Part 1. COMPTROLLER OF PUBLIC ACCOUNTS

Chapter 3. TAX ADMINISTRATION

Subchapter O. STATE SALES AND USE TAX

34 TAC §3.284

The Comptroller of Public Accounts proposes an amendment to §3.284, concerning drugs, medicines, medical equipment, and devices. This section is being amended to reflect changes made by Senate Bill 441 and House Bill 652, 76th Legislature, 1999. Effective April 1, 2000, the exemption for medical supplies is broadened to include blood glucose monitoring strips and over-the-counter drugs and medicines. Under House Bill 652, effective July 1, 1999, specially designed eating utensils are exempt when purchased for persons who are elderly or who have medical conditions and cannot feed themselves independently with conventional eating utensils. These items are exempt with or without prescriptions. This section is also amended to add wound care dressings and certain skin closure supplies to the definition of drugs and medicines and to add intravenous systems to the list of prosthetic devices. The term "diagnostic" replaces the term "identification" in the definition of drugs or medicines without changing the meaning.

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

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

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

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

The amendment implements Tax Code, §151.313.

§3.284.Drugs, Medicines, Medical Equipment, and Devices.

(a)

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

(1)

Appliance or device - An instrument, apparatus, implement, machine, contrivance, implant, chemical, or other similar or related product that does not achieve its primary intended purposes through chemical action within or on the body, and that is not dependent upon being metabolized for the achievement of its primary intended purposes.

(2)

[ (1) ] Brace - Any appliance or device that is used on or attached to the human body, and that gives [ giving ] rigidity or support for the purpose of correcting a physical ailment or defect.

(3)

[ (2) ] Corrective lenses - Any appliance or device that is worn to correct or aid defective eyesight, such as eyeglasses, [ Eyeglasses, ] contact lenses, or other visual aids that [ are dispensed or prescribed by ] an ophthalmologist or optometrist dispenses or prescribes .

(4)

[ (3) ] Dental device - An artificial replacement of one or more teeth or a dental appliance worn on the teeth to correct irregularities of growth or position. For the purposes of this section, the term dental device does not include toothbrushes, toothpaste, dental floss, mouth mirrors, or other devices used to prevent cavities or plaque build-up or removal.

(5)

Dietary supplement - A product that:

(A)

contains one or more vitamins, minerals, herbs, amino acids, or substances to increase caloric intake;

(B)

is not represented as a food or the sole item of a meal or the diet; and

(C)

is labeled or is required to be labeled "dietary supplement" or "supplement."

(6)

Drug or medicine [ (4) Drugs and medicines ] - A product that: [ Those commonly recognized substances possessing identification, curative, or remedial properties which are applied to or consumed by humans or animals either internally or externally for the alleviation of pain or for the diagnosis, cure, or prevention of sickness, disease, or suffering. The terms "drugs and medicines" do not include hardware of any kind, equipment, appliances, devices, or chemicals used to test body fluids and tissues. ]

(A)

is intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease, illness, injury, or pain;

(B)

is applied to the human body, or that humans ingest or inhale;

(C)

is not an appliance or device; and

(D)

is not food.

(7)

Food - Material, usually of plant or animal origin, that contains or consists of essential nutrients and is intended for human ingestion:

(A)

for taste or aroma; or

(B)

to satisfy the appetite, hunger, or thirst.

(8)

[ (5) ] Hearing aid - Any appliance or device worn to correct or aid defective hearing. The term also includes an audio loop used by a person who is deaf.

(9)

[ (6) ] Hypodermic needle - A hollow needle adapted for use with hypodermic syringes.

(10)

[ (7) ] Hypodermic syringe - A small syringe with a hollow needle adapted for use in removing or injecting material beneath the skin.

(11)

[ (8) ] Ileostomy, colostomy, and ileal bladder appliance - [ Any ] An appliance or device that is surgically implanted or [ surgically ] formed to assist the human body in the elimination of natural waste.

(12)

[ (9) ] Orthopedic appliance - Any appliance or device designed specifically for use in the correction or prevention of human deformities, defects, or chronic diseases of the skeleton, joints, or spine.

(13)

[ (10) ] Prosthetic device - An item that [ Any item: ]

[ (A) ]

[ that ] is artificial and replaces a missing part of the body , [ ; or ]

[ (B) ]

[ that ] performs the function of a vital organ or appendage of the human body , [ ; ] or

[ (C) ]

[ that ] is permanently implanted in the body. Examples of prosthetic devices are heart- lung pumps, nasal gastric and gastrointestinal devices, ureteral stents, urethral stents, artificial kidney machines, intravenous systems, and related components and supplies.

(14)

[ (11) ] Therapeutic appliance or device - An appliance or device that is [ Any item ] designed to alleviate pain or [ designed ] for use during the treatment or cure of human sickness, disease, suffering, or deformity.

(15)

Wound care dressing - An item that absorbs wound drainage, protects healing tissue, maintains a moist or dry wound environment (as appropriate), or prevents bacterial contamination.

(b)

Drugs and medicines.

(1)

Insulin that is [ exempt whether or not ] sold with or without a [ by ] prescription is exempt .

(2)

Sales tax is not due on the sale of drugs or [ and ] medicines that are prescribed [ sold ] or dispensed for [ to ] humans or [ for ] animals on the oral or written prescription of licensed practitioners of the healing arts. Sales tax is due on the sale of all other nonprescription drugs and medicines , except as provided in subsections (b)(1) and (b)(3) of this section, and the retailer must collect tax from the purchaser on such sales.

(3)

Sales tax is not due on the sale of non-prescription drugs or medicines. A product is presumed to be a drug or medicine for sales tax purposes if it is labeled or required to be labeled with a "Drug Facts" panel pursuant to the regulations of the federal Food and Drug Administration.

(4)

Sales tax is not due on the sale of wound care dressings.

(c)

Dietary supplements. Sales tax is not due on the sale of dietary supplements. A product is presumed to be a dietary supplement for sales tax purposes if it is labeled or required to be labeled with a "Supplement Facts" panel pursuant to the regulations of the federal Food and Drug Administration.

(d)

[ (c) ] Medical equipment.

(1)

Sales tax is not due on the sale, lease, or rental of medical equipment meeting the definition of a brace, corrective lens, hearing aid, orthopedic appliance, prosthetic device, or dental device. Sales tax is not due on replacement parts designed specifically for such devices and appliances. With the exception of corrective lenses, a prescription is not required.

(2)

Sales tax is not due on the sale of ileostomy, colostomy, or [ and ] ileal bladder appliances, related supplies or replacement parts that are designed specifically for such appliances.

(3)

Sales tax is not due on the sale of hypodermic syringes and hypodermic needles used for medical purposes.

(4)

Sales tax is not due on the sale of blood glucose monitoring strips.

(5)

[ (4) ] Sales tax is not due on the sale, lease, or rental of hospital beds or their replacement parts. A hospital bed is the type of bed used in a hospital for rest, recuperation, and treatment. A hospital bed does not include an operating table, delivery table, examination table, stretcher, or gurney. A prescription is not required.

(6)

[ (5) ] Sales or use tax is not due on the sale, lease, or rental of the following items when used by the deaf. An exemption certificate is not required for the purchase, rental, or lease of these items:

(A)

hearing aids;

(B)

specialized printing or signaling equipment that the deaf use [ signalling equipment used by the deaf ] for the purpose of enabling communication by [ the deaf to communicate through the use of an ] ordinary telephone, including all materials, paper, and printing ribbons that are used in that equipment;

(C)

an appliance or device, such as a light signal , that is used [ and device ] to adapt items such as telecommunication devices for the deaf (TDD), telephones, doorbells, and smoke alarms; and

(D)

adaptive devices or adaptive software for computers that deaf persons use [ used by persons who are deaf ].

(7)

[ (6) ] Sales or use tax is not due on the sale, lease, or rental of the following items when used by the legally blind. An exemption certificate is not required for the purchase, rental, or lease of these items:

(A)

a braille wristwatch, braillewriter [ braille writer ], braille paper; and

(B)

braille electronic equipment that connects to computer equipment , along with [ and ] the necessary adaptive devices and [ adaptive ] computer software . [ ; and ]

[ (C)

harness for guide dogs.]

