records that show:

(A) the number of gallons of all gasoline or diesel fuel inventories on hand at the first of each month;

(B) the number of gallons of all gasoline or diesel fuel refined, compounded, or blended;

(C) the number of gallons of all gasoline or diesel fuel purchased or received, showing the name of the seller and the date of each purchase or receipt;

(D) the number of gallons of all gasoline or diesel fuel sold, distributed, or used, showing the name of the purchaser and the date of the sale, distribution, or use;

(E) the number of gallons of all gasoline or diesel fuel lost by fire, theft, or accident;

(F) an itemized statement showing by load the number of gallons of all gasoline or diesel fuel:

(i) received during the preceding calendar month for export and the location of the loading;

(ii) exported from this state by destination state or country; and

(iii) imported during the preceding calendar month by state or country of origin; and

(G) proof of payment of tax to the destination state in a form acceptable to the comptroller for gasoline or diesel fuel exported from this state under Tax Code, §162.204(a)(4)(A).

(4) A distributor when acting as an importer, exporter, blender, aviation fuel dealer, or motor fuel transporter is subject to the record keeping requirements of that license.

(5) An importer, as that term is defined in Tax Code, §162.001, shall keep the shipping documents that relate to each receipt for distribution of gasoline or diesel fuel and shall keep records that show:

(A) the number of gallons of all gasoline or diesel fuel inventories on hand at the first of each month;

(B) the number of gallons of all gasoline or diesel fuel refined, compounded, or blended;

(C) the number of gallons of all gasoline or diesel fuel purchased or received, showing the name of the seller and the date of each purchase or receipt;

(D) the number of gallons of all gasoline or diesel fuel sold, distributed, or used, showing the name of the purchaser and the date of the sale, distribution, or use;

(E) the number of gallons of all gasoline or diesel fuel lost by fire, theft, or accident; and

(F) an itemized statement showing by load the number of gallons of all gasoline or diesel fuel:

(i) received during the preceding calendar month for export and the location of the loading;

(ii) exported from this state by destination state or country; and

(iii) imported during the preceding calendar month by state or country of origin.

(6) An importer when acting as an exporter or blender is subject to the record keeping requirements of that license.

(7) An exporter, as that term is defined in Tax Code, §162.001, shall keep the shipping documents that relate to each receipt for distribution and shall keep records that show:

(A) the number of gallons of all gasoline or diesel fuel inventories on hand at the first of each month;

(B) the number of gallons of all gasoline or diesel fuel refined, compounded, or blended;

(C) the number of gallons of all gasoline or diesel fuel purchased or received, showing the name of the seller and the date of each purchase or receipt;

(D) the number of gallons of all gasoline or diesel fuel sold, distributed, or used, showing the name of the purchaser and the date of the sale or use;

(E) the number of gallons of all gasoline or diesel fuel lost by fire, theft, or accident;

(F) an itemized statement showing by load the number of gallons of all gasoline or diesel fuel:

(i) received during the preceding calendar month for export and the location of the loading; and

(ii) exported from this state by destination state or country;

(G) proof of payment of tax to the destination state or proof that the transaction was exempt in the destination state, in a form acceptable to the comptroller if an exemption under Tax Code, §162.104(a)(4)(B) and §162.204(a)(4)(B) is claimed.

(8) A blender, as that term is defined in Tax Code, §162.001, shall keep the shipping documents that relate to each receipt for distribution and shall keep records that show the number of gallons of:

(A) all gasoline or diesel fuel inventories on hand at the first of each month;

(B) all gasoline or diesel fuel refined, compounded, or blended;

(C) all blending agents blended with gasoline or diesel fuel;

(D) all gasoline or diesel fuel purchased or received, showing the name of the seller and the date of each purchase or receipt;

(E) the number of gallons of all gasoline or diesel fuel sold, distributed, or used, showing the name of the purchaser and the date of the sale or use; and

(F) the number of gallons of all gasoline or diesel fuel lost by fire, theft, or accident.

(9) A terminal operator, as that term is defined in Tax Code, §162.001, shall keep a record showing:

(A) the number of gallons of all gasoline or diesel fuel inventories on hand at the first of each month, including the name and license number of each owner and the amount of gasoline or diesel fuel held for each owner;

(B) the number of gallons of all gasoline or diesel fuel received, showing the name of the seller and the date of each purchase or receipt;

(C) the number of gallons of all gasoline or diesel fuel sold, distributed, or used, showing the name of the purchaser and the date of the sale, distribution, or use;

(D) the number of gallons of all gasoline or diesel fuel lost by fire, theft, or accident; and

(E) the number of gallons of an itemized statement showing by load the number of gallons of all gasoline or diesel fuel:

(i) received during the preceding calendar month for export and the location of the loading;

(ii) exported from this state by destination state or country; and

(iii) imported during the preceding calendar month by state or country of origin.

(10) A dealer, as that term is defined in Tax Code, §162.001, shall keep the shipping documents that relate to each receipt for distribution and shall keep records that show the number of gallons of:

(A) gasoline or diesel fuel inventories on hand at the first of each month;

(B) all gasoline or diesel fuel purchased or received, showing the name of the seller and the date of each purchase or receipt;

(C) all gasoline or diesel fuel sold or used, showing the date of the sale or use; and

(D) all gasoline or diesel fuel lost by fire, theft, or accident.

(11) An interstate trucker, as that term is defined in Tax Code, §162.001, shall keep a record on an individual-vehicle basis of:

(A) the total miles traveled, evidenced by odometer or hubodometer readings, everywhere by all vehicles traveling to or from this state, and the total miles traveled, evidenced by odometer or hubodometer readings, in this state, including for each individual vehicle:

(i) date of each trip (starting and ending);

(ii) trip origin and destination;

(iii) beginning and ending odometer or hubodometer reading of each trip;

(iv) odometer or hubodometer reading entering Texas, and odometer or hubodometer reading leaving Texas;

(v) power unit number or vehicle identification number or license plate number;

(B) the total quantity purchased and delivered at retail of gasoline, diesel fuel or liquefied gas everywhere by all vehicles traveling to or from this state, and the total quantity of gasoline, diesel fuel or liquefied gas purchased and delivered into the fuel supply tanks of motor vehicles in this state, including for each individual vehicle:

(i) date of purchase;

(ii) name and address of seller;

(iii) number of gallons or liters purchased;

(iv) type of fuel purchased;

(v) price per gallon or liter; and

(vi) unit number of the vehicle into which the fuel was placed.

(C) An interstate trucker that uses a distribution log to record removals from the person's own bulk storage into a motor vehicle must include on each log the person's stamped or preprinted name and address, and for each individual delivery:

(i) date of delivery;

(ii) number of gallons or liters of gasoline, diesel fuel or liquefied gas delivered;

(iii) license plate or vehicle identification number or power unit number;

(iv) odometer or hubodometer reading; and

(v) signature of the user.

(D) An interstate trucker that maintains bulk fuel storage must keep a record of the number of gallons of gasoline, diesel fuel, or liquefied gas beginning and ending inventories, all invoices of bulk purchases and records to substantiate all fuel withdrawals from storage.

(12) An aviation fuel dealer, as that term is defined in Tax Code, §162.001, shall keep the shipping document that relates to each receipt for distribution and shall keep records that show:

(A) the number of gallons of all gasoline or diesel fuel inventories on hand at the first of each month;

(B) the number of gallons of all gasoline or diesel fuel purchased or received, showing the name of the seller and the date of each purchase or receipt;

(C) the number of gallons of all gasoline or diesel fuel lost by fire, theft, or accident;

(D) the number of gallons of all gasoline or diesel fuel sold or used in aircraft or aircraft servicing equipment; and

(i) the name of the purchaser or user of gasoline or diesel fuel;

(ii) the date of the sale or use of gasoline or diesel fuel; and

(iii) the registration or "N" number of the airplane or a description or number of the aircraft or a description or number of the aircraft servicing equipment in which gasoline or diesel fuel is used.

(13) A dyed diesel fuel bonded user, as that term is defined in Tax Code, §162.001, shall keep a record showing the number of gallons of:

(A) dyed and undyed diesel fuel inventories on hand at the first of each month;

(B) dyed and undyed diesel fuel purchased or received, showing the name of the seller and the date of each purchase or receipt;

(C) dyed and undyed diesel fuel delivered into the fuel supply tanks of motor vehicles;

(D) dyed and undyed diesel fuel used in off-highway equipment or for other nonhighway purposes and described in Tax Code, §162.229(c); and

(E) dyed and undyed diesel fuel lost by fire, theft, or accident.

(14) A motor fuel transporter, as that term is defined in Tax Code, §162.001, shall keep a complete and separate record of each intrastate and interstate transportation of gasoline or diesel fuel, showing:

(A) the date of transportation;

(B) the name of the consignor and consignee;

(C) the means of transportation;

(D) the quantity and kind of gasoline or diesel fuel transported;

(E) the points of origin and destination;

(F) the import verification number if that number is required by §3.441 of this title (relating to Documentation of Imports and Exports, Import Verification Numbers, Export Sales, and Diversion Numbers); and

(G) full data concerning the diversion of shipments, including the number of gallons diverted from interstate to intrastate and intrastate to interstate commerce, the diversion number if that number is required by §3.441 of this title.

(15) A licensed liquefied gas dealer, as that term is described in Tax Code, §162.304, shall keep a record of all liquefied gas sold or delivered for taxable purposes.

(16) A person who does not hold a license under Tax Code, Chapter 162, who files a claim for refund of gasoline or diesel fuel taxes shall keep the shipping document that relates to each receipt of gasoline or diesel fuel, original invoice issued by the seller, and distribution log to support gallons of gasoline or diesel fuel removed from the person's own bulk storage and for each individual delivery:

(A) the date of delivery;

(B) the number of gallons of gasoline or diesel fuel delivered;

(C) the signature of user; and

(D) the type or description of off-highway equipment into which the gasoline or diesel fuel was delivered or the type of motor vehicle identified by state highway licensed plate number, vehicle identification number, or unit number assigned to motor vehicle and odometer or hubmeter reading.

(c) The comptroller may require selective schedules from a supplier, permissive supplier, distributor, importer, exporter, blender, terminal operator, motor fuel transporter, dealer, aviation fuel dealer, dyed diesel fuel bonded user, and interstate trucker for any purchase, sale, or delivery of gasoline or diesel fuel if the schedules are consistent with the requirements of Tax Code, Chapter 162.

(d) The records required by this section must be kept for at least four years and must be open to inspection at all times by the comptroller and the attorney general.

