TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER O. STATE SALES AND USE TAX

34 TAC §3.344

The Comptroller of Public Accounts adopts an amendment to §3.344, concerning telecommunications services, with changes to the proposed text as published in the April 2, 2010, issue of the Texas Register (35 TexReg 2729).

This section is being amended to implement several bills as follows. Senate Bill 1497, 77th Legislature, 2001 implements the federal Mobile Telecommunications Sourcing Act (4 U.S.C §§116-126) (hereafter collectively SB 1497). Under SB 1497, effective for billing cycles beginning on or after August 1, 2002, state and local sales taxes on mobile telecommunications services are determined by the customer's place of primary use. House Bill 2425, 78th Legislature, 2003, (hereafter HB 2425) added Tax Code, §151.025(d) and changed billing and records requirements for telecommunications service providers. House Bill 1459, 80th Legislature, 2007 (hereafter HB 1459), excludes from telecommunications services pay telephone calls that are made by coins, but not other forms of payment. House Bill 3319, 80th Legislature, 2007 (hereafter HB 3319), expands the sale for resale exemption to apply to cell phones and other wireless voice communications devices purchased by persons who do not sell telecommunications services.

The agency received comments on the proposed rule amendment. The comments and the agency's responses are as follows:

One set of comments was submitted by Robin A. Casey of Casey, Gentz & Magness, L.L.P. as counsel for the Texas Cable Association (TCA) concerning the provisions of the section relating to voice over Internet protocol (VoIP) services. Similar comments were received from Dineen Majcher of Smith & Majcher. Texaltel, a trade association representing competitive communications providers operating in Texas, submitted comments in support of and consistent with TCA.

TCA expressed concerns that the proposed provisions concerning VoIP services do not accurately reflect the current state and federal regulatory law. Specifically, TCA contends that classifying VoIP services as telecommunications services may violate determinations to be made by the Federal Communications Commission (FCC) and Texas Public Utility Commission (PUC) that VoIP services are information services. Therefore, TCA asks that the section include a clear statement that the definition of VoIP services is intended solely for the purposes of taxation until such time that the term is clearly defined by the FCC and PUC.

TCA and Ms. Majcher also ask that no definition of VoIP services be included in the rule. TCA is concerned that including a definition for the term may result in disparate tax treatment based on definitional interpretation. In the alternative, TCA suggests, as does Ms. Majcher, that if a definition is included then VoIP service should be described as a communications services rather than a telecommunications service. TCA states that although the comptroller's stated intent is to base the definition of VoIP services on the definition of the term as provided by Newton's Telecom Dictionary, TCA submits that the dictionary definition does not describe VoIP as a telecommunications service.

Finally, TCA and Ms. Majcher ask that the term "VoIP service" be added to the definition of taxable service in subsection (a)(12) to clarify that VoIP service is taxable and to ensure that VoIP service is not classified as telecommunications for purposes other than Texas state and local taxes or, in the alternative, asks that an express statement along the lines of "for tax purposes only" be added to the rule language.

The comptroller declines to adopt the changes recommended by TCA, Texaltel, and Ms. Majcher. The comptroller can only adopt rules that relate to the administration of state and local taxes that are under her authority as provided by the Texas Legislature. The determination that VoIP services are telecommunications services is based solely on the language in the relevant statutes, Texas Tax Code, §151.0101 and §151.0103. Section 151.0103(a) begins by stating that telecommunications services has the meaning provided "(f)or purposes of this title only." Therefore, it is unnecessary to state expressly in the rule that VoIP services are telecommunications services solely for purposes of determining state and local tax responsibilities. Should the FCC, PUC, or any other governmental agency or entity determine that VoIP services are classified otherwise, it would not change the comptroller's determination that the Texas Tax Code definition of telecommunications services includes VoIP services.

The comptroller acknowledges that technology changes over time and that could lead to the current definition of VoIP services as proposed in the section to become outdated or obsolete. Should that occur, the comptroller will amend the section to reflect such changes. For that reason, the comptroller declines to delete the definition of VoIP services as proposed in the rule. And, the comptroller still believes the definition of VoIP services as stated in Newton's Telecom Dictionary, a well-known and accepted treatise on telecommunications issues and terms, is an appropriate guideline for defining the term for state and local tax purposes. We decline to amend subsection (a)(12) as requested because the definition of telecommunications services is defined to include Voice over Internet Protocol (VoIP) and the term telecommunications is used in subsection (a)(12).