(8)

[ (7) ] Sales or use tax is not due on the sale, lease, or rental of the following items when used by the legally blind , if an exemption certificate is provided to the seller:

(A)

a slate and stylus;

(B)

print enlarger;

(C)

light probe;

(D)

magnifier;

(E)

white cane;

(F)

talking clock; [ and ]

(G)

hardware and software that are necessary to adapt a computer for a legally blind person to use; and [ large print terminal and talking terminal. ]

(H)

harness for guide dog.

(9)

[ (8) ] Sales tax is not due on the sale, lease, or rental of therapeutic appliances, devices, and related supplies specifically designed for those products when sold, leased, or rented to individuals under a prescription of a licensed practitioner of the healing arts.

(A)

A hot tub, spa, or similar appliance qualifies as a therapeutic appliance when prescribed for the purchaser by a licensed practitioner of the healing arts. The patient must provide the seller of the hot tub, spa, or similar appliance with a prescription, an exemption certificate, and a signed statement on letterhead from the licensed practitioner. The signed statement should specify the medical requirements for the hot tub, spa, or similar appliance. Unless a hospital, nursing home, or other institution qualifies for exemption under the Tax Code, §151.310(a)(1) or (2), the institution must pay sales tax on equipment and supply items used to provide medical services unless the item qualifies for exemption under paragraphs (1)-(3) of this subsection.

(B)

Sales tax is not due on the sale of eating utensils, such as spoons, forks, or knives, that are designed to facilitate independent eating and purchased for use by a person who cannot eat independently with conventional utensils because of injury, disease, physical or mental disability, or advanced age.

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 12, 2001.

TRD-200100255

Martin Cherry

Deputy General Counsel for Tax Policy and Agency Affairs

Comptroller of Public Accounts

Earliest possible date of adoption: March 4, 2001

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

34 TAC §3.298

The Comptroller of Public Accounts proposes an amendment to §3.298, concerning amusement services. The amendment is the result of a change to Tax Code, §151.3101, by House Bill 3211, 76th Legislature, 1999, effective October 1, 1999. The amendment allows public colleges and universities and other public institutions of higher education to provide tax- free amusement services without the limitations placed on other state agencies. Public institutions of higher education are able to provide tax-free amusement services as nonprofit private institutions of higher education. Subsection (g)(6) is also being amended to clarify that the exemption is not lost when members reimburse an exempt organization or pay the admission charges directly if an exemption certificate is issued by the organization. Subsection (g)(8) is added to clarify that the simple renting or leasing of facilities by an exempted organization to an organization that is not exempted does not create an exemption for the amusement service provided by the non-exempt organization. Various subsections are amended to correct errors in grammar and sentence structure, and to make the section easier to read and understand. Various subsections are amended to correct errors in grammar and sentence structure and to make the section easier to read and understand.

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

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

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

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

The amendment implements Tax Code, §151.3101.

§3.298.Amusement Services.

(a)

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

(1)

Amusement services - Entertainment, recreation, sport, pastime, diversion, or enjoyment that is a pleasurable occupation of the senses. Amusement services and places that offer [ offering ] amusement services include, but are not limited to, the following:

(A)

live or recorded performances, whether by individual ticket or by season tickets:

(i)

ballet performances;

(ii)

circuses;

(iii)

ice skating shows;

(iv)

motion pictures;

(v)

musical concerts;

(vi)

opera performances;

(vii)

outdoor theatres; and

(viii)

theatres (movies and plays);

(B)

exhibitions or displays:

(i)

animal shows (contests, exhibitions);

(ii)

antique shows;

(iii)

aquatic shows;

(iv)

arts and crafts, and art shows (fairs);

(v)

auto shows;

(vi)

museums ( that display [ displaying ] art objects, wax figures, antique autos, etc.); and

(vii)

zoos;

(C)

spectator sports:

(i)

drag strip [ dragstrip ] operation;

(ii)

horse shows (horse riding exhibitions);

(iii)

motorcycle races;

(iv)

automobile races (full size and miniature cars);

(v)

rodeo;

(vi)

sporting events such as football, baseball, basketball, hockey, and soccer games; and

(vii)

wrestling, boxing, or arm wrestling;

(D)

participatory sports or games:

(i)

athletic clubs;

(ii)

bowling games;

(iii)

court fees - tennis, racketball, handball, etc.;

(iv)

domino games (including by the hour);

(v)

go-cart raceways;

(vi)

golf courses;

(vii)

golf driving ranges;

(viii)

health clubs (spas), (admissions and memberships);

(ix)

miniature golf courses;

(x)

chartered boat or party boat excursions (see paragraph (2) of this subsection for excursions of more than one day duration , and for excursions on which fishing guide services are provided);

(xi)

pool (billiards) games (by the game or by the hour);

(xii)

skate board tracks;

(xiii)

skating rinks (roller skating and ice skating);

(xiv)

swimming pools;

(xv)

water slides; and

(xvi)

physical fitness centers;

(E)

fairs or carnivals:

(i)

amusement parks;

(ii)

carnivals;

(iii)

fairs;

(iv)

games of skill, at a circus, carnival, etc.;

(v)

shooting galleries (ranges); and

(vi)

side shows;

(F)

other:

(i)

except as provided by subsection (e)(4) of this section, cover charges (for admission to night clubs, dance halls, discos, etc., that provide [ providing ] dancing, music, or other entertainment);

(ii)

hot tub concessions;

(iii)

parties (New Year's Eve) that [ sponsored by ] radio stations, hotels, etc. , sponsor. Ticket price includes meal, set-ups, entertainment, party favors;

(iv)

rides for pleasure (in hot-air balloons, helicopters, trains, ships, boats, etc.);

(v)

tour trains and buses, whose primary purpose is to show tourist sights along a route , as opposed to regular transportation;

(vi)

tours of tourist attractions, including [ such as ] ships, buildings, [ and ] monuments, and natural wonders such as caves and caverns; and

(vii)

palm reading, fortune telling, and astrological chart preparation;

(G)

country clubs and other private clubs and organizations that provide entertainment, recreation, sports, dining, or social facilities to members.

(2)

Nonamusement services - Activities that [ which ] are primarily instructional in nature , or nontaxable personal services. Places, services, and clubs that [ not covered by ] the tax on amusement services does not cover include, but are not limited to:

(A)

hobby clubs (stamp collecting clubs, toastmaster clubs, camera clubs, amateur radio clubs);

(B)

instructions for any sport or musical discipline;

(C)

camps for children (day camps or boarding camps);

(D)

video cassette clubs;

(E)

political fundraisers;

(F)

campground admissions;

(G)

cruises that [ which ] last longer than 24 hours and extend offshore beyond [ outside ] Texas territorial limits;

(H)

fishing and hunting leases and guide services; and

(I)

membership in sororities and fraternities.

(3)

Occasional sale - The sale of not more than 10 admissions for amusement services during a 12-month period by a person who does not hold himself out as engaging, or does not habitually engage, in the sale [ selling ] of amusement services.

(4)

Provider of an amusement service - The person who has legal rights of ownership over , or the legal right to provide, present, or offer , an amusement, entertainment, or recreation that is rendered on a regular basis at a fixed location , and for which admissions are sold, such as the owner of the wax figure display at a wax museum. The provider of an amusement service is also the person who has legal rights of ownership to an amusement, entertainment, or recreation that will not be rendered on a regular basis at a fixed location , and for which amusement service admissions will be sold, such as the provider of a singer's one-night live performance[ by a singer ]. A provider of an amusement service may be, but is not always, the owner of the facility (land and/or building) at which the amusement service is offered or performed. A provider of an amusement service may gain the right of providing an amusement service by virtue of a contract or agreement (lease, rental, concession right) with the performer(s) of the entertainment , or with a facility owner when the use of that facility constitutes the amusement service. Terms used within the amusements industry to refer to a provider include manager, promoter, concessionaire, tenant, or association (or club) president.