(e) A person who claims a deduction or exclusion authorized by law must keep records that substantiate the claim. When records regarding the amount and applicability of any deductions or exclusions from the motor fuels tax are insufficient, the comptroller may estimate deductions or exclusions based on any records available or may disallow all deductions and exclusions. No exclusions for loss by fire, accident, or theft will be allowed unless accompanied by fire department, environmental regulatory agency, or police department reports that verify the fire, accident, or theft.

(f) Failure to keep adequate records. If any person who is required by this section to keep accurate records of receipts, purchases, sales, distributions, or uses of gasoline or diesel fuel, fails to keep those records, the comptroller may estimate the tax liability based on any information available.

(g) The comptroller may suspend any permit or license the comptroller has issued to a person if the person fails to keep the records required by this section.

(h) Records may be written, kept on microfilm, stored on data processing equipment, or may be in any form that the comptroller can readily examine.

(i) Information required.

(1) The comptroller may require any person who must hold a license or registration under Tax Code, Chapter 162, to furnish information that the comptroller needs to:

(A) identify any person who applies for a motor fuels license, uses a signed statement to purchase tax-free dyed diesel fuel, or transports motor fuel in Texas by truck, railcar, or vessel, or any person who is required to file a return;

(B) determine the amount of bond, if any, required to commence or continue business;

(C) determine possible successor liability; and

(D) determine the amount of tax the person is required to remit, if any.

(2) The information required may include, but is not limited to, the following:

(A) name of the actual owner of the business;

(B) name of each partner in a partnership;

(C) names of officers and directors of corporations and other organizations;

(D) all trade names under which the owner operates;

(E) mailing address and actual locations of all business outlets;

(F) license numbers, title numbers, and other identification of business vehicles;

(G) identification numbers assigned by other governmental agencies, including social security numbers, federal employers identification numbers, and driver's license numbers;

(H) names of gasoline and diesel fuel suppliers or distributors with whom the person will transact business; and

(I) names and last known addresses of former owners of the business.

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 January 20, 2005.

TRD-200500270

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.432

The Comptroller of Public Accounts proposes new §3.432, concerning refunds on gasoline and diesel fuel tax. The amendment incorporates legislative changes made by House Bill 2458, 78th Legislature, 2003, Regular Session, which amended Tax Code by adding Chapter 162. The proposed rule provides guidelines for claiming a tax refund or credit for taxes paid on gasoline or diesel fuel used off the highway, resold to certain exempt entities, exported from Texas, loss caused by fire, theft, or accident, and other exempt uses authorized by law.

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

Mr. Heleman 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 new information regarding tax responsibilities. This rule is adopted under 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 rule is proposed under Tax Code §111.102, 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 proposed rule implements Tax Code §§162.104, 162.125, 162.127, 162.128, 162.204, 162.227, 162.229, and 162.230.

§3.432.Refunds on Gasoline and Diesel Fuel Tax (Tax Code, §§162.104, 162.125, 162.127, 162.128, 162.204, 162.227, 162.229, and 162.230).

(a) This rule applies only to motor fuel transactions that take place on or after January 1, 2004. Motor fuel transactions that occur prior to January 1, 2004, will be governed by sections in Texas Administrative Code, Tile 34, Part 1, Chapter 3, Subchapter L.

(b) Refunds and credits. A person may file a claim for refund or a license holder may take a credit on a return for taxes paid on gasoline or diesel fuel used off the highway, for certain resale, for export from Texas, for loss caused by fire, theft, or accident, or other use if authorized by law. The claim for refund or credit must be filed in accordance with this section.

(c) Time limitation. A claim for refund or credit must be filed before the expiration of the following time limitations, as provided by Tax Code, §162.128 and §162.230:

(1) one year from the first day of the calendar month that follows:

(A) purchase;

(B) tax exempt sale;

(C) use, if withdrawn from one's own storage for one's own use;

(D) export from Texas; or

(E) loss by fire, theft, or accident; or

(2) for dyed and undyed diesel fuel used in off-highway equipment, stationary engines, or for other nonhighway purpose on or after January 1, 2004, a claim for refund on diesel fuel under subsections (e), (f), and (g) of this section must be postmarked no later than December 31, 2004, or

(3) four years from the due and payable date for a tax return on which an overpayment of tax was made by a licensed supplier, permissive supplier, distributor, importer, exporter, or blender who determines that taxes were erroneously reported or that more taxes were paid than were due because of a mistake of fact or law. The supplier, permissive supplier, distributor, importer, exporter, or blender must establish the credit by filing an amended tax return for the period in which the error occurred and tax payment was made to the comptroller.

(d) Filing forms and documentation. A claim for refund or credit must be on a form prescribed by the comptroller and must be submitted within the applicable limitations period provided by subsection (c) of this section. A person or license holder is required to maintain and have available for inspection the following documentation and information to substantiate a claim for refund or credit:

(1) an original purchase invoice with the name and address of the seller or name of the purchaser, whichever is applicable. For refund or credit purposes, the original invoice may be a copy of the original impression if the copy has been stamped "Customer Original Invoice," "Original for Tax Purposes," or similar wording. If a copy is so stamped, the original and all other copies must then be stamped "Not Good for Tax Purposes" or similar wording. Invoices of original impression submitted in support of refund claims must be without the above wording stamped or imprinted;

(2) evidence as to who paid the tax. A purchaser claiming a refund or credit must have an invoice that either separately states the tax amount paid or a written statement that the price included state tax. A seller claiming a refund or credit must have issued an invoice, signed by the purchaser, that contains a statement that no state tax was collected or that it was a tax-free sale;

(3) if refund or credit is claimed on fuel purchased at retail the purchase invoice must note the identification of each vehicle or type of equipment (e.g., including railway engines, motor boats, refrigeration units, stationary engines, off-highway equipment, or nonhighway farm equipment that has traveled between multiple farms or ranches as allowed in §3.440 of this title (relating to On-Highway Travel of Farm Machinery)) in which the fuel was delivered and used;

(4) if refund or credit is claimed on fuel removed from the claimant's own bulk storage, then a distribution log as provided by Tax Code, §162.127 and §162.229. The distribution log must contain the name and address of the user and, for each individual removal from the bulk storage the following information:

(A) the date the fuel was removed;

(B) the number of gallons removed;

(C) the type of fuel removed;

(D) signature of the person removing the fuel; and

(E) the type or description of the off-highway equipment into which the fuel the was delivered, or the identification of both on-highway and off-highway motor vehicles into which the fuel was delivered, including the state highway license number or vehicle identification number and odometer or hubmeter reading, or description of other off-highway use.

(e) Refund or credit for gasoline or dyed and undyed diesel fuel used solely for an off-highway purpose. A claim for refund or credit for gasoline or dyed and undyed diesel fuel used solely for off-highway purposes must list each off-highway vehicle or piece of equipment or document other nonhighway use and the total number of gallons used by way of a distribution log as described in subsection (d) of this section. The refund or credit for dyed or undyed diesel fuel used for off-highway purpose expires on January 1, 2005.

(f) Refund or credit for gasoline or dyed and undyed diesel fuel used by a lessor of off-highway equipment. The lessor of off-highway equipment who claims a refund or credit of state fuel tax must maintain documentation that shows that the state tax was assessed and paid, a list of each piece of off-highway equipment, and a distribution log as described in subsection (d) of this section of the number of gallons of gasoline, dyed diesel fuel, and undyed diesel fuel used in both on-highway and off-highway vehicles and equipment. A lessor who claims a refund of state fuel tax may include a separate refueling, fuel reimbursement, or fuel service charge on the invoice, if the invoice contains a statement that the fuel charge does not include state motor fuel taxes. The refund or credit for dyed or undyed diesel fuel used by a lessor of off-highway equipment expires on January 1, 2005.

(g) Refund or credit for gasoline or dyed and undyed diesel fuel used in a motor vehicle operated exclusively off-highway, except for incidental highway use. A claim for refund or credit may be filed by a person who used gasoline or dyed and undyed diesel fuel in motor vehicles incidentally on the highway, when the incidental travel on the public highway is infrequent, unscheduled, and insignificant to the total operation of the motor vehicle, and only for the purpose of transferring the base of operation or to travel to and from required maintenance and repair. A refund or credit for dyed or undyed diesel fuel used in a motor vehicle operated exclusively off-highway, except for incidental highway use, expires on January 1, 2005.

(1) A record that shows the date and miles traveled during each highway trip must be maintained.

(2) 1/4 gallon for each mile of incidental highway travel shall be deducted from the number of gallons claimed.

(h) Refund or credit for gasoline used in gasoline-powered motor vehicles equipped with power take-off or auxiliary power units. A person who files a claim for refund or a license holder who takes a credit on a tax return for gasoline used in the operation of power take-off or auxiliary power units must use one of the following methods in determination of the amount of gasoline used:

(1) direct measurement method. The use of a metering device, as defined by §3.435 of this title (relating to Metering Devices Used to Claim Refund of Tax on Gasoline Used in Power Take-Off and Auxiliary Power Units) is an acceptable method for determination of fuel usage. A person who claims a refund or credit for gasoline used to propel motor vehicles with approved measuring or metering devices that measure or meter the fuel used in stationary operations must maintain records on each vehicle so equipped, and the records must reflect:

(A) the miles driven as shown by any type of odometer or hubmeter;

(B) the gallons delivered to each vehicle; and

(C) the gallons used as recorded by the meter or other measuring device;

(2) gasoline-powered ready mix concrete trucks and solid waste refuse trucks equipped with power take-off or auxiliary power units. Operators of gasoline-powered ready mix concrete trucks and solid waste refuse trucks that are equipped with power take-off or auxiliary power units that are mounted on the motor vehicle and use the fuel supply tank of the motor vehicle may claim refund on 30% of the total gasoline used in this state by each vehicle. A solid waste refuse truck means a motor vehicle equipped with a power take-off or auxiliary power unit that provides power to compact the refuse, open the back of the container before ejection, and eject the compacted refuse;

(3) mileage factor method. The nontaxable use may be determined by computing the taxable use at 1/4 gallon for each mile traveled, as recorded by the odometer or hubmeter and subtracting that amount from the total quantity of gasoline delivered into the motor vehicle fuel supply tanks. The remainder will be considered nontaxable, and a tax refund or tax credit may be claimed on that quantity of fuel;

(4) two tank method. A motor vehicle may be equipped with two fuel tanks and an automatic switching device that a spring-activated air release parking brake operates, and that switches from one tank that is designated for highway use to another tank that is not so designated when the vehicle is stationary. The highway tank and the not-for-highway tank may not be connected by crossover line or equalizer line of any kind. The tax paid on the gasoline delivered to the tank designated not-for-highway use may be claimed as a tax refund or taken as a tax credit. All gasoline delivered into the fuel supply tanks of a vehicle that is equipped with an automatic switching device must be invoiced as taxable. Separate invoices must be issued for deliveries of fuel into each tank. A notation that indicates that fuel was delivered into the tank designated not- for-highway use must be made on invoices;

(5) fixed percentage method. In lieu of the use of one of the previously mentioned methods, the owner or operator of a gasoline-powered motor vehicle that is equipped with a power take-off or auxiliary power unit that is mounted on the vehicle may claim a credit or refund of the tax paid on 5.0% of the total taxable gasoline used in this state by each vehicle so equipped;

(6) proposed alternate methods. Proposals for the use of methods that this section does not specifically cover to determine the amount of gasoline used in power take-off operations or auxiliary power units may be submitted to the comptroller for approval;

(7) accurate mileage records must be kept regardless of the method used;

(8) beginning September 1, 2003, motor vehicle air conditioning and heating systems are no longer considered power take-off systems. A person may file a claim for refund of state taxes paid on gasoline used in the operation of an air conditioning or heating system prior to September 1, 2003.