Comments and suggested edits were received from Ned A. Lenhart, CPA and President of Sales Tax Advisors of Georgia.

First, Mr. Lenhart notes that subsection (h)(4) uses the term "wireless" when describing certain prepaid services and notes that the term "wireless" is not defined in the rule. He suggests that we substitute the term "telecommunications" for "wireless" because "prepaid telecommunications" services are clearly defined in subsection (a)(9) of the regulation.

Second, he notes that subsection (h) makes a cross reference to the definition of place of primary use in subsection (a)(7), but notes the correct reference is to subsection (a)(8).

Finally, Mr. Lenhart asks that the comptroller reconsider the information in subsection (a)(8) concerning the application of "place of primary use" sourcing rules for purposes of allocating local taxes as applied to prepaid telecommunications services. He suggests the subsection be amended to reflect the realities relating to the purchase, use, and recharging of prepaid phones which typically occurs on an anonymous basis with the seller having no information to determine a place of primary use. He suggests that the sourcing for prepaid telecommunications services be the same as for pre-paid calling cards, which are treated as tangible personal property and subject to state and local tax based on the location where payment is received.

Based on comments received on the proposed version of this section and new §3.1271 of this title (relating to Imposition and Collection of the Prepaid Wireless 911 Service Fee), we have amended subsections (a)(6), (a)(9), and (h), and added new subsection (b)(13), so that prepaid wireless telecommunications services are sourced the same for purposes of sales and use taxes and for purposes of the prepaid wireless 9-1-1 fee as explained in §3.1271. These changes address Mr. Lenhart's comments.

Comments were also received from Patrick Tyler, General Counsel of the Commission on State Emergency Communications (CSEC).

First, CSEC suggests that the section as proposed does not address prepaid telephone calling services as defined in the Mobile Telecommunications Sourcing Act (MTSA), 4 U.S.C. §124(9), and, therefore, does not provide guidance when the purchase of prepaid telecommunications services are through a landline and evidenced by something other than a card or other item of tangible personal property, such as an access code. We have amended subsections (a)(6), (a)(9) and (h) to provide greater clarity on this issue.

CSEC submits that for purposes of the MTSA both prepaid telephone cards and prepaid wireline telecommunications services are excluded from the sourcing rules provided by the MTSA. In addition, CSEC submits that "(i)ncluding prepaid telephone calling services in the rule would also preclude the use of the (MTSA) exception for such services as a means to avoid application of the prepaid wireless emergency 9-1-1 service fee." We understand this comment to mean that prepaid calling cards and prepaid telecommunications services are not covered by the MTSA and that both types of prepaid services needs to be addressed in this section so that it is also clear that 9-1-1 service fees administered by CSEC apply to sales of these items.

We have amended subsections (a)(6), (a)(9), and (h), and added new subsection (b)(13), to reflect that prepaid wireless telecommunications services should be sourced consistently for purposes of sales and use taxes and the prepaid wireless 9-1-1 fee as explained in §3.1271. We decline to adopt the request to treat non-mobile prepaid telecommunications services as tangible personal property and be taxed like prepaid calling cards.

Finally, with respect to the definition of place of primary use in subsection (a)(8), CSEC suggests that the third sentence be deleted or modified to read: "The purchaser of mobile telecommunications service is presumed to be the customer for purposes of determining place of primary use." CSEC submits that without the change, the definition imposes an undue burden on sellers to determine whether a purchaser of mobile telecommunications service is also the ultimate end user. According to CSEC, such a requirement exceeds what is required by the MTSA, which authorizes service providers to rely on information provided by the customer to determine the tax due if such reliance is in good faith. We decline to adopt this suggested change, as the overall language in subsection (a)(8) indicates that, ultimately, it is the end user's place of primary use that determines where the tax is due and the language in the rule is not inconsistent with the provisions of the MTSA on that point.

Specific amendments to the adopted version of the section are as follows.