(5)

Sales price of an amusement service - The fee charged for admission to an amusement, including a convenience fee, handling charge, service charge, or other amount that is over and above the amount that would be charged for an amusement admission at the ticket counter of the facility at which the amusement service will be rendered. Sales price also includes [ Also included are ] dues, initiation fees, and other charges, assessments, and fees required for a special privilege, status, or membership classification in a private club or organization. Receipts subject to tax under the Texas Alcoholic Beverage Code, §202.02, are not included in the sales price of an amusement service.

(6)

Sales price of membership to country clubs, including clubs described by the Internal Revenue Code of 1986, §501(c)(7) - The sales price includes dues, initiation fees, and other charges, assessments, and fees required for a special privilege, status, or membership classification in a private club or organization. Whether [ or not ] the club has its own facilities is irrelevant to the determination of sales price. [ not relevant. ] Receipts subject to tax under [ the ] Texas Alcoholic Beverage Code, §202.02, are not included in the sales price of an amusement service.

(7)

Seller of admissions to amusement services - A person who sells more than 10 [ ten ] admissions to amusement services during a 12-month period , and includes those persons who hold themselves out as engaging, or who habitually engage, in the sale [ selling ] of admissions to amusement services.

(8)

Sale of an amusement service admission - The transfer of title to , or possession of , a ticket or other admission document for [ a ] consideration , or the collection of an admission, membership, or enrollment fee, whether by individual performance, subscription series, or membership privilege, or through the use of a coin-operated or credit-card- operated machine. The consideration paid may secure the admission privilege for an individual or a group of individuals. The contract or agreement whereby the right is secured for a provider to offer an amusement, recreation, or entertainment as an amusement service is not the sale of an admission to an amusement service and is not subject to sales tax, such as the payment [ paying ] of a fee to a singer for a performance that [ will be provided by ] the payer of the fee will provide as an amusement service through the sales of tickets.

(b)

Charges to private club members and guests. The membership dues, initiation fees, and other assessments and fees charged for a special privilege, status, or membership classification in a private club or organization, including organizations described by the Internal Revenue Code of 1986, §501(c)(7), if the organizations provide amusements, are taxable. Taxable fees for special privileges in the organization include, but are not limited to, liquor pool dues, boat slip rental fees, golf cart storage fees, locker rental fees, locker room use fees, and fees for access to the restaurant and bar. Separate charges for amusement services by persons who operate [ operating ] clubs or other facilities over and above amounts that are received for membership or initiation fees, such as green fees or fees for admissions to swimming pools, racketball courts, or tennis courts, are also taxable. Initiation fees that [ which ] are refundable, as evidenced by a written agreement, are not taxable.

(c)

Entry fees. Entry fees will not be taxable as amusements if:

(1)

the fee substantially exceeds what would normally be paid for use of [ using ] the facility , and a person is paying to compete in a contest, and part of the fee offsets [ goes toward ] the cost of conducting the contest and for prizes; or

(2)

an individual would not normally use the facility[ , ] or pay a fee , except for the purpose of participation [ participating ] in a contest.

(d)

Travel agencies.

(1)

Tickets to amusements that travel agencies sell [ sold by travel agencies ] as part of a travel package are taxable only if:

(A)

the price of the ticket is separately stated from the price for the remainder of the package; or

(B)

though not separately stated, the surrounding additional costs are inconsequential.

(2)

If the travel agency is not required to collect sales tax , then [ is not required to be collected by the travel agency, ] sales tax must be paid at the time the travel agency purchases the tickets[ originally ].

(e)

Imposition of tax.

(1)

Sales tax is due on the sale of an admission to an amusement service if the event or location of the service is within the State of Texas. Sales tax is also due on admissions to gambling ships that operate outside Texas waters , if the ships [ they ] depart from and return to Texas ports. Sales tax is not due on the sale of an admission to an amusement service if the event or location of the service is outside Texas.

(2)

Use tax is due on an out-of-state sale of an admission to an amusement event that will take place in Texas.

(3)

When [ there is ] a sale of an amusement service occurs that [ which ] does not involve the transfer of a ticket or other physical evidence of admission, possession of or title to the admission is [ to be ] regarded as occurring [ taking place ] at the seller's place of business. An example is [ would be ] when admission is secured by a reservation that [ made by ] the seller makes for the purchaser.

(4)

Sales or use tax is not due on cover charges that [ which ] are taxable under [ the Texas ] Alcoholic Beverage Code, §202.02.

(f)

Taxable item sold or transferred with amusement service.

(1)

Sellers of service may issue a resale certificate in lieu of tax to suppliers of tangible personal property only if care, custody, and control of the property is transferred to the client. For example, a taxpayer purchases padlocks to transfer to customers when lockers are rented. The padlock is transferred to customers, and the customers use the padlock when renting the locker. The taxpayer [ Taxpayer ] may purchase the padlock tax free by issuing a resale certificate. Tax is due on the total amount charged the customer, including amounts for the padlock and for the services.

(2)

A resale certificate may be issued for a service if the buyer intends to transfer the service as an integral part of taxable services. A service will be considered an integral part of a taxable service if the service purchased is essential to the performance of the taxable service , and without which the taxable service could not be rendered.

(3)

A resale certificate may be issued for a taxable service if the buyer intends to incorporate the service into tangible personal property that [ which ] will be resold. If the entire service is not incorporated into the tangible personal property, the presumption is that [ it will be presumed ] the service is subject to tax , and the service will only be exempt to the extent that the buyer can establish the portion of the service that was actually incorporated into the tangible personal property. If the buyer does not intend to incorporate the entire service into the tangible personal property, no resale certificate may be issued, but credit may be claimed at the time of sale of the tangible personal property to the extent the service was actually incorporated into the tangible personal property.

(4)

Any item, such as machinery or equipment, purchased for use [ to be used ] in the provision [ providing ] of an amusement service is not an item that is transferred with an amusement service , and is subject to sales tax.

(5)

A reseller of a ticket or admission document to an amusement service may deduct from "taxable sales reported," [ taxable sales reported ] the "adjusted value" of the ticket or admission document purchased for resale from a non-permitted purchaser of the ticket or admission document. The "adjusted value" is the face value of the ticket or admission document, less the included sales tax. A reseller is allowed the deduction from taxable sales when filing a sales tax report , if all of the following criteria are met:

(A)

the purchaser paid the sales tax , [ was paid by the purchaser ] and the purchaser does not hold a Texas Sales and Use Tax Permit;

(B)

the language on the ticket or admission document purchased for resale states that all taxes have been included in the price of the ticket or admission document;

(C)

the ticket or admission document for which a deduction is claimed was not purchased tax- free by use of a resale or exemption certificate; and

(D)

the ticket or admission document is actually resold.

(g)

Exemptions.

(1)

Sales tax is not due on the sale of an amusement service if the service is provided exclusively:

(A)

by a nonprofit organization, corporation, or association, other than organizations described by the Internal Revenue Code of 1986, §501(c)(7), if the proceeds do not go to the benefit of an individual, except as a part of the services of a purely public charity. Initiation and membership fees and other assorted fees charged by such a nonprofit organization, corporation, or association are not taxable. Examples [ would ] include[ : ] organizations, corporations, or associations recognized as nonprofit organizations under the Internal Revenue Code, §501(c) ; [ , ] Kiwanis clubs, labor unions, and ex-students organizations. Organizations described by the Internal Revenue Code of 1986, §501(c)(7), that provide amusements, do not qualify for this exemption , even though such groups are formed [ organized ] as nonprofit organizations;

(B)

by a nonprofit corporation organized under the laws of this state for the purpose of encouraging agriculture by the maintenance of public fairs and exhibitions;

(C)

by an educational[ , ] (including institutions of higher education as defined under Education Code, §61.003(8)), religious, law enforcement, or charitable association or organization , as long as no part of the proceeds goes to the benefit of a private individual;

(D)

by the United States, the State of Texas, a municipality, county, school district, special district, or other political subdivision of the State of Texas , other than a public institution of higher education as defined under Education Code, §61.003(8) . An amusement service is not "exclusively provided" by a governmental entity if the entity contracts with an entity that is not listed in the Tax Code, §151.3101(a)(1), for the provision of the amusement;

(E)

in a place that is included in the National Register of Historic Places; or

(F)

in a place that is designated as a Recorded Texas Historic Landmark by the Texas Historical Commission.