(i) Refund or credit for gasoline or diesel fuel sold to or used by an exempt entity.

(1) A license holder, other than an aviation fuel dealer, may take a credit on a return for taxes paid on the purchase of gasoline or diesel fuel that is resold tax-free if the purchaser was one of the follow entities:

(A) the United States or federal government and the purchase is for its exclusive use. The federal government means any department, board, bureau, agency, corporation, or commission that the United States government has created or wholly owns. Exclusive use by the federal government means use of fuel only in motor vehicles or other equipment that the federal government operates. A person operating under a contract with the federal government is not an exempt entity. Evidence that sales were made to the federal government must be maintained and consist of:

(i) a United States tax exemption certificate--Standard Form 1094 or similar certificate that includes the same information as the Standard Form 1094; or

(ii) copies of the invoice(s) when a United States National credit card--Standard Form 149, was used for the purchase, which invoice must include the license plate number or official vehicle designation, if fuel is delivered into the fuel supply tank of a motor vehicle; or

(iii) a copy of a contract between the seller and the federal government supporting the sales invoices or purchase vouchers;

(B) a Texas public school district and the purchase is for its exclusive use. Exclusive use by a public school district means use of fuel only in motor vehicles or other equipment that the public school district operates;

(C) a commercial transportation company with a contract to provide public school transportation services to a Texas public school district under Education Code, §34.008, and the gasoline or diesel is used exclusive to provide those services;

(D) a Texas non-profit electric cooperative organized under Utilities Code, Chapter 161, and telephone cooperative organized under Utilities Code, Chapter 162, and the purchase is for its exclusive use. Exclusive use by an electric or telephone cooperative means use of fuel only in motor vehicles or other equipment that the electric or telephone cooperative operates.

(2) An exempt entity enumerated in paragraph (1)(A)-(D) of this subsection, may claim a refund of taxes paid on gasoline or diesel fuel purchased for its exclusive use.

(j) Refund or credit for gasoline or diesel fuel exported from Texas or sold for export.

(1) A person may claim a refund or a licensed supplier, permissive supplier, distributor, importer, exporter, or blender may take a credit on a return for taxes paid on gasoline or diesel fuel that the person or the license holder exports from this state in quantities of 100 or more gallons. Proof of export must be one of the following:

(A) proof of export that United States Customs officials have certified, if the fuel was exported to a foreign country;

(B) proof of export that a port of entry official of the state of importation has certified, if the state of importation maintains ports of entry;

(C) proof from the taxing officials of the state into which the fuel was imported that shows that the exporter has accounted for the fuel on that state's tax returns;

(D) other proof that the fuel has been reported to the state into which the gasoline or diesel fuel was imported; or

(E) a common or contract carrier's transporting documents (see §3.439 of this title (relating to Motor Fuel Transporting Documents)) that list the consignor and consignee, the points of origin and destination, the number of gallons shipped or transported, the date of export, and the kind of fuel exported;

(2) A licensed supplier, permissive supplier or distributor may take a credit on a return for taxes paid on gasoline or diesel fuel resold tax-free to a licensed supplier, permissive supplier, distributor, importer, or exporter for immediate export from this state under the following circumstances:

(A) a shipping document or bill of lading issued by the seller that shows the destination state;

(B) the purchaser (exporter) is licensed in Texas as a supplier, permissive supplier, distributor, importer, or exporter; and

(C) the purchaser is licensed in the destination state to pay that state's tax; or

(D) if the destination is a foreign country, a shipping document or bill of lading issued by the seller that shows the foreign destination.

(3) Effective January 1, 2006, a licensed supplier or permissive supplier must collect either the destination state's tax or Texas tax from the purchaser on gasoline or diesel fuel exported to another state.

(k) Refund or credit for gasoline or diesel fuel loss by fire, theft, or accident. A person may claim a refund or a license holder may take a credit on a return for taxes paid on 100 or more gallons of gasoline or diesel fuel loss by fire, theft, or accident. The claimant must maintain records of the incident that establishes that the exact quantity of fuel that has been claimed as lost was actually lost, and that the loss resulted from that incident. The time limitation prescribed in subsection (c)(1) of this section is determined by the date of the first incident of a multiple incident loss that totals 100 gallons or more. A claim for refund for loss by fire, theft, or accident shall be accompanied by fire department, police department, or regulatory agency reports as appropriate.

(1) If the incident is a drive-away theft at a retail outlet (i.e., theft occurs when a person delivers gasoline or diesel fuel into the fuel supply tank(s) of a motor vehicle at a retail outlet without payment for the fuel), the following documentation shall be maintained:

(A) a police department report or evidence that the incident of drive-away theft has been or will be taken as a deduction on the federal income tax return during the same or the subsequent reporting period; and

(B) separate report for each incident that the employee(s) who witnessed the event prepared and signed. The report must include the date and time of occurrence, type of fuel, number of gallons, outlet location, and, if the theft is reported to a police department, the police case number.

(2) If the accidental loss was incurred through a leak in a line or storage tank, the minimum proof required is:

(A) a statement by the person who actually dug up or otherwise examined the hole or leak. Such statement should articulate the extent of the leak, the date of the examination, and the person's name and title; and

(B) a statement of the actual loss as determined by computing the measured inventory next preceding the discovery of the accidental leak, plus motor fuel salvaged from the leaky tank or line, if any, less intervening withdrawals for sale or use.

(3) A person claiming a refund or credit under this subsection must take inventory on the first of each month and promptly correct the inventory for any loss that has occurred in the preceding month. If inventories have not been accurately or timely measured, or if complete records have not been kept of all withdrawals for sale or use as required by law, a claim for refund or credit cannot be honored for payment.

(l) Refund or credit for gasoline or diesel moved between terminals. A licensed supplier or permissive supplier may take a credit on a return for tax paid on gasoline or diesel fuel removed from an IRS registered terminal that is transferred by truck or railcar to another IRS registered.

(m) Refund or credit for gasoline or diesel fuel sold to or purchased by a licensed aviation fuel dealer.

(1) A licensed supplier, permissive supplier, or distributor may take a credit on a return for tax paid on gasoline or diesel fuel sold to a licensed aviation fuel dealer for delivery solely into the fuel supply tanks of aircraft, aircraft servicing equipment, or into a bulk storage tank of a licensed aviation fuel dealer.

(2) A licensed aviation fuel dealer may claim refund for tax paid on gasoline or diesel fuel delivered into the fuel supply tanks of aircraft, aircraft servicing equipment, or into a bulk storage tank of another licensed aviation fuel dealer.

(n) Refund or credit for gasoline or diesel fuel used outside of Texas by a licensed interstate trucker. A licensed interstate truck may take a credit on a tax return for tax paid on gasoline or diesel fuel purchased in Texas and used outside of Texas in commercial vehicles operated under an interstate trucker license. The credit may be taken on the return for the period in which the purchase occurred. If the credit exceeds the amount of tax reported due on that return, the licensed interstate trucker:

(1) may carry forward the excess credit on any of the three successive quarterly returns until exhausted, or until the due date of the third successive quarterly return, whichever occurs first; or

(2) may seek refund of the excess credit by filing a claim for refund on or before the due date of the third successive quarterly return; or

(3) if returns are filed on an annual basis an interstate trucker may seek refund or credit no later than the due date of the annual return; and

(4) any remaining credit not taken on return or claimed as a refund before the prescribed deadline expires.

(o) Refund for gasoline or diesel fuel sold on Indian reservations. A retailer located on an Indian reservation recognized by the United States government may claim refund of tax paid on gasoline or diesel fuel resold tax-free to exempt tribal entities and tribal members. The retail dealer must maintain records that include the original purchase invoices that show that the state tax was paid and sales invoices that include:

(1) the name of the purchaser;

(2) the date of the sale;

(3) the number of gallons sold;

(4) the type of fuel sold; and

(5) a written statement that no state tax was collected or that it was a tax-free sale.

(p) The right to receive a refund or take a credit under this section is not assignable.

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 January 24, 2005.

TRD-200500308

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.441

The Comptroller of Public Accounts proposes new §3.441, concerning documentation of imports and exports, import verification numbers, export sales, and diversion numbers. The new rule incorporates legislative changes in House Bill 2458, 78th Legislature, 2003, to add Tax Code, Chapter 162, relating to motor fuel taxes and the repeal of Tax Code, Chapter 153. The new rule provides requirements for a license holder to document imports and exports of motor fuel, procedure to obtain import verification and diversion numbers and conditions under which a license holder makes an export sale.

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

Mr. Heleman 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 new information regarding tax responsibilities. This rule is adopted under 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.

The new rule 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 Tax Code. Title 2.

The proposed rule implements Tax Code, §§162.001, 162.004 and 162.016.

§3.441.Documentation of Imports and Exports, Import Verification Numbers, Export Sales, and Diversion Numbers. (Tax Code, §§162.001, 162.004 and 162.016)

(a) This rule applies only to motor fuel transactions that take place on or after January 1, 2004. Motor fuel transactions that occur prior to January 1, 2004, will be governed by sections in Texas Administrative Code, Title 34, Part 1, Chapter 3, Subchapter L.

(b) Imports.

(1) Imports. Motor fuel imported into Texas by or for a seller constitutes an import by that seller. Motor fuel imported into Texas by or for a purchaser constitutes an import by that purchaser.

(2) Import Verification Number. An importer must obtain from the comptroller an import verification number for each load of gasoline or diesel fuel imported into Texas by truck or railroad tank car. An import verification number must be obtained within 72 hours before or after the gasoline or diesel fuel enters Texas. The importer must write the import verification number on the shipping document issued for that fuel.

(3) Documentation. An importer must possess a shipping document created by the terminal or bulk plant where the fuel was loaded (see §3.439 of this title (relating to Motor Fuel Transportation Documents) for motor fuel imported by any means into Texas).

(c) Export Sales.

(1) A licensed supplier, permissive supplier or distributor makes an export sale when it sells motor fuel in Texas to a licensed exporter, importer, distributor, supplier or permissive supplier who then, prior to any other sale or use in Texas, sends or transports the motor fuel outside the state. The bill of lading or shipping document must list the out of state destination.

(2) A licensed supplier, permissive supplier, or distributor who makes an export sale will not be liable for tax on motor fuel that the purchaser diverts provided that the seller issued a bill of lading or shipping document that shows that the fuel is to be delivered to a destination outside Texas.

(3) Documentation.

(A) The comptroller may request proof of export from the exporter to verify that the motor fuel was exported from Texas. This proof may consist of:

(B) proof of export that a U.S. customs office has certified, if the fuel was exported from this state to a foreign country;

(C) proof of export that a port of entry of the state of importation has certified, if ports of entry are maintained by that state;

(D) proof from the tax officials of the state into which the motor fuel was imported, which shows that the exporter has accounted for the motor fuel on the state's tax report; or

(E) other proof that the fuel has been reported to the state into which the motor fuel was imported.

(d) Diversion Number. An importer or exporter who diverts the delivery of a load of gasoline or diesel fuel being transported by truck or railroad tank car from the destination state or country that is preprinted on the shipping document that has been issued for that fuel to another state or country must obtain a diversion number from the comptroller. A diversion number must be obtained within 72 hours before or after the diversion. The importer, exporter, or common or contract carrier must write the diversion number on the shipping document issued for that fuel.

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 January 20, 2005.

TRD-200500271

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.442

The Comptroller of Public Accounts proposes a new §3.442, concerning bad debts or accelerated credit for non-payment of taxes. The new rule incorporates legislative changes in House Bill 2458, 78th Legislature, 2003, to add Tax Code, Chapter 162, relating to motor fuel taxes and the repeal of Tax Code, Chapter 153. The new rule provides the criteria necessary for a licensed distributor, supplier, or permissive supplier to file a claim for refund on the monthly return for a bad debt deduction or accelerated credit for the non-payment of tax, requirements for repaying tax when payment is recovered, and criminal and civil penalties for issuing bad checks for the payment of fuel.

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

Mr. Heleman 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 new information regarding tax responsibilities. This rule is adopted under 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 Lomax, Manager, Tax Policy Division, P.O. Box 13528, Austin, Texas, 78711.

The new rule 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 Tax Code, Title 2

The new rule implements Tax Code, §§162.113, 162.116, 162.126, 162.214, 162.228, and 162.409.

§3.442.Bad Debts or Accelerated Credit for Non-payment of Taxes. (Tax Code, §§162.113, 162.116, 162.126, 162.214, 162.228, and 162.409).

(a) This rule applies only to motor fuel transactions that take place on or after January 1, 2004, under Tax Code, Chapter 162. Motor fuel transactions that occur before January 1, 2004, are governed by provisions of Chapter 3, Subchapter L of this title, and promulgated under Tax Code, Chapter 153.

(b) Bad Debt Deductions. A licensed distributor, supplier, or permissive supplier may file a claim for refund on the monthly return of taxes paid on fuel that was sold on account that is later determined to be uncollectible, worthless, and previously written off as bad debt at the time that the distributor, supplier, or permissive supplier held an active license..

(1) The claim for refund must be in writing, state the fuel type (gasoline or diesel), state the beginning and ending date of sales on which the bad debt is claimed, the number of gallons, and the dollar amount of bad debts. The licensed distributor, supplier, or permissive supplier must establish the bad debt amount by providing information on the form required by the comptroller. Required information includes but is not limited to the following:

(A) the date of sale or invoice date;

(B) invoice fuel amount, and invoice fuel tax amount;

(C) the name and address of the purchaser, and if applicable, the licensed number of the purchaser;

(D) all payments or credits applied to the account of the purchaser; and

(E) uncollected amounts in the purchaser's account that were written off as bad debt in the distributor's, supplier's, or permissive supplier's records, including the number of gallons of fuel represented by the motor fuel portion of the bad debt.

(2) All payments and credits made by the purchaser must be applied to the purchaser's account to determine the bad debt amount, and if the purchaser's account also contains purchases of goods other than motor fuel, then the payments and credits to that account should be applied ratably between motor fuel, including tax, and other goods sold to the purchaser. The comptroller will only allow a claim for refund of tax on the number of gallons represented by the motor fuel portion of the bad debt. The maximum amount of refund claimed cannot exceed the tax paid on the fuel sold on account that has been written off as a bad debt.

(3) A claim for refund of taxes based on a bad debt must be filed within four years from the date the account is entered in the distributor's, supplier's, or permissive supplier's books as a bad debt.

(c) Accelerated Credit. If a licensed supplier or permissive supplier reported and remitted taxes on a tax return for fuel sold on account to a purchaser who is licensed as a distributor or importer at the time of the transaction and who subsequently fails to pay the taxes to the seller, the licensed supplier or permissive supplier may take a credit against tax liability on a subsequent tax return if the licensed supplier or permissive supplier notifies the comptroller of the default within 60 days after the default occurs.

(1) The notification shall be provided in the form required by the comptroller, and credits may be taken beginning with the return for the reporting month in which the notification is made. When credits are taken on a return, the licensed supplier or permissive supplier must submit with that return information required by the comptroller.

(2) A licensed supplier or permissive supplier who fails to notify the comptroller of the default within the prescribed 60-day period cannot take a credit on a return, but may seek a refund of taxes based on bad debts subject to the requirements provided by subsection (b) of this section.

(3) All payments and credits made by the purchaser must be applied to the purchaser's account to determine that non-payment amount, and if the purchaser's account contains the purchase of goods or items other than motor fuel, then the payments and credits to that account should be applied ratably between motor fuel, including tax, and other goods or items sold to the purchaser. The comptroller will only allow a credit of tax on the number of gallons represented by the motor fuel portion of the unpaid amount. The maximum amount of credit taken cannot exceed the tax paid on the fuel sold on account that has been unpaid.

(4) If the notification of default was timely made to the comptroller, credits for taxes that were not collected from the licensed purchaser must be taken within four years from the date of default.

(5) A distributor, supplier, permissive supplier, or importer whose right to defer payment of tax to a supplier or permissive supplier has been suspended may seek reinstatement of the right to defer payment when all motor fuel tax liability has been satisfied and considered in good standing with the comptroller. The distributor, supplier, permissive supplier, or importer must request that the comptroller issue a notice of good standing for motor fuel taxes.

(d) Credit card sales. The refund for bad debts or credit for non-payment of taxes allowed under this section does not apply to sales of fuel that is delivered into the supply tank of a motor vehicle or motorboat when payment is made through the use and acceptance of a credit card. For purpose of this section, a credit card is defined as any card, plate, key, or like device by which credit is extended to and charged to the purchaser's account. Credit sales to commercial or agricultural customers at locations not open to the general public are eligible to the bad debt credit.

(e) A supplier, permissive supplier, or distributor who collects all or part of an account that was written off as a bad debt for which a refund was sought under subsection (b) of this section or who collects all or part of the unpaid tax after a credit was taken under subsection (c) of this section, must report and remit the collected amount on the return that is due for the reporting period in which the bad debt was originally claimed. The comptroller may assess a deficiency, including 10% penalty at the rate provided by Tax Code, §111.060, if the amount recovered is not reported and tax is not paid to the state during the month in which the recovery is made. Interest will accrue from the date the credit was taken.

(f) If the comptroller determines that a taxpayer obtained a refund from the comptroller or took a credit on a return when he knew or should reasonably have known that the account or tax was collectible, the comptroller may issue a deficiency for the tax plus 10% penalty and interest imposed from the date the refund was granted or the credit taken. In addition, other penalties provided by this section or by Tax Code, Chapters 111 or 162, may be imposed.

(g) The comptroller may issue a deficiency assessment for tax, plus penalty and interest applicable under Tax Code, Chapter 111, against the purchaser whose account was the subject of a refund for bad debt obtained or a credit claimed by a distributor, supplier, or permissive supplier.

(h) Criminal and civil penalties for issuing bad checks.

(1) A person commits an offense if he issues a check to a licensed distributor, licensed supplier, or permissive supplier for the payment of fuel knowing that his account with the bank on which the check is drawn has insufficient funds and if the payment is for an obligation that includes tax imposed by Tax Code, Chapter 162, that is required to be collected by the licensed distributor or licensed supplier. The offense is a Class C misdemeanor.

(2) If a licensed distributor, licensed supplier, or permissive supplier receives an insufficient fund check causing a refund to be sought or a credit taken in accordance with the provisions in this section, the licensed distributor or licensed supplier may notify the comptroller of the receipt of the insufficient fund check. When making the notification, a photocopy of both sides of the returned check should be furnished.

(3) A person who issues an insufficient fund check to a licensed distributor, licensed supplier, or permissive supplier for payment of an obligation that includes tax imposed by Tax Code, Chapter 162, that is required to be collected by the licensed distributor, licensed supplier, or permissive supplier may be assessed a penalty equal to 100% of the total amount of tax not paid to the licensed distributor, licensed supplier, or permissive supplier. This penalty is in addition to any penalties, interest, and collection actions authorized by the Tax Code.

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 January 20, 2005.

TRD-200500272

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.444

The Comptroller of Public Accounts proposes new §3.444, concerning temperature adjustment conversion table and metering devices. The new rule incorporates legislative changes in House Bill 2458, 78th Legislature, 2003, to add Tax Code, Chapter 162, relating to motor fuel taxes and the repeal of Tax Code, Chapter 153. The new rule provides the method to be used to temperature adjust a volume of gasoline or diesel fuel to 60 degrees Fahrenheit and describes the frequency and methods required to test and maintain the accuracy of meters and thermometers used to measure the temperature of gasoline and diesel fuel.

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

Mr. Heleman 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 new information regarding tax responsibilities. This rule is adopted under 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.

The new rule 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 Tax Code. Title 2.

The proposed rule implements Tax Code, §162.103 and §162.202.

§3.444.Temperature Adjustment Conversion Table and Metering Devices (Tax Code, §162.103 and §162.202).