(2)

Sales tax is not due on the sale of an amusement service by a ticket service, ticket agent, ticket outlet, or any other seller of amusement services , when the provider of the amusement service is exempt as set forth in paragraph (1) of this subsection.

(3)

Except as provided by subsection (h) of this section, a nonprofit group may hire a for-profit organization to provide the expertise to produce an event without loss of the exemption provided by paragraph (1)(A) of this subsection. The nonprofit organization must hold itself out as the provider of the amusement , and may not be a joint venturer with the for-profit entity.

(4)

Amusement services provided through coin-operated machines that [ are operated by ] the consumer operates are exempt from sales tax. The coin used to operate the machine may be a token as well as a United States coin. Examples are coin-operated:

(A)

pinball machines;

(B)

video games and motion pictures;

(C)

pool tables;

(D)

televisions;

(E)

shuffleboard;

(F)

jukeboxes; and

(G)

batting cages.

(5)

Sales tax is not due on the occasional sale of an amusement service.

(6)

Sales tax is not due on the purchase of an amusement service by an exempt entity for its own amusement or for the amusement of its members. See §3.322 of this title (relating to Exempt Organizations). The seller must secure a valid exemption certificate. An amusement service is purchased for the amusement of its members irrespective of whether:

(A)

the organization pays the admission for the members;

(B)

the members reimburse the exempt organization; or

(C)

the members directly pay the service provider under an agreement by the provider to accept payments from individual members, the aggregate total of which equals the contractual obligation of the organization.

(7)

Sales tax is not due on the purchase of the admission to an activity that [ which ] may be classified as an amusement, entertainment, or recreation , if purchased under a written prescription of a licensed practitioner of the healing arts for the primary purpose of health maintenance or improvement. The written prescription must specify the type of the treatment needed. If a membership privilege is purchased pursuant to a written prescription, a new prescription must be obtained each time the membership is renewed.

(8)

Except as provided under subsection (g)(1)(E) or (F) of this section, tax is due on an amusement service provided by an organization that is not exempted under subsection (g) or (h) of this section, when the facilities used to provide the amusement service are leased or rented from an organization that is exempted under subsection (g) or (h) of this section.

(h)

Governmental entities.

(1)

Entities recognized as governmental entities are subject to the provisions of this subsection even though the entities may also be classified under the Tax Code, §151.3101(a)(3), (4), or (5).

(2)

Unless an event is solely for educational purposes, an amusement service provided by this state, an institution that this state owns or operates, [ owned or operated by the state, ] an agency of this state, a city, county, school district, special district, or other political subdivision of this state, or any agency of the United States , is taxable if the public entity [ that ] contracts with a person, a for-profit organization, or any other organization that is not listed in [ the ] Tax Code, §151.3101(a)(1), to provide the expertise to produce or provide a musical concert or other amusement event . [ loses the exemption provided in subsection (g) of this section. ] These public entities [ organizations ] must collect sales tax on admissions to amusement events that are provided by or in conjunction with a person, a for-profit organization, or other organization that is [ organizations ] not listed in [ the ] Tax Code, §151.3101(a)(1). This provision does not apply to a public institution of higher education as defined under Education Code, §61.003(8). Public institutions of higher education are included in the term "educational organizations" and are subject to the provisions of subsection (g)(1)(C) of this section.

(3)

An amusement is not solely for educational purposes unless either[ : ] 100% of the proceeds from the admissions go to the educational organization , [ ; ] or students at the educational institution actually perform the amusement.

(i)

Collection of the tax.

(1)

Persons who sell admissions to an amusement service for resale may accept a resale certificate from the purchaser of the amusement in lieu of tax. The resale certificate will cover all convenience fees, handling charges, service charges, etc., that promoters, ticket services, and others add [ added ] to the sales price of the admission[ by promoters, ticket services, and others ].

(2)

Each seller of amusement services who sells [ selling ] to the final consumer must collect and remit the tax to the comptroller , based on the total receipts from all taxable sales. A seller is [ will be ] responsible for remitting the correct amount of tax based on the total sales price of admissions , including any charges that others have added[ by others ].

(3)

The comptroller may regard any seller of an admission to an amusement service as the agent of the person from whom he obtains the tickets or other admission document , if the comptroller determines that the tax will be collected more efficiently. The seller of an admission to amusement service is [ will be ] regarded as the agent if:

(A)

the person who provides [ providing ] the tickets or other admission documents obtains written authorization from the comptroller to assume responsibility for the tax collection of the [ his ] agent;

(B)

the person who provides [ providing ] the tickets includes in the sales price of the admission any convenience fee, handling charge, etc., that the agent has added to the price [ added on by his agent ]; and

(C)

the provider of the tickets gives to the seller/agent a written statement that the provider holds a tax permit issued by the comptroller and is assuming responsibility for tax collection and reporting for the [ his ] agent.

(j)

Records. Every seller of admissions to amusement services is responsible for keeping accurate records of all sales and purchases. See §3.281 of this title (relating to Records Required; Information Required). Every seller of admissions to amusement services must hold a sales tax permit and must file reports as required by §3.286 of this title (relating to Seller's and Purchaser's Responsibilities). A reseller of a ticket or admission document to an amusement service who deducts [ that is deducting ] the "adjusted value" of the ticket or admission document purchased for resale from a non-permitted purchaser, as provided in subsection (f)(5) of this section, must have records that verify [ verifying ] the deduction , including [ that include ]:

(1)

the name and address of the non-permitted purchaser;

(2)

the face value of any ticket or admission document that [ purchased by ] a non- permitted purchaser has purchased ;

(3)

proof (such as a copy of the ticket or admission document) showing that sales tax is included in the price of the ticket or admission document;

(4)

the sales of tickets or admission documents; and

(5)

the remaining inventory of unsold tickets or admission documents.

(k)

Local tax. City, county, transit authority, and special purpose district tax should be allocated to the city, county, transit authority, and/or special purpose district where the amusement event occurred.

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 12, 2001.

TRD-200100256

Martin Cherry

Deputy General Counsel for Tax Policy and Agency Affairs

Comptroller of Public Accounts

Earliest possible date of adoption: March 4, 2001

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

34 TAC §3.300

The Comptroller of Public Accounts proposes an amendment to §3.300, concerning manufacturing; custom manufacturing; fabricating; processing. The amendment reflects changes made to Tax Code, §151.318, by the 75th Legislature, 1997 and 76th Legislature, 1999. House Bill 1855, 75th Legislature, 1997, effective October 1, 1997, limits, with certain exceptions, the exemption for tangible personal property used in the manufacturing process to property that makes or causes a chemical or physical change in the product being manufactured or in an intermediate or preliminary product that becomes a part of the product manufactured for sale. These new limitations do not apply to semiconductor fabrication cleanrooms, pollution control equipment, and a stipulated list of equipment used to power, supply, support or control qualifying manufacturing equipment or pollution control equipment (such as actuators, steam production equipment, cooling towers, transformers, pumps, compressors, computerized control units, etc.). Senate Bill 1, 75th Legislature, effective July 1, 1997, exempts water conservation equipment used by manufacturers. Senate Bill 862, 75th Legislature, effective October 1, 1997, clarified that computer software manufacturing begins with the design and writing of the program and includes testing or demonstration. House Bill 3211, 76th Legislature, 1999, effective October 1, 1999, provided clarifications to the language passed in the 75th Legislature.

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

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

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

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

The amendment implements Senate Bills 1 and 862, and House Bill 1855, 75th Legislature, 1997, and House Bill 3211, 76th Legislature, 1999.

§3.300.Manufacturing; Custom Manufacturing; Fabricating; Processing.

(a)

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

(1)

Accessory - A machine fixture that [ which ] causes the machinery to operate in a specialized way.

(2)

Custom manufacturing - Producing tangible personal property to the special order of the customer, e.g., tailor-made clothing, custom-made draperies or slip-covers, or furniture made-to- order. Custom manufacturers are manufacturers for the purpose of this section.

(3)

Display item - A manufactured item that is identical in size and function to other items held for sale which it represents and that is ultimately sold at retail. For example, manufacturer's apparel lines, furniture showroom pieces, light fixture displays.

(4)

Equipment - Any apparatus, work clothing, device, or simple machines used directly in production.