(a) This rule applies only to motor fuel transactions that take place on or after January 1, 2004. Motor fuel transactions that occur prior to January 1, 2004, will be governed by sections in Texas Administrative Code, Title 34, Part 1, Chapter 3, Subchapter L.

(b) Temperature adjustment method. For the purpose of conversion of actual gasoline and diesel fuel volume to equivalent volume of 60 degrees Fahrenheit, Table 6B of revised ASTM-API-IP Petroleum Measurement Tables may be used in lieu of any conversion table which the comptroller may issue.

(c) Testing and accuracy of meters and thermometers or other devices designed to accurately measure the temperature of fuel. Meters must be tested each 90 days or after 10 million gallons through-put, whichever occurs first. The accuracy of any meter being used must be maintained within 1% of correct volume during all loading or unloading operations. The tests of meters shall be determined by the methods provided by the American Society of Mechanical Engineers- American Petroleum Institute for the Installation, Proving and Operation of Meters in Liquid Hydrocarbon Service. Thermometers or other devices designed to accurately measure the temperature of fuel must be tested each 90 days and must conform to standards set by the American Society of Mechanical Engineers-American Petroleum Institute or National Bureau of Standards.

(d) Records. A record of all tests must be maintained and open for examination by the comptroller for a period of four years.

(e) Posting of results. The results of the most recent tests on all meters and thermometers or temperature measuring devices being used must be posted in a conspicuous place at each terminal where the tests are required.

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 January 20, 2005.

TRD-200500273

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.446

The Comptroller of Public Accounts proposes new §3.446, concerning electronic filing of reports, civil penalties, and deferred tax payments. The new rule incorporates legislative changes in House Bill 2458, 78th Legislature, 2003, to add Tax Code, Chapter 162, relating to motor fuel taxes and the repeal of Tax Code, Chapter 153. The new rule provides requirements for electronic filing of reports and schedules by licensed suppliers, permissive suppliers, distributors, importers, exporters, blenders, motor fuel transporters, and terminal operators, conditions under which a civil penal may be assessed for failure to file reports or failure to file reports electronically when required to do so, and deferred tax payments to licensed suppliers and permissive suppliers by licensed suppliers, permissive suppliers, distributors and importers.

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

Mr. Heleman 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 new information regarding tax responsibilities. This rule is adopted under 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 Lomax, Manager, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711.

The new rule 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 Tax Code, Title 2.

The amendment implements Tax Code, §§162.114, 162.116, 162.118, 162.119, 162.120, 162.121, 162.122, 162.123, 162.215, 162.217, 162.219, 162.220, 162.221, 162.222, 162.223, 162.224, and 162.402.

§3.446.Electronic Filing of Reports, Civil Penalties, and Deferred Tax Payments. (Tax Code, §§162,114, 162.116, 162.118, 162.119, 162.120, 162.121, 162.122, 162.123, 162.215, 162.217, 162.219, 162.220, 162.221, 162.222, 162.223, 162.224, and 162.402).

(a) This rule applies only to motor fuel transactions that take place on or after January 1, 2004. Motor fuel transactions that occur prior to January 1, 2004, will be governed by sections in Texas Administrative Code, Title 34, Part 1, Chapter 3, Subchapter L.

(b) Electronic filing of reports and schedules.

(1) The comptroller may require a supplier, permissive supplier, distributor, importer, exporter, blender, or motor fuel transporter to file reports and schedules by means of electronic transmission under the following circumstances:

(A) the combined total number of gallons of gasoline and diesel fuel that a licensed supplier, permissive supplier, distributor, importer, exporter, or blender receives during the preceding 12 months exceeds five million gallons, or the total number of transactions that a licensed supplier, permissive supplier, distributor, importer, exporter, or blender reports on the monthly report schedules exceeds 100 transactions each month for three consecutive months on an individual license basis; or

(B) the total number of transactions that a motor fuel transporter reports on the quarterly report schedules exceeds 100 transactions.

(2) For the purpose of this section, one transaction means a single purchase, sale, import, or export of gasoline or diesel fuel, or the summary of multiple purchases, sales, imports, or exports of gasoline or diesel fuel during a reporting period, when the seller, purchaser, fuel type, motor fuel transporter, origin state or country, and destination state or country are the same.

(3) The taxpayer or its authorized agent shall enter into a written agreement with the comptroller to permit electronic filing of reports and schedules. The signature of the taxpayer or its authorized agent on the written agreement into which the parties enter for this purpose shall be deemed to appear on each report filed electronically.

(4) Electronic transmission of each report and schedule shall be made in a format that the comptroller approves and that is compatible with the comptroller's equipment and facilities.

(5) The comptroller shall notify the taxpayers to whom this subsection applies no less than 90 days before the taxpayer is required to begin filing its reports and schedules electronically.

(6) Suppliers, permissive suppliers, distributors, importers, exporter, blenders, and motor fuel transporters who are required to file reports and supplements electronically, but are unable to do so, may request a waiver from the comptroller.

(7) The license of a supplier, permissive supplier, distributor, importer, exporter, blender, or motor fuel transporter who is required to file electronically may be suspended if the supplier, permissive supplier, distributor, importer, exporter, blender, or motor fuel transporter fails to file reports and schedules by means of electronic transmission in an approved format, after being notified of such requirement.

(8) A terminal operator must file reports and schedules electronically.

(c) Civil penalty.

(1) A motor fuel transporter who is required to file reports and schedules and who fails to do so, after being notified of such requirement, may be assessed a penalty not to exceed $200 for each report period and $25 for each reportable transaction. Each calendar quarter that a motor fuel transporter fails to file a report with the comptroller is a separate violation. The comptroller will send notice to the motor fuel transporter about the assessment of the penalty. The motor fuel transporter may request a redetermination under the terms of §§1.1-1.42 of this title (relating to Rules of Practice and Procedure). An oral hearing at the office of the Comptroller of Public Accounts in Austin, Texas, may be requested. The standard of proof in an administrative hearing pursuant to this section is by a preponderance of the evidence, unless otherwise provided by statute.

(2) A motor fuel transporter or terminal operator who is required to file reports and schedules electronically and who fails to do so in an approved format, after being notified of such requirement, may be assessed a penalty not to exceed $200 for each report period and $25 for each reportable transaction. The comptroller will send notice to the motor fuel transporter or terminal operator about the assessment of the penalty. The motor fuel transporter or terminal operator may request a redetermination under the terms of §§1.1-1.42 of this title (relating to Rules of Practice and Procedure). An oral hearing at the office of the Comptroller of Public Accounts in Austin, Texas, may be requested. The standard of proof in an administrative hearing pursuant to this section is by a preponderance of the evidence, unless otherwise provided by statute.

(d) Deferred tax payments.

(1) A licensed supplier, permissive supplier, distributor, or importer ordering a withdrawal of motor fuel at a terminal rack may elect to defer the payment of taxes to a supplier or permissive supplier until two days before the supplier or permissive supplier is required to remit the tax to the state. If two days before the report due date falls on a weekend or banking holiday, then the payment to the supplier or permissive supplier is to be made on the last business day prior to the weekend or banking holiday. For example, if the due date falls on a Tuesday the 25th, then the supplier or permissive supplier may draft the account on Friday the 21st.

(2) A supplier, a permissive supplier, or its representative shall give at least a two day notice by electronic means of the amount to be drafted from the account of the supplier, permissive supplier, distributor, or importer. If two days before the date the bank account is to be drafted falls on a weekend or banking holiday, then the notice to the supplier, permissive supplier, distributor or importer is to be made on the last business day prior to the weekend or banking holiday. For example, if the due date falls on a Tuesday the 25th, then the supplier or permissive supplier must give notice on Wednesday the 19th.

(3) The supplier, permissive supplier, distributor or importer shall pay the taxes to the supplier or permissive supplier by electronic funds transfer.

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 January 20, 2005.

TRD-200500274

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.601

The Comptroller of Public Accounts proposes an amendment to §3.601, concerning definitions, changes in ownership, gross receipts regulations, and record keeping requirements. This section is amended to provide notification and record keeping requirements.

Subsection (b)(2) is amended to require general business license holders to file written notification of change of ownership of a machine, as required for registration certificate holders. Subsection (d)(1)(F) is amended to require that directions to a location included in a licensee's records when location address is a rural route and box number. Subsection (d)(1)(G) is amended to require that the notification of change of machine ownership is included in a licensee's records.

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

Mr. Heleman also has determined that for each year of the first five years the rule is in effect, the amendment would have no fiscal impact on the state or on units of local government. This rule is adopted under 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 78711-3528.

This amendment is proposed under Tax Code, §111.002 and §111.0022, 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, and taxes, fees, or other charges which the comptroller administers under other law.

The amendment implements Occupations Code, §2153.201 and §2153.202.

§3.601.Definitions, Changes in Ownership, Gross Receipts Regulations, and Record Keeping Requirements.

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

(1) Gross receipts--The total sum of money derived from the operation of a coin-operated machine which vends music, skill, or pleasure.

(2) Issue a license--A license issued on an applicant's original application or a license issued on an application for renewal.

(3) License--A general business license, import license, or repair license issued by the comptroller.

(4) Machine or amusement machine--All machines that [ which ] vend or dispense music, or are operated for skill or pleasure. A machine in an independent cabinet with a separate central control mechanism shall be considered a separate machine in regard to occupation tax requirements. A machine that [ which ] is no longer functional, and that has been permanently taken out of service, will not be considered to be a coin-operated machine operated for music, skill, or pleasure. In this context permanently taken out of service means that it is no longer financially practical to operate the machine and the machine [ it ] will be used only for parts.

(5) Machines designed exclusively for children--Machines that [ which ] can only be used for skill or pleasure by a child under 12 years of age.

(6) Owner of a registration certificate--An owner who possesses a valid registration certificate issued by the comptroller.

(7) Permit--The decal issued by the comptroller to an owner of a coin-operated machine evidencing the payment of the occupation tax.

(8) Person--Any natural person, association of natural persons, trustee, receiver, partnership, corporation, organization, or the manager, agent, [ servant ] or employee of any of them.

(9) Video game--An electronic mechanism played for skill or pleasure by means of images on a screen. Each cabinet that [ which ] holds a game of skill or pleasure by means of images on a screen constitutes an independent operation subject to the occupation tax.

(b) Changes in ownership. Changes in ownership are reported in the following manner:

(1) if any partner of a partnership; trustee of a trust; receiver of a receivership; officer or director of a corporation; shareholder owning 10% or more of the outstanding shares of a corporation; individual applicant or licensee; officer, director or member of an association or other entity changes since [ from the date ] the last ownership information was filed with the comptroller, written notification of the ownership change must be filed with the comptroller within 10 days of the ownership change;

(2) if any information on an application changes since [ from the date ] the last application was filed or any information changes since [ from the last date ] the comptroller was notified of an information change, including the change of ownership of any permitted machine owned by the registration certificate holder or general business license holder , written notification of the change must be filed with the comptroller within 10 days of the change;

(3) if the owners of a corporation change, a written notification of the change must be filed with the comptroller within 10 days of the change. The business entity may continue to operate under its existing license or registration certificate;

(4) if partners in a partnership change or a business entity dissolves, the successor in interest must request a temporary extension of a license or file an application for a new license. A successor in interest is one who assumes the ownership interest of a business entity but does not include the purchaser of the assets of the entity. To request a temporary extension of a license, the successor in interest must file with the comptroller a certification by the county judge of the county in which the business is located that the person requesting the extension is successor in interest. In the case of a sole proprietor, only when there is a successor in interest as the result of the death of the licensee can there be an extension of a license. The death of this licensee must be certified by a county judge of the county in which the business is located, or by the judge of the probate court in the county in which the estate of the deceased licensee is probated. In all other instances, the entity assuming a sole proprietor's interest must obtain a license. At the time of renewal of a license that has been extended, the successor in interest must file an original license application; and

(5) if a sole proprietor owner of a registration certificate dies, the successor in interest must notify the comptroller in writing. The successor in interest may then continue to use the registration certificate until its expiration at which time the successor in interest must file an original application for a registration certificate. In all other instances, the successor in interest of the owner of a registration certificate shall file an application for a new registration certificate.

(c) Gross receipts regulations. The following regulations apply to gross receipts:

(1) distribution of gross receipts from amusement machines. The term "gross receipts from an amusement machine" is defined to be the total sum of money derived from the operation of a coin-operated machine that [ which ] vends music, skill, or pleasure. No licensee shall enter into a contract or offer to contract with a bailee or lessee (location operator) of an amusement machine to compensate the bailee or lessee in excess of 50% of the gross receipts from an amusement machine, except that a licensee may refund a bailee or lessee of an amusement machine all money accepted by an amusement machine due to its malfunction. Before any money may be refunded under this exception, the name, address, and telephone number of the person who deposited money in the malfunctioning machine together with the sum of money deposited by him must be supplied to the licensee;

(2) collection records of distribution of gross receipts from an amusement machine. Complete and separate records showing the distribution of the gross receipts for each location that an amusement machine is operated shall be made on each and every occasion the licensee or one of his employees collects money from the cash box of an amusement machine placed in operation. These records showing the distribution of the gross receipts for each location that an amusement machine is operated shall be kept by a licensee at his [ their ] designated address. These records shall be kept by the licensee for a period of two years; and

(3) entry to cash boxes of amusement machines. No licensee shall allow the bailee or lessee of an amusement machine to open or gain entry in any manner to the cash box except a coin-operated machine equipped with an income meter that totals or computes the sum of money deposited in the machine in dollars and cents. All keys to the cash box of a coin-operated machine other than a machine expressly exempt by this rule shall at all times remain in the possession of the licensee or his employees.

(d) Record keeping requirements. The following requirements are imposed on record keeping:

(1) in addition to all other record keeping requirements, each licensee shall maintain at the designated address, for inspection at all times by the comptroller, a record of each and every amusement machine purchased, received, possessed, controlled, handled, exhibited, or operated by him in this state as long as the licensee owns the machine and for two years after the date the licensee ceases to own the machine. Under this section the following information shall be shown in the licensee's records:

(A) the full name and address of the owner of each and every machine, or if other than an individual, the principal officers or members thereof and their addresses;

(B) the date each machine was acquired or received in Texas;

(C) the make, type, and serial number of each and every machine;

(D) the date each machine was first placed in operation;

(E) the date of the first and most recent registration of each machine;

(F) the location or locations of each machine including county, city, and street, or directions if location is a [ and/or ] rural route and box number;

(G) every change in ownership of each machine including written notification as described in subsection (b)(2) of this section ;

(H) the distribution of the gross receipts for each location that a machine is located and the receipts from each machine;

(I) the date each machine was taken out of operation, the reason the machine was taken out of operation, and the location of a machine taken out of operation or the description of the final disposition of a machine; and

(J) all contracts made with location owners;

(2) depreciation schedules and federal income tax returns must be maintained for four years to be in compliance with the sales tax statutes; and

(3) purchase invoices for the machines must be maintained for four years to be in compliance with the sales tax statutes.

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 January 24, 2005.

TRD-200500316

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.602

The Comptroller of Public Accounts proposes an amendment to §3.602, concerning licenses and certificates, renewals and due dates, occupation tax permits and exemptions. This section is amended to update incorrect statutory references. The legislature changed the penalty for operating without a license or registration certificate. The legislature codified the Coin- Operated Machine law as Occupations Code, Chapter 2153. Additional amendments are made to provide notification requirements.

Subsection (a)(4) is amended to require general business license holders to file written notification of change of ownership of a machine, as is required for registration certificate holders. Subsection (b)(1) is amended to correct the statutory penalty to a Class A misdemeanor. Subsection (c)(1) is amended to correct the statutory penalty to a Class A misdemeanor. Subsection (d)(4) is amended to require a written notification of change of machine ownership before a tax permit is assigned. Subsection (d)(7) is amended to update statutory reference to Occupations Code, §2153.005.

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

Mr. Heleman also has determined that for each year of the first five years the rule is in effect, the amendment would have no fiscal impact on the state or on units of local government.. This rule is adopted under 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 78711-3528.

This amendment is proposed under Tax Code, §111.002 and §111.0022, 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, and taxes, fees, or other charges which the comptroller administers under other law.

The amendment implements Occupations Code, §§2153.005, 2153.051, 2153.202, 2153.356 and 2153.404.

§3.602.Licenses and Certificates, Renewals and Due Dates, Occupation Tax Permits and Exemptions.

(a) Licenses and registration certificates.

(1) Annual general business, import, and/or repair license fees, and registration certificate fees. Annual license and registration certificate fees are payable in advance and cannot be prorated quarterly.

(2) Age requirement for issuance of a license. No natural person shall be issued a license by the comptroller for the operation of coin-operated machines unless at the time the license is issued the applicant is more than [ above the age of ] 18 years of age .

(3) Information requirement for issuance of a license or registration certificate. An applicant for a license or registration certificate must provide [ complete ] all information required by [ asked for in the ] comptroller's application before a license or registration certificate will be issued or renewed.

(4) General business license and registration [ Registration ] certificate notification requirement. A general business license holder must notify the comptroller in writing within 10 days of any change in ownership of a machine. A registration certificate holder must notify the comptroller in writing of any change in ownership of a machine and each time the location of a machine is changed within 10 days of the change.

(5) Occasional sale exemption for registration certificate holder. A registration certificate holder may make one or two sales of coin-operated machines during any 12-month period if the certificate holder does not hold out as engaging (or does not habitually engage) in the business of selling coin-operated machines without losing the licensing exemption. Before the third sale of a coin-operated machine in a 12-month period by a certificate holder not previously in the business of selling, leasing, or renting coin-operated machines, a general business or import license must be obtained. The transfer of title or possession of more than one machine in a single transaction will constitute one sale.

(b) Annual general business, import and repair license renewals, and annual occupation tax.

(1) License renewal applications are due November 30. License renewal applications will not be considered complete for processing unless the tax due and [ as well as ] the license fee are [ is ] remitted. Complete license renewal applications filed after the due date may result in the renewal license being issued after December 31, the expiration date of the existing license. In such a case a person may not operate amusement machines after the expiration date until the renewal license is issued. A person who operates amusement machines without a license or with an expired license is guilty of a Class A [ B ] misdemeanor.

(2) An applicant who properly completes the application and remits all fees and taxes with it by the due date may continue to operate amusement machines after the expiration date if the applicant's license renewal has not been issued unless the applicant is notified by the comptroller prior to the license expiration date of a problem with the license renewal.

(c) Annual registration certificate renewals and annual occupation tax.

(1) Registration certificate renewal applications are due November 30. Registration certificate renewal applications will not be processed unless the tax due and [ as well as ] the registration fee are [ is ] remitted. Registration certificate renewal applications filed after the due date may result in the renewal registration certificate being issued after December 31, the expiration date of the existing registration certificate. In such a case, a person may not operate amusement machines after the expiration date until the renewal certificate is issued. A person who operates amusement machines without a registration certificate or with an expired registration certificate is guilty of a Class A [ B ] misdemeanor.

(2) An applicant who properly completes the application and remits all fees and taxes with it by the due date may continue to operate amusement machines after the expiration date even if the registration certificate renewal has not been issued unless the applicant is notified by the comptroller prior to the registration certificate expiration date of a problem with the registration certificate renewal.

(3) License and registration certificate fees may not be prorated quarterly and the annual license or registration fee must be submitted with an application.

(d) Occupation tax permits.

(1) Occupation tax. Each amusement machine is subject to the occupation tax at the time a person exhibits, displays, or permits a machine to be exhibited or displayed in this state with the exception of annual renewals. The occupation tax for annual renewals for each machine exhibited or displayed or permitted to be exhibited or displayed in this state is due November 30 of each year.

(2) Rate schedule. The following rate schedule will be applicable to machines first exhibited or displayed or permitted to be exhibited or displayed in this state in any quarter of the calendar year:

Figure: 34 TAC §3.602(d)(2) (No change.)

(3) Replacement of lost, stolen, or destroyed valid Occupation Tax Permits. The comptroller shall provide a duplicate permit if a valid permit has been lost, stolen, or destroyed. The fee for each duplicate permit is $5.00. If a tax permit is lost, stolen, or destroyed, a written statement must be submitted explaining the circumstances by which the tax permit was lost, stolen, or destroyed, and including the number of the lost, stolen, or destroyed permit, before a replacement permit can be issued. A permit for which a duplicate permit has been issued is void.

(4) Assignment of tax permits. Each coin-operated machine operated for music, skill, or pleasure shall be registered with the comptroller by make, model, and serial number. A tax permit issued by the comptroller shall be affixed to each registered machine. Each coin-operated machine shall have a serial number and the name and telephone number of the owner of said machine must be [ that is ] clearly visible on the outside surface of the machine cabinet. If a coin- operated machine is not manufactured with a serial number, a licensee or registration certificate holder shall assign a serial number to the machine and either stamp or engrave the assigned number on the machine cabinet. If all these requirements have been met, a tax permit may be assigned by submitting written notice, as described in subsection (a)(4) of this section, to the comptroller within 10 days of [ upon ] the transfer of title or possession of a machine.