(5)

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.

(6)

Hand tool - An instrument [ of manual operation, ] that is[ , an instrument ] to be used, managed, and powered by the hand[ , ] ( e.g., paint brush, trowel, hammer, screwdriver, files ) . Equipment that is [ which is being ] controlled or operated by the hand , but is moved or powered by electricity, gas, steam, or other fuel [ etc. ], is not a hand tool[ , ] ( e.g., electric drill, chain saw, jack hammer ) .

(7)

Machinery - All power-operated machines.

(8)

Manufacturer - A person who is engaged in manufacturing . The definition [ and ] includes processors, fabricators, submanufacturers, and custom manufacturers.

(9)

Manufacturing - Each [ Every ] operation beginning [ commencing ] with the first stage in the [ 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 shall not include those acts in preparation for production. For example, a lumber company that cuts [ cutting ] trees or a manufacturer that gathers, arranges, or sorts [ gathering, arranging, or sorting ] raw materials or inventory is preparing for production. The first production stage for the manufacturing of software is the design and writing of the code or program, and manufacturing includes the testing or demonstration of the software. Manufacturing includes the repair [ repairing ] or rebuilding of tangible personal property that the manufacturer owns [ owned by the manufacturer ] for the purpose of being sold , but does not include the repair or rebuilding of property that belongs [ belonging ] to another. [ When production is completed, maintaining the life of tangible personal property or preventing its deterioration is not a part of the manufacturing process. ]

(A)

Completion of production means the tangible personal property [ article ] has all the physical properties, including packaging, if any, that [ which ] it has when transferred by the manufacturer to another. For example, a manufacturer of raw rubber has completed production [ of a manufactured article ] when the raw rubber is ready to be transferred to a manufacturer of rubber goods.

(B)

Processing and fabrication are two activities that [ which ] are performed during manufacturing. For example, the person who takes raw steel and makes pipe is engaged in fabrication. The workers who coat or thread the pipe are engaged in processing.

(10)

Processing - The physical application of the materials and labor necessary to modify or to change the characteristics of tangible personal property. 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 property. Processing does not include remodeling.

(11)

Remodeling - To make tangible personal property belonging to another over again, in a similar but different way, or to change the style, shape, or form, without causing a loss of its identity, or without causing the property to work in a new or different manner.

(12)

Replacement part - Any repair part attached to the machinery, equipment, or accessory.

(13)

Sample - A scale model or representative piece of a manufactured product held for sale. For example, cloth swatches and wallpaper books.

(14)

Semiconductor fabrication cleanrooms and equipment - All tangible personal property, without regard to whether the property is affixed to or incorporated into realty, that is used in connection with the manufacturing, processing, or fabrication in a cleanroom environment of a semiconductor product, without regard to whether the property is actually contained in the cleanroom environment.

[ (A) ]

The term includes integrated systems, fixtures, and piping ; [ , ] moveable cleanroom partitions and cleanroom lighting ; [ , ] all property necessary or adapted to reduce contamination or to control airflow, temperature, humidity, chemical purity, or other environmental conditions or manufacturing tolerances ; [ , and ] production equipment and machinery ; all tangible personal property that moves the product or other materials that are necessary and essential to the process, including piping that is used to move gas, liquids, deionized water, and hazardous waste material; silicon wafer moving, handling, and tracking systems; and electrical supply and control equipment, such as switches, wiring, and monitoring equipment that is incorporated into the realty .

[(B)

Semiconductor fabrication cleanroom equipment is not "intraplant transportation equipment" nor is it used incidentally in a manufacturing, processing, or fabrication operation.]

[ (C) ]

The term does not include the building or any permanent, nonremovable structural component part of the building, such as vibration-isolation platforms and vibration columns[ , that houses the cleanroom environment ].

(15)

Submanufacturer - A person who performs one or more of the manufacturing operations described in paragraph (9) of this subsection upon a product, or upon an intermediate or preliminary product, for a manufacturer. [ Useful life - The time it takes for an item used in the manufacturing process to be entirely consumed or without value beginning the date the item was purchased new. ]

(b)

Manufacturer's responsibilities.

(1)

Collection of tax. Persons who are engaged in the business of fabricating, manufacturing, processing, or custom manufacturing must collect sales tax on the total sales price of the manufactured item or accept a resale or [ take an ] exemption certificate in lieu of the tax. The sales price includes[ , but is not limited to, ] the cost of materials, labor or service costs, and all expenses that are connected with production. Persons who fabricate, custom manufacture, or process [ fabricating, custom manufacturing, or processing ] tangible personal property that the customer furnishes, [ which is furnished ] either directly or indirectly , [ by the customer ] must collect tax on such fabricating, custom manufacturing, or processing charge. Manufacturers shall pay or accrue sales or use tax on all items used in the manufacturing process that [ which ] do not qualify for exemption from tax. A manufacturer who purchases tangible personal property tax free by means of an exemption certificate or resale certificate and subsequently uses the item for a nonexempt purpose must remit the tax to the comptroller based on the purchase price of the item or the fair market rental value of the equipment for the period of time during which the equipment is used for purposes other than manufacturing . Reference should be made to §3.285 of this title (relating to Resale Certificate; Sales for Resale), §3.287 of this title (relating to Exemption Certificates), and §3.346 of this title (relating to Use Tax).

(2)

Installed items. Generally, the charge for labor to install an item sold is taxable when the item sold is taxable. Persons who manufacture and install items that [ which ] become improvements to residential realty or are incorporated into new real property structures are contractors and are subject to the provisions of §3.291 of this title (relating to Contractors). Example: cabinetmakers [ or drapery makers ] who also affix the [ draperies or ] cabinets as a part of a new-construction contract. [ See also §3.347 of this title (relating to Improvements to Realty). ] Persons who manufacture and install items that become improvements to existing nonresidential realty are subject to the provisions of §3.357 of this title (relating to Labor Relating to Nonresidential Real Property Repair, Remodeling, Restoration, Maintenance, New Construction, and Residential Property). Persons who manufacture and install items as a part of a [ repair ] contract to repair tangible personal property are subject to the provisions of §3.292 of this title (relating to Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property). Example: fabricating a propeller shaft for a customer as a part of an outboard motor repair. Persons who manufacture and install items that [ which ] do not become improvements to realty or that [ which ] are not part of a repair must collect sales tax on the total charge. Example: a retailer who makes and installs draperies for a home owner.

(3)

Molds, dies, patterns. The manufacturer's purchase [ by the manufacturer ] of molds, dies, patterns, jigs, tooling, photo engraving, and other manufacturing aids, and their raw materials or component parts , may qualify for exemption under subsection (d) of this section. [ will be presumed to have been purchased for use as machinery, equipment, or accessories necessary or essential to the manufacturing process and are therefore presumed to be taxable at the time of purchase. Only if such aids have a useful life when new of six months or less is their purchase exempt. ]

(A)

Written agreement - sale. A separate charge by the manufacturer for the aid will be considered a sale of the aid to the customer only if [ there is ] a written agreement exists between parties that clearly makes [ clearly making ] the customer the owner of the aid. As owner of the aid, the customer will owe tax on the amount that the manufacturer charged, [ charged by the manufacturer ] unless [ the aid has a useful life when new of six months or less and the product produced is resold by ] the customer is also manufacturing a product for sale .

(B)

No written agreement - no sale. When [ there is ] no written agreement exists between the manufacturer and the customer , and the manufacturer separates the charge for the aid from the charge for the items produced by means of the aid, a sale will not be considered to have occurred. The combined charges constitute the sales [ selling ] price of the manufactured item. (Charge for aid plus charge for items produced equals sales [ selling ] price of items.) The total charge shall be taxable or nontaxable depending on the taxability of the items produced. [ Only if the aids have a useful life when new of six months or less is their purchase by the manufacturer exempt. ]

(4)

Samples. Since the sole use of such samples is to demonstrate not the sample but the other items that the sample [ which it ] represents, the purchase of the raw materials that are used to make the sample is subject to [ the ] sales or use tax, regardless of the fact that the sample itself may be ultimately sold.