(5) Attachment of tax permits. Tax permits shall be securely affixed to any permanent surface on a machine in such a manner that the tax permits may be clearly seen by the public and cannot be removed without the continued application of steam and water. Tax permits shall not be attached to a machine that [ which ] has not been registered with the comptroller.

(6) Issuance of extra tax permits. The comptroller [ No tax permits ] will issue permits only for [ be issued except for ] machines that are exhibited or displayed on location. The taxpayer shall not stockpile permits nor shall any permits be affixed to unregistered machines.

(7) Exemptions. In order to establish that an organization is exempt from the license requirements pursuant to the Coin-Operated Machines [ Services Law, ] Occupations Code, §2153.005 [ Texas Civil Statutes, Article 8817, §8 ], the organization [ it ] must do the following:

(A) submit a written statement to the comptroller setting out in detail the nature of the activities conducted or to be conducted, a copy of the articles of incorporation if the organization is a corporation, a copy of the bylaws, a copy of any applicable trust agreement or a copy of its constitution, and a copy of any letter granting exemption from the Internal Revenue Service; and

(B) furnish any additional information requested by the comptroller including, but not limited to, documentation showing all services performed by the organization and all income, assets, and liabilities of the organization.

(8) Written notice. After a review of the material, the comptroller will inform the organization in writing if it qualifies for an exemption.

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 January 24, 2005.

TRD-200500317

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.701

The Comptroller of Public Accounts proposes an amendment to §3.701, concerning reporting requirements. The proposed amendment corrects the name of the Texas Natural Resource Conservation Commission (TNRCC) by changing the name to the Texas Commission on Environmental Quality (TCEQ).

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

Mr. Heleman 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 new information regarding fee responsibilities. This rule is adopted under 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, and 111.0022, 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, and taxes, fees, or other charges which the comptroller administers under other law.

The amendment implements the Health and Safety Code, Section 371.062.

§3.701.Reporting Requirements.

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

(1) Automotive oil--Any lubricating oils that can be used in an internal combustion engine, crankcase, transmission, gear box, or differential for an automobile, bus, or truck.

(A) Automotive oil includes natural or synthetic engine oil, transmission fluid, and gear oil of any type that can be used, according to the labeling, in the engine of an automobile, truck, or bus, and includes oil that is not labeled specifically for this use, but is suitable for this use according to generally accepted industry specifications.

(B) Automotive oil does not include:

(i) chain oil;

(ii) turbine oil;

(iii) waste oil;

(iv) outboard motor oil;

(v) refrigerant oil;

(vi) cotton spray oil;

(vii) form oil; and

(viii) oil additives as they exist prior to blending.

(2) Distributor--A person who maintains a distribution center or warehouse in this state and annually sells more than 25,000 gallons of automotive oil. A distributor must obtain a permit from the comptroller's office.

(A) The distributor's permit is valid until the permit is surrendered by the holder or canceled by the comptroller.

(B) Oil manufacturers that meet the distributor definition, and are currently liable for paying this fee to the comptroller, will not be required to obtain a distributor's permit.

(3) Do-it-yourselfer used oil collection center--A site or facility registered with the Texas Commission on Environmental Quality (TCEQ) [ Natural Resource Conservation Commission (TNRCC) ] that accepts or aggregates and stores used oil collected only from household do-it-yourselfers.

(4) First sale--The first actual sale of automotive oil delivered to a location in this state and sold to a purchaser who is not an automotive oil manufacturer or distributor. First sale does not include the sale of automotive oil exported from this state to a location outside this state for the purpose of sale or use outside this state, to the United States Government, or for resale to or use by vessels engaged exclusively in foreign or interstate commerce. A sale to a subsequent purchaser who maintains a do-it-yourselfer used oil collection center or used oil collection center registered by the TCEQ [ TNRCC ] is not considered a first sale.

(5) Importer--Any person who imports, or causes to be imported, automotive oil into this state for sale, use, or consumption. For purposes of this subsection first sale includes the use or consumption of automotive oil in this state.

(6) Oil manufacturer--Any person or entity that formulates automotive oil and packages, distributes, or sells that automotive oil. Oil manufacturer includes any person packaging or repackaging automotive oil.

(7) Out-of-state seller--A person or entity engaged in business in this state as defined in §3.286 of this title (relating to Seller's and Purchaser's Responsibilities).

(8) Used oil collection center--A site or facility that is registered by the TCEQ [ TNRCC ] to manage used oil collected from used oil generators or household do-it-yourselfers.

(b) Exemptions.

(1) Sales of automotive oil to an oil manufacturer or distributor are exempt from the automotive oil fee.

(2) Sales of automotive oil to a subsequent purchaser who maintains a do-it-yourselfer used oil collection center or used oil collection center registered by the TCEQ [ TNRCC ] are exempt from this fee. A copy of its current TCEQ [ TNRCC ] registration must be provided by the purchaser as documentation for an exempt purchase.

(3) Sales of automotive oil to be used by vessels engaged exclusively in foreign or interstate commerce are exempted from this fee.

(4) Sales of automotive oil to the United States Government are exempt from this fee.

(5) Sales of automotive oil delivered to a location in another state for the purpose of sale or use outside the State of Texas are exempt from this fee if shipment is made by means of:

(A) the facilities of the seller;

(B) delivery by the seller to a carrier for shipment to a consignee at a point outside this state;

(C) delivery by the seller to a forwarding agent for shipment to a location in another state of the United States or its territories or possessions; or

(D) the facilities of the purchaser if proof of delivery outside of Texas is provided.

(6) Exports beyond the territorial limits of the United States are exempt from this fee if proof of export can be shown by:

(A) a copy of the bill of lading issued by a licensed and certificated carrier showing the seller as consignor, the buyer or purchaser as consignee, and a delivery point outside the territorial limits of the United States;

(B) documentation provided by a licensed United States custom broker certifying that delivery was made to a point outside the territorial limits of the United States;

(C) formal entry documents from the country of destination showing that the automotive oil was imported into a country other than the United States. For the country of Mexico, the formal entry document would be the pedimento de importaciones document with a computerized number issued by Mexican customs officials; or

(D) a copy of the original airway, ocean, or railroad bill of lading issued by a licensed and certificated carrier which describes the items being exported and a copy of the freight forwarder's receipt if the freight forwarder takes possession of the property in Texas.

(c) Credit or refund of fee paid. A purchaser of automotive oil who makes an exempt sale or use of the oil as provided in this section may obtain a refund or credit from the supplier for the automotive oil fee previously paid to the supplier. The purchaser requesting a refund or credit from its supplier must furnish documentation that verifies the exemption. An oil manufacturer, or distributor, or importer who makes an exempt sale or use of the oil as provided in this section may obtain a refund or credit from the comptroller for the automotive oil fee previously paid to the comptroller. The amount of refund that may be claimed may equal but not exceed the amount of the fee paid on the automotive oil. See Tax Code, §§111.104-111.107.

(d) Report and payment required.

(1) Each automotive oil manufacturer, importer, or distributor shall file a report with the comptroller stating the number of quarts of automotive oil sold, imported, used, or consumed in this state.

(2) An automotive oil manufacturer or distributor who makes a first sale or use of automotive oil in Texas is liable for the fee.

(3) An automotive oil importer who imports or causes to be imported automotive oil into Texas for sale, use, or consumption is liable for the fee at the time the oil is received by the importer.

(e) Amount of fee.

(1) Except as provided in paragraph (2) of this subsection, the rate of the fee shall be $.02 per quart or $.08 per gallon of automotive oil.

(2) The TCEQ [ TNRCC ] may adjust the fee rate to meet the expenditure requirements of the used oil recycling program, and to maintain an appropriate fund balance. The fee rate may not exceed $.05 per quart or $.20 per gallon.

(3) On or before September 1 of each year, the TCEQ [ TNRCC ] and the comptroller shall jointly issue notice of the effective fee rate for the next fiscal year.

(4) Effective September 1, 1997, the rate of fee shall be $.01 per quart or $.04 per gallon of automotive oil. The rate shall be fixed at this level and paragraphs (1), (2), and (3) of this subsection are superseded.

(f) Due date of report and payment.

(1) The automotive oil fee report and payment are due no later than the 25th day of the month following the end of each calendar quarter in which the liability for the fee is incurred.

(2) An automotive oil manufacturer, importer or distributor of automotive oil must file a quarterly report even if there is no fee to report.

(g) Discount. A person required to pay the fee may retain 1.0% of the amount of the fees due from each quarterly payment as reimbursement for administrative costs.

(h) Penalty. Penalties due on delinquent fees and reports shall be imposed as provided by [ the ]Tax Code, §111.061.

(i) Interest. Interest due on delinquent fees shall be imposed as provided by [ the ]Tax Code, §111.060.

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 January 24, 2005.

TRD-200500318

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.809

The Comptroller of Public Accounts proposes an amendment to §3.809, concerning due dates, penalty and interest, and overpayments. The amendment specifically addresses the penalty and interest applicable to late payments and underpayments to conform with changes in interest calculation in Tax Code, Title 2.

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

Mr. Heleman also has determined that for each year of the first five years the rule is in effect, the rule would benefit the public by providing information concerning tax responsibilities and conforming the rule language to statutory language. This rule is adopted under 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 Insurance Code, Article 4.10, §6(b), Article 4.11, §13, and Article 9.59, §3(b), and Tax Code, Title 2, Subtitles A and B.

§3.809.Due Dates, Penalty and Interest, and Overpayments.

(a) Premium and Maintenance Tax Return due date. The premium tax and maintenance tax return for each taxable year that ends [ ending ] the preceding December 31st shall be filed and the total amount of tax due shall be paid on or before the 1st day of March of each year or if a company is required to file an annual statement after March 1, the premium tax and maintenance tax report is required to be filed at that time.

(b) Premium tax prepayments. All Texas licensed insurers with a net tax liability for the previous calendar year in excess of $1000 must prepay premium tax semiannually.

(1) A semiannual prepayment of premium tax must be made on March 1, or at the same time that the annual statement is required to be filed, and on August 1[ by all insurers with a net tax liability for the previous calendar year in excess of $1,000 ]. Each [ The ] prepayment shall equal the lesser of one-half of the net [ total ] premium tax due [ paid ] for the previous calendar year, or one-half of the current year's net premium tax due [ liability ]. If no premium tax was due [ paid ] during the previous calendar year, the prepayment will be based on the net tax that [ which ] would be owed on the aggregate of premiums [ premium receipts ] for the two previous [ preceding ] calendar quarters based on the minimum tax rate specified by law. [ If the premium tax liability for the previous year was between $.01 and $1,000, no prepayment is due. ]

(2) The amount due is the lesser of the net [ total annual ] premium tax due [ liability ] from the previous year, or the actual net premium tax due [ tax liability ] for the current year multiplied by 50%.

(3) Because examination expense credits, valuation fee credits, and guaranty association assessment credits have been factored into the net premium tax due line item on the annual tax report, the prepayment amount should not be adjusted to reflect these credits.

(c) Penalty and interest. Late payment or underpayment of any insurance tax, assessment, or fee will result in the application of penalty and interest [ Any taxes due prior to September 1, 1993, including prepayments, are subject to the Insurance Code in effect at that time. Therefore, any assessments issued by the comptroller for additional taxes which were originally due prior to September 1, 1993, fall under the penalty and interest provisions contained within the Insurance Code, Article 4.13 and Article 4.14, in effect through August 31, 1993. Refer to paragraph (1) of this subsection. The comptroller does not have the authority to waive penalty or interest on assessments made for periods prior to September 1, 1993 ].

(1) Late payment. Failure to file and pay taxes, assessments, and fees by the due date as provided under the Insurance Code will subject a taxpayer to penalty and interest under Tax Code, Title 2, Subtitles A and B.

[(1) Prepayments and tax returns due prior to September 1, 1993.]

[(A) Late payment.]

[(i) Penalty. A penalty equal to 5.0% of the amount of taxes due shall be assessed for each month or portion of a month for which such payment is late. The penalty shall not exceed 20%.]

[(ii) Interest. Interest shall accrue at an annual rate of 9.0% from the due date until the date paid.]

[(B) Underpayment.]

[(i) Penalty. Insurance carriers failing to satisfy the provisions of subsection (a) or (b)(1) of this section will be assessed penalty, as prescribed in subparagraph (A)(i) of this paragraph, on the difference between the amount of quarterly prepayment tax liability actually paid and the amount due.]

[(ii) Interest. Insurance carriers failing to satisfy the provisions of subsection (a) or (b)(1) of this section will be assessed interest, as prescribed in subparagraph (A)(ii) of this paragraph, on the difference between the amount of quarterly prepayment tax liability actually paid and the amount due.]

(2) Underpayment. Failure to file and pay taxes, assessments, and fees, as provided under Insurance Code, Article 4.10, §6(b), Article 4.11, §13(a), and Article 9.59, §3(b), will subject a taxpayer to penalty and interest under Tax Code, Title 2, Subtitles A and B, on the difference between the amount of semiannual prepayment tax actually paid and the net premium tax due.

[(2) Prepayments and tax returns due on or after September 1, 1993.]

[(A) Late payment.]

[(i) A penalty of 5.0% will be assessed on all payments which are received 1-30 days after the due date. An additional 5.0% penalty will be assessed on tax payments received more than 30 days after the due date.]

[(ii) Interest will be assessed on payments received more than 60 days after the due date at the rate of 12% per annum. Interest will begin to accrue on the 61st day from the due date and continue through date of the tax payment. The interest will be in addition to the 10% penalty assessed in clause (i) of this subparagraph.]

[(B) Underpayment.]

[(i) Penalty. Insurance carriers failing to satisfy the provisions of subsection (a) or (b)(2) of this section will be assessed penalty, as prescribed in subparagraph (A)(i) of this paragraph, on the difference between the amount of semiannual prepayment tax liability actually paid and the amount due.]

[(ii) Interest. Insurance carriers failing to satisfy the provisions of subsection (a) or (b)(2) of this section will be assessed interest, as prescribed in subparagraph (A)(ii) of this paragraph, on the difference between the amount of semiannual prepayment tax liability actually paid and the amount due.]

(3) Penalty. A 5.0% penalty is due on the amount of any insurance tax, assessment, or fee that is not paid when due. If any of the taxes, assessments, or fees are not paid within 30 days after the due date, an additional 5.0% penalty is imposed on the amount that remains unpaid.

(4) Interest. Delinquent taxes accrue interest beginning 60 days after the due date. For example, if payment is made on the 61st day after the due date, one day's interest is due. For reports due on or after January 1, 2000, the annual rate of interest on delinquent taxes is the prime rate plus one percent, as published in the Wall Street Journal on the first day of each calendar year that is not a Saturday, Sunday, or legal holiday.

(d) Overpayment of tax liability. Commencing with the tax return due on March 1, 1995, if the sum of the semiannual prepayments exceeds the net premium tax due [ actual tax due ] as determined by the accurate and correct filing of the original or amended annual tax return, the overpayment will be automatically refunded or credited to the taxpayer unless the taxpayer notifies the comptroller in writing to apply the overpayment to another period or unless the taxpayer's account reflects an outstanding liability in any other tax collected by the comptroller . [ The notification should be written on the face of the tax return. ]

(e) Interest on refunds. Under Tax Code, Title 2, a refund granted for a report due on or after January 1, 2000, for an amount found to be erroneously paid, will include interest at the same variable interest rate charged on delinquent taxes. The applicable interest rate is 1.0% plus the prime rate as published in the Wall Street Journal on the first business day of each year. Interest accrues beginning the later of 60 days after the date of payment or the due date of the tax report. A refund for a report due before January 1, 2000 does not accrue interest. Interest does not accrue on a credit taken on a taxpayer's report.

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 January 24, 2005.

TRD-200500319

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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

34 TAC §3.1251

The Comptroller of Public Accounts proposes an amendment to §3.1251, concerning the school fund benefit fee. This section is amended to correct statutory references to Tax Code, Chapter 153, motor fuels tax license holders, and §3.173, relating to refunds on gasoline and diesel fuel tax. The 78th Legislature, Regular Session (2003), replaced Tax Code, Chapter 153, with Chapter 162.

Subsection (b) is amended to correct references to Tax Code, Chapter 162, and to motor fuels license holders under the new code. Subsection (d) is amended to correct reference to Tax Code, Chapter 162. Subsection (c)(5) is amended to correct reference to §3.432, relating to refunds of gasoline and diesel fuel tax.

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

Mr. Heleman 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 new information regarding fee responsibilities. This rule is adopted under 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 78711-3528.

This amendment is proposed under Tax Code §111.002 and §111.0022, which provide 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, and taxes, fees, or other charges which the Comptroller administers under other law.

The amendment implements Tax Code, §162.204 and Transportation Code, Chapter 20, §20.002.

§3.1251.School Fund Benefit Fee.

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

(1) Commercial motor vehicle--A self-propelled vehicle used to transport passengers for compensation or hire between points in Texas on a fixed or scheduled route that:

(A) has a gross weight, registered weight, or gross weight rating of more than 26,000 pounds; or

(B) is designed to transport more than 15 passengers, including the driver.

(2) Fixed or scheduled route--Published routes between fixed points in Texas that are open for travel by the general public with intended times of departure and arrival at a terminal or other specified location. Fixed or scheduled route travel includes the distance from the Texas border to the first arrival point, the distance from the first arrival point to the last departure point, and the distance from the last departure point to the Texas border.

(3) Political subdivision--Any county, city, town, village, district, or other political subdivision of the state. For the purpose of this section, a political subdivision includes a person performing a contract to provide transportation services for any city, town, village, district, or other political subdivision of the state.

(b) Collection of tax on sales of diesel fuel. Diesel fuel suppliers, permissive suppliers, distributors [ jobbers ], and retail dealers must collect the tax imposed by [ the ] Tax Code, Chapter 162 [ 153 ], on sales of diesel fuel to any person qualifying for a tax refund under subsection (c) of this section.

(c) Refund of tax paid on diesel fuel used on fixed or scheduled routes.

(1) A person, other than a political subdivision, who owns, controls, operates, or manages a commercial motor vehicle and uses diesel-powered motor vehicles to transport passengers for compensation or hire between points in Texas on fixed or scheduled routes may file a claim for refund with the comptroller for state taxes paid on diesel fuel used exclusively in commercial motor vehicles while traveling fixed or scheduled routes.

(2) The amount of fuel subject to state motor fuels tax refund shall be computed by dividing the total miles traveled on fixed or scheduled routes by the vehicles' average mile-per-gallon.

(3) A claim for refund must be filed in the calendar month following the month in which the diesel fuel is used in a commercial motor vehicle.

(4) A claim for refund of tax paid on diesel fuel consumed while traveling fixed or scheduled routes may not be paid unless the motor vehicle operator has filed the required school fund benefit fee report.

(5) Tax paid on diesel fuel used to operate commercial motor vehicles on charter trips or other non-fixed or non-scheduled routes is not refundable, other than for refunds provided by §3.432 [ §3.173 ] of this title (relating to Refunds of Gasoline and Diesel Fuel Tax).

(d) School fund benefit fee due. A fee is imposed under [ the ] Transportation Code, Chapter 20, §20.002 [ 20.002 ], on diesel fuel exempted from the motor fuels tax under [ the ] Tax Code, Chapter 162 [ 153 ], at a rate of $0.04875 per gallon.

(e) Due date of report and payment.

(1) The school fund benefit fee report and payment are due not later than the last day of the month following the calendar month in which liability for the fee is incurred, except as provided by paragraph (5) of this subsection.

(2) A commercial motor vehicle operator must file a monthly report even if there is no fee to report.

(3) Penalties due on delinquent fees and reports shall be imposed as provided by [ the ] Tax Code, §111.061.

(4) Interest on delinquent fees shall be imposed as provided by [ the ] Tax Code, §111.060.

(5) The due date for the September, October, and November, 1999, school fund benefit fee report and payment is extended to January 31, 2000. The report and payment for the period September 1, 1999, through November 30, 1999, are to be included with the December, 1999 report and payment.

(f) Records required. A commercial motor vehicle operator shall keep records showing:

(1) all fixed or scheduled routes;

(2) the date and number of miles traveled on fixed or scheduled routes in Texas;

(3) the date and number of miles traveled on charter trips and other non-fixed or non-scheduled routes in Texas;

(4) the number of gallons of diesel fuel on hand on the first day of each month;

(5) the number of gallons of diesel fuel purchased or received, showing the name of the seller and the date of each purchase;

(6) the date and number of gallons of diesel fuel delivered into the fuel supply tanks of commercial motor vehicles;

(7) the date and number of gallons delivered into the fuel supply tanks of other diesel powered motor vehicles.

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 January 24, 2005.

TRD-200500305

Martin Cherry

Chief Deputy General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: March 6, 2005

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