(c)

Nonexempt manufacturing items. Certain items are specifically subject to tax:

(1)

taxable items that are not otherwise exempted by this section; [ used by a manufacturer, processor, or fabricator in any activities other than the actual manufacturing, processing, fabricating operation, or repair of tangible personal property held for sale by the manufacturer such as machinery, equipment, and supplies used in selling or distributing, research and development, or in transportation activities; ]

(2)

machinery, equipment, replacement parts, and accessories that are rented or leased for a term of less than one year;

(3)

items that [ which ] are merely useful or incidental to the operation, such as office machines, office supplies, [ intraplant ] transportation equipment, maintenance supplies, cleaning supplies, lubricants, and other items that [ which ] are [ used to maintain equipment that is ] incidental to the manufacturing process and are not otherwise exempted by this section; [ are taxable; and ]

(4)

hand tools ; [ . ]

(5)

intraplant transportation equipment, unless exempted in subsections (d)(17) and (18) of this section, including equipment that is used to move a product or raw material in connection with the manufacturing process, and specifically including all piping, conveyor systems, and related pumps (unless otherwise exempted), meters, valves, or rollers. Intraplant transportation equipment is taxable even if manufacturing or processing activities (such as cooling, mixing, or pollution containment) occur during the transportation of product or component parts of the product;

(6)

machinery and equipment or supplies that are not otherwise exempted in this section, but that are used to maintain or store tangible personal property (for example, refrigeration equipment that a restaurant uses);

(7)

tangible personal property that is used in the transmission or distribution of electricity, including transformers, cable, switches, breakers, capacitor banks, regulators, relays, reclosers, fuses, interruptors, reactors, arrestors, resistors, insulators, instrument transformers, and telemetry units that are not otherwise exempted under this section, and lines, conduit, towers, and poles.

(d)

The following items are exempted from the taxes imposed by Tax Code, Chapter 151, if purchased, leased, or rented by a manufacturer for storage, use, or consumption: [ Exempt manufacturing items. ]

(1)

tangible personal property that will become an ingredient or component part of tangible personal property that is manufactured, processed, or fabricated for ultimate sale; [ Gas and electricity. Gas and electricity when used directly in manufacturing are exempt. See §3.295 of this title (relating to Natural Gas and Electricity). ]

(2)

tangible personal property that is directly used or consumed in or during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale, if the use or consumption of the property is necessary or essential to the manufacturing, processing, or fabrication operation and directly makes or causes a chemical or physical change to: [ Component parts. Tangible personal property purchased for use as an ingredient of or component part of a product manufactured for ultimate sale at retail is exempt. ]

(A)

the product that is being manufactured, processed, or fabricated for ultimate sale; or

(B)

any intermediate or preliminary product that will become an ingredient or component part of the product that is being manufactured, processed, or fabricated for ultimate sale.

(3)

services that are performed directly on the product that is being manufactured prior to the product's distribution for sale, and for the purpose of making the product more marketable; [ Necessary and essential materials. ]

[(A)

Materials that are necessary or essential to the operation of machinery or equipment used in the actual manufacturing process are exempt. All materials which are directly used or consumed in any phase of the actual manufacturing, processing, or fabricating operation are exempt if they are necessary or essential to the operation. For example, lubricants consumed in the operation of machinery or equipment used in the actual manufacturing process, explosives used to blast granite or other material from the earth for further processing and sale, ice used during processing or manufacturing that is necessary and essential to the process, any material which is used or consumed in a process to remove impurities, to achieve quality control, to cause a physical or chemical change in a product, or otherwise make the product more marketable are exempt. Materials used to test the quality of the product after the manufacturing process is complete are not exempt.]

[(B)

Materials, other than machinery or equipment, used in manufacturing to satisfy or comply with requirements of law or regulations for public health or pollution control purposes are exempt.]

[(C)

Labor charges for repair, maintenance, remodeling, or restoration services to pollution control equipment or machinery required by law or regulation and other tangible personal property that is exempt under this section are exempt].

[(D)

Gases used on the premises of a manufacturing plant to prevent contamination of raw material or product, or to prevent a fire, explosion, or other hazardous or environmentally damaging situation at any stage in the manufacturing process or in loading or storage of the product or raw material on premises are exempt.]

(4)

actuators, steam production equipment and its fuel, in-process flow through tanks, cooling towers, generators, heat exchangers, transformers and the switches, breakers, capacitor banks, regulators, relays, reclosers, fuses, interruptors, reactors, arrestors, resistors, insulators, instrument transformers, and telemetry units that are related to the transformers, electronic control room equipment, computerized control units, pumps, compressors, hydraulic units, and related accessories that are used to power, supply, support, or control equipment that qualifies for exemption under paragraph (2) or (6) of this subsection or to generate electricity, chilled water, or steam for ultimate sale; [ Services. Services performed directly on the product being manufactured when these services are performed prior to its distribution for sale and are for the purpose of making the product more marketable. ]

(5)

transformers located at an electric generating facility that increase the voltage of electricity generated for ultimate sale, the electrical cable that carries the electricity from the electric generating equipment to the step-up transformers, and the switches, breakers, capacitor banks, regulators, relays, reclosers, fuses, interruptors, reactors, arrestors, resistors, insulators, instrument transformers, telemetry units, and related accessories that are associated with the step- up transformers; and transformers that decrease the voltage of electricity generated for ultimate sale and the switches, breakers, capacitor banks, regulators, relays, reclosers, fuses, interruptors, reactors, arrestors, resistors, insulators, instrument transformers, telemetry units, and related accessories that are associated with the step-down transformers; [ Wrapping, packing, and packaging supplies. Wrapping, packing, and packaging supplies used to further the sale of a product are exempt. See §3.314 of this title (relating to Wrapping, Packing, Packaging Supplies, Containers, Labels, Tags, and Export Packers). ]

(6)

tangible personal property that is used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale, if the use or consumption of the property is necessary and essential to a pollution control process; [ Display item. Both the purchase of such an item and the raw materials used to make such an item are exempt from the sales and use tax, so long as the item is used only to demonstrate itself and the same or similar items prior to its sale to an ultimate consumer. The item may not be used for any purpose other than demonstration or display. Any other use by the manufacturer is taxable as a divergent use. ]

(7)

lubricants, chemicals, chemical compounds, gases, or liquids that are used or consumed during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale, if their use or consumption is necessary and essential to prevent the decline, failure, lapse, or deterioration of equipment that is exempted by this section; [ Useful life of six months or less. ]

[(A)

Machinery, equipment, accessories, and replacement parts which are entirely consumed or without value within six months from the date the items were purchased new are exempt.]

[(B)

Work clothing such as safety goggles, gloves, and similar work clothing having a useful life when new of six months or less which are necessary and essential to the manufacturing process when purchased by the manufacturer and not resold to the employee are exempt. Work clothing is exempt only if the manufacturing operation would not be possible without its use.]

(8)

gases that are used on the premises of a manufacturing plant to prevent contamination of raw material or product, or to prevent a fire, explosion, or other hazardous or environmentally damaging situation at any stage in the manufacturing process or in loading or storage of the product or raw material on premises;

(9)

tangible personal property that is used or consumed during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale, if the use or consumption of the property is necessary and essential to a quality control process. For example, equipment that is used to test the product after the item is produced, but prior to wrapping and packaging. Equipment that is used to test raw materials prior to processing does not qualify for this exemption;

(10)

safety apparel or work clothing that is used during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale, if the manufacturing process would not be possible without the use of the apparel or clothing and the apparel or clothing is not resold to the employee. Examples are safety goggles, gloves, ear plugs, or hairnets that the law requires employees to wear during processing, or static wrist guards that manufacturing personnel wear in a manufacturing process that must be free of static electricity. A regulation that requires employees to wear clean clothing is not sufficient to qualify uniforms for exemption;

(11)

tangible personal property that is used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale, if the use or consumption of the property is necessary and essential to comply with federal, state, or local laws or rules that establish requirements for public health purposes. For example, disinfectants that are used in a meat packing operation to sanitize work areas are exempt. Tangible personal property that is required to be on site, but used only in emergency situations, is not considered consumed in the actual manufacturing process (for example, fire extinguishers, eye baths, and safety signs are not exempt under this provision);

(12)

tangible personal property that is specifically installed to:

(A)

reduce water use and wastewater flow volumes from the manufacturing, processing, fabrication, or repair operation;

(B)

reuse and recycle wastewater streams that are generated within the manufacturing, processing, fabrication, or repair operation; or

(C)

treat wastewater from another industrial or municipal source for the purpose of replacing existing freshwater sources in the manufacturing, processing, fabrication, or repair operation.

(13)

gas and electricity when used directly in manufacturing. See §3.295 of this title (relating to Natural Gas and Electricity).

(14)

labor charges for repair, maintenance, remodeling, or restoration services to pollution control equipment or machinery that a law or regulation requires, and other tangible personal property that is exempt under this section.

(15)

wrapping, packing, and packaging supplies that are used to further the sale of a product. See §3.314 of this title (relating to Wrapping, Packing, Packaging Supplies, Containers, Labels, Tags, and Export Packers).

(16)

display items and the raw materials that are used to make display items, so long as the item is used only to demonstrate itself and the same or similar items prior to its sale to an ultimate consumer. The item may not be used for any purpose other than demonstration or display. Any other use by the manufacturer is taxable as a divergent use.

(17)

piping or conveyor systems that are a component part of a single item of manufacturing equipment or pollution control equipment that is eligible for the exemption. For example, a printing press contains rollers and pipes to transport or feed paper or ink during the manufacturing process. The purchase of the press would continue to qualify for exemption, and rollers, pipe, or other press repair parts would remain as qualifying accessories or repair parts, even when purchased separately. An integrated group of manufacturing and processing machines and ancillary equipment that operate together to create or produce the product, or an intermediate or preliminary product that will become an ingredient or component part of the product, is not a single item of manufacturing equipment.

(18)

piping through which the product, or an intermediate or preliminary product that will become an ingredient or component part of the product, is recycled or circulated in a loop between the single item of manufacturing equipment and the ancillary equipment that supports only that single item of manufacturing equipment, if the single item of manufacturing equipment and the ancillary equipment operate together to perform a specific step in the manufacturing process; and piping through which the product, or an intermediate or preliminary product that will become an ingredient or component part of the product, is recycled back to another single item of manufacturing equipment and its ancillary equipment in the same manufacturing process.

(e)

Rented or leased taxable items. The exemptions provided in this section do not apply to any taxable item rented or leased before October 1, 1995, under an operating lease to a person engaged in manufacturing. Taxable items used in a manner exempted under this section and leased on or after October 1, 1995, for a term of [ exceeding ] one year or more qualify for exemption.

(f)

Semiconductor fabrication cleanrooms and equipment. Semiconductor fabrication cleanrooms and equipment as defined in subsection (a)(14) of this section and associated materials and other items that are necessary and essential to maintain the cleanroom environment are exempt. Semiconductor fabrication cleanrooms and equipment are not intraplant transportation equipment or used incidentally in a manufacturing process or fabrication operation as those terms are used in subsections (c)(3) and (c)(5) of this section. [ Useful life of more than six months. ]

[(1)

State tax paid on qualifying machinery, equipment, replacement parts, and accessories with a useful life exceeding six months qualified for a partial refund by the comptroller if the items were purchased by a manufacturer and the tax was paid after December 31, 1989. A reduction in the amount of tax due applies at the time of purchase to items purchased on or after October 1, 1993. Purchases on or after January 1, 1995, are exempt. The date that title or possession transfers from the retailer to the manufacturer is the purchase date. Items purchased out of state will be considered purchased on the date they are brought into this state.]

[(2)

Manufacturing machinery, equipment, replacement parts, and accessories purchased by a manufacturer qualify for a refund, a reduction in the amount of tax paid, or for exemption:]

[(A)

if it will be used in the actual manufacturing, processing, fabrication, or repair of tangible personal property to be sold, and the use of the item is necessary and essential to the manufacturing, processing, fabrication, or repair operation or a pollution control process resulting from the operation; and]

[(B)

is not purchased under a lump-sum contract to improve real property or under a lump-sum real property repair or remodeling contract.]

[(3)

Qualifying items purchased in 1990 and from January 1, 1991, through September 30, 1991, and on which tax is paid qualify for a refund of 25% of the state tax paid. The refund may be claimed only during the calendar year after the tax is paid.]

[(4)

Manufacturing machinery and equipment purchased from October 1, 1991, through September 30, 1993, do not qualify for sales tax refunds or tax reductions.]

[(A)

Fifty percent of the sales price of qualifying items purchased from October 1, 1993, through December 31, 1993, is exempted from the state sales and use tax.]

[(B)

Seventy-five percent of the sales price of qualifying items purchased during 1994 is exempted from the state sales and use tax.]

[(C)

Qualifying items purchased on or after January 1, 1995, are exempt.]

[(5)

Except for equipment listed in subparagraphs (A)-(C) of this paragraph, semiconductor fabrication cleanroom equipment qualifies for exemption as provided under paragraph (4) of this subsection. Equipment listed in subparagraphs (A)-(C) of this paragraph, is exempt if purchased on or after October 1, 1995:]

[(A)

tangible personal property that moves the product or other materials necessary and essential to the process including piping used to move gas, liquids, deionized water and hazardous waste material; silicon wafer moving, handling and tracking systems;]

[(B)

electrical supply and control equipment such as switches, wiring and monitoring equipment incorporated into the realty; and]

[(C)

partition panels that are not incorporated into realty.]

(g)

Overhaul, retrofit, or repair of jet turbine engines. A person who is engaged in the overhaul, retrofit, or repair of jet turbine aircraft engines and their component parts may claim an exemption from tax on the purchase of machinery, equipment, or replacement parts or accessories with a useful life in excess of six months, or supplies, including aluminum oxide, nitric acid, and sodium cyanide, used in electrochemical plating or a similar process, that are used or consumed in the overhauling, retrofitting, or repairing of jet turbine aircraft engines or their component parts. [ Method of obtaining the refund. ]

[(1)

A refund under subsection (f) of this section must be claimed only during the calendar year following the year in which the tax was paid. Claims for refund must be on the form provided by the comptroller for that purpose. No other form may be used and credit may not be taken on a return.]

[(2)

The claimant will be required to list invoice numbers, voucher numbers, or other code numbers referring to source documents, item description, date of purchase, invoice date, date tax was paid, or the report period tax was paid directly to the comptroller, or any other information requested by the comptroller. All records and documentation supporting the claim must be retained by the claimant for inspection by the comptroller.]

[(3)

Amounts claimed and obtained on nonqualifying items may be recovered by the comptroller together with applicable penalty and interest from the date of the refund.]

(h)

Persons engaged in printing tangible personal property. A person who is engaged in printing or imprinting tangible personal property for sale or production of a publication for the dissemination of news of a general character and of a general interest that is printed on newsprint and distributed to the general public daily, weekly, or at some other short interval, free of charge, may purchase tax free, in addition to other items that are exempted under this section, the following items that are necessary and essential to and used in connection with the printing process: pre-press machinery, equipment, and supplies, including computers, cameras, film, film developing chemicals, veloxes, plate-making machinery, plate metal, litho negatives, color separation negatives, proofs of color negatives, production art work, and typesetting or composition proofs. [ Method of paying a reduced amount of tax. ]

[(1)

The purchaser shall provide the retailer an exemption certificate for the appropriate percentage of the sales tax for qualifying items purchased on or after October 1, 1993.]

[(A)

A retailer who receives an exemption certificate for purchases in 1993 for 50% of the sales tax shall collect state sales tax on 50% of the sales price.]

[(B)

A retailer who receives an exemption certificate for purchases in 1994 for 75% of the sales price shall collect state sales tax on 25% of the sales price.]

[(2)

A purchaser who remits use tax on qualifying items purchased on or after October 1, 1993, shall deduct from the amount reported as the purchase price the appropriate percentage allowed as a reduction in the state tax.]

(i)

Separated and lump-sum contracts to improve realty. A contractor who incorporates into realty any equipment or materials that qualify for exemption under subsection (d) of this section may accept an exemption certificate in lieu of tax from the manufacturer for the separately stated exempt materials sold under a separated contract. Taxable materials, such as foundation materials and items that are noted under subsection (c) of this section must be separately stated from qualifying equipment, or a single charge for qualifying and nonqualifying materials will be presumed taxable. When nonresidential repair, remodeling, or restoration of realty is performed, qualifying equipment must be separately stated from both nonqualifying materials and taxable labor, or the exemption on the qualifying equipment is lost. A lump-sum charge to repair, remodel, or restore nonresidential realty is taxable. See §3.357 of this title (relating to Labor Relating to Nonresidential Real Property Repair, Remodeling, Restoration, Maintenance, New Construction, and Residential Property). A lump-sum charge to perform new construction as covered in §3.291 of this title (relating to Contractors) is not taxable. The contractor is the consumer of all the goods that the contractor uses in the performance of a lump sum new construction contract, and neither the contractor nor the manufacturer may claim an exemption on otherwise qualifying manufacturing equipment. [ Tax refund or reduced amount. A person engaged in overhauling, retrofitting, or repairing jet turbine engines and their component parts is entitled to a refund, a reduction, or an exemption in the amount of sales and use tax for the purchase of qualifying items including aluminum oxide, nitric acid, and sodium cyanide used in electrochemical plating or a similar process that are used or consumed in the overhauling, retrofitting, or repairing of jet turbine engines or their component parts. The refund or reduced amount of tax is obtained in the same manner as is provided for manufacturers under subsections (g) and (h) of this section. ]

(j)

A taxpayer who claims an exemption under this section must prove that the exemption applies and that no exclusion under subsection (c) of this section applies. [ Divergent use. Machinery and equipment purchased on or after January 1, 1995, and on which the full sales tax exemption is claimed is subject to tax on either the fair market rental value or on the full purchase price during any period of use for other than manufacturing purposes as provided for under §3.287 of this title (relating to Exemption Certificates). Machinery and equipment purchased between January 1, 1990, and December 31, 1994, and on which the reduced tax was paid must be used primarily or predominantly in the manufacturing process. No additional tax is due on a divergent use provided the divergent use is less than 50% of the overall use. Tax is due on the full purchase price if the use is primarily for a use not eligible for 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 12, 2001.

TRD-200100257

Martin Cherry

Deputy General Counsel for Tax Policy and Agency Affairs

Comptroller of Public Accounts

Earliest possible date of adoption: March 4, 2001

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

34 TAC §3.325

The Comptroller of Public Accounts proposes an amendment to §3.325, concerning refunds, interest, and payments under protest. Subsection (c) of this section is amended to provide for the payment of interest on a claim for refund or in an audit as directed under Senate Bill 1321, 76th Legislature, 1999. Amendments to this section for interest paid on a claim for refund or as the result of an audit are effective for reports due on or after January 1, 2000. Subsection (b) is amended to allow purchasers, who paid sales or use tax to a vendor in error, to request a refund directly from the state, pursuant to the decision in Fleming Foods of Texas v. Rylander . Subsections (c) and (d) were also amended to delete obsolete language. Nonsubstantive grammatical corrections are made to subsection (a).

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

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

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

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

The amendment implements Tax Code, §111.064.

§3.325.Refunds, Interest, and Payments Under Protest.

(a)

Tax paid to state. Any person, his attorney, assignee, executor, or administrator may request from the comptroller a refund of any tax [ which he has ] remitted to the state but that [ which ] was not due.

(1)

A claim for refund of an amount paid pursuant to a deficiency determination is timely for all transactions that are included in the deficiency determination if made in accordance with subparagraphs (B) or (C) of this paragraph. A claim for refund for items that are not included in a deficiency determination must be made in accordance with subparagraph (A) of this paragraph. The refund request must be made within:

(A)

four years from the date on which the tax was due and payable as defined in Tax Code, §151.401 ; or

(B)

six months after a determination for the periods for which refund is claimed becomes final; or

(C)

six months after any determination would have become final had payment not been made before the due date . [ ; ]

[(D)

a claim for refund of an amount paid pursuant to a deficiency determination is timely for all transactions included in the deficiency determination if made in accordance with subparagraphs (B) or (C) of this paragraph. A claim for refund for items not included in a deficiency determination must be made in accordance with subparagraph (A) of this paragraph.]

(2)

Before the expiration of the statute of limitations, the comptroller and a taxpayer may agree in writing to an extension of the statute of limitations.

(3)

An extension of the statute of limitations applies only to the periods that are specified [ specifically mentioned ] in the agreement. Any assessment or refund request that pertains [ pertaining ] to periods for which limitations have been extended must be made prior to the expiration date of the agreement. Following expiration of the agreement, the statute of limitations applies to subsequent assessments and refund requests as if no extension had been agreed [ authorized ].

(4)

The request for refund must be made in writing and must state the specific grounds upon which the claim is founded. The request must also indicate the period for which the claimed overpayment was made.

(5)

In determining the statute of limitations for filing a refund claim, the time during which an administrative proceeding is pending before the comptroller for the same period is not counted. A taxpayer may not file a sales tax refund claim for the same transaction and for the same time period as a refund claim previously denied.

(6)

Failure to file a claim within the limitation prescribed by this section constitutes a waiver of any demand against the state on account of the overpayment.

(b)

Tax paid to seller. A person who remits tax to a permitted seller [ rather than directly to the state ] may [ not ] request from the seller or the comptroller a refund of Texas tax paid in error. [ any tax which that person has remitted to a seller but contends was not due. ] The following procedures must be used. [ The tax must be recovered from the seller. See §3.338 of this title (relating to Allowance of Credit for Tax Paid to Suppliers) for provisions governing the allowances of credit for tax paid to a seller. ]

(1)

Seller who requests a refund from the comptroller.

(A)

[ 1 ] Before a seller refunds to a purchaser tax collected in error, the seller must obtain from the purchaser [ A written request for a refund must be directed to the seller and must be accompanied by ] a properly completed exemption or resale certificate that [ which ] meets all the requirements of §3.285 of this title (relating to Sales for Resale; Resale Certificate) and §3.287 of this title (relating to Exemption Certificates). The seller must retain the certificate [ should be retained by the seller ] to document the basis for the refund. [ reason tax was refunded. ]

(B)

[ (2) ] 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 purchaser who requests a refund from the comptroller.

(A)

A 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 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 purchaser who holds a sales and use tax permit 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)

Interest. [ Interest will be paid at the rate of 10% per annum on an amount found to have been erroneously paid to the comptroller for reporting periods after January 1, 1982. Refunds for reporting periods prior to January 1, 1982, will not accrue 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: [ Interest begins to accrue either 60 days after the date of payment or 60 days after the due date of the tax report, whichever is later. ]

(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. [ For overpayments and credits which occurred prior to October 4, 1986, interest stops on December 4, 1986. (This is the date the provision of the Tax Code authorizing payment of interest was repealed.) Overpayments and credits on transactions occurring after December 4, 1986, will not draw 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 [ and interest ] are first refunded to the party from whom they were collected.

(d)

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.

[(1)

Taxes which become due during the period September 1, 1987 through August 31, 1989, and which are paid under protest pursuant to the authority of the Tax Code, §112.051, shall be deposited to the general revenue fund. A written letter of protest which sets out fully and in detail each and every ground or reason why it is contended that the assessment is unlawful or unauthorized 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 him of the amount received that is paid under protest and the date of the payment.]

[(2)

Taxes which become due prior to or after the period September 1, 1987-August 31, 1989, and which are paid under protest pursuant to the authority of the Tax Code, §112.051, will be placed in a suspense account pending resolution of the matter in issue. A written letter of protest which sets out fully and in detail each and every ground or reason why it is contended that the assessment is unlawful or unauthorized must accompany the payment. If the payment and letter of protest do not accompany one another, the payment will not be placed in a suspense account and the payment will not be deemed to have been made under protest. For the taxpayer's convenience, the comptroller will advise him of the amount received that is paid under protest and the date of the payment. If suit is not filed in accordance with the statute, the protest payment will be cleared to the general fund after the expiration of 90 days from the date of 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 12, 2001.

TRD-200100258

Martin Cherry

Deputy General for Tax Policy and Agency Affairs

Comptroller of Public Accounts

Earliest possible date of adoption: March 4, 2001

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