Subsection (a)(1) updates the definition of basic local exchange telephone service for purposes of clarity and due to SB 1497. Paragraph (4) provides a definition for interstate long-distance telecommunications service for purposes of clarity and due to SB 1497. Paragraph (5) defines intrastate long-distance telecommunications service for purposes of clarity and due to SB 1497. Paragraph (6) defines mobile telecommunications service pursuant to SB 1497. Paragraph (7) defines pay telephone coin sent pursuant to HB 1459. Paragraph (8) defines place of primary use pursuant to SB 1497. Paragraph (9) defines prepaid telecommunications service according to longstanding agency policy. Paragraph (10) clarifies the definition of private communications service according to longstanding agency policy. Paragraph (13) revises the definition of telecommunications services to reflect changes made under SB 1497, HB 1459, and to clarify agency policy. Paragraph (15) is revised to clarify when the sale of a prepaid telephone calling card is treated as tangible personal property for determining tax due, and when such a sale is taxed as a telecommunications service. New paragraph (16) adds a definition for Voice over Internet Protocol (VoIP) to better reflect the current state of technology with respect to telecommunications services. This definition is based on Newton's Telecom Dictionary (2009).

In this adopted version of the section, we have revised subsection (a)(9) and (15) to better define the difference between a prepaid telecommunications service and a telephone prepaid calling card. Also, in subsection (a)(6) we corrected a misspelling of the word "Mobile" and in subsection (a)(16) we corrected a misspelling of the word "term."

Subsection (b) identifies specific services on which tax is due and now includes provisions to distinguish between intrastate and interstate long-distance services according to agency policy, to account for mobile telecommunications services under SB 1497, and to distinguish the taxability of pay telephone services when paid for with something other than coins. Paragraph (9) clarifies the taxability of equipment and charges related to the sale of telecommunications services and expresses longstanding agency policy related to the requirement for separate invoices for telecommunications services and equipment so that appropriate state and local tax rates are applied. Paragraph (11) clarifies agency policy regarding private line services because of advances in technologies and to express longstanding agency policy regarding allowable allocation methods for sellers based on the percentage of customer channel termination points in Texas. Paragraph (12) clarifies agency policy related to charges that are passed through to customers or imposed on service providers that become part of the tax base. New paragraph (13) is added to this adoption to explain that prepaid wireless telecommunications services as defined in subsection (a)(9) are subject to Texas tax if purchased in person from a Texas business or if purchased by telephone or Internet and the primary business address or residential address of the purchaser is in Texas.

Subsection (c) in the current version of the rule is deleted to reflect that the telecommunications infrastructure fund assessment is repealed as of September 1, 2008. The remaining subsections are relettered accordingly.

Subsection (c) now addresses nontaxable services and adds paragraph (5) to reflect changes due to SB 1497. Paragraph (6) explains longstanding policy that charges reflected on customer bills that are not a cost of doing business of the seller, such as 9-1-1 fees, are not part of the tax base and are not subject to tax.

Subsection (d) now reflects changes to billing and records requirements due to HB 2425 as now reflected in Tax Code, §151.025(d).

Subsection (e) now concerns the resale of tangible personal property and is organized into two paragraphs. Subsection (e)(2) adds the resale exemption for persons who sell cell phones and other wireless voice communications devices as a condition of the purchase of telecommunications services from another pursuant to HB 3319.

Subsection (f)(2) reflects longstanding requirements for the resale of telecommunications services. Paragraph (3) explains the resale provisions for mobile telecommunications service providers under SB 1497.

Subsection (h), previously subsection (i), is rewritten and reorganized to reflect local tax provisions as follows. Paragraph (1) explains that local jurisdictions may repeal the exemption on local telecommunications services taxes. Paragraph (2) clarifies that local taxes can never apply to interstate long-distance telecommunications services. Paragraph (3) explains the general rules for collecting local taxes subject to the exceptions in paragraphs (4) and (6). Paragraph (4) explains how local taxes apply to mobile telecommunications services under SB 1497. Paragraph (5) addresses local tax rules for prepaid telephone cards which are treated as tangible personal property. Paragraph (6) explains the local tax rules for prepaid wireless telecommunications services.

Nonsubstantive changes are made throughout the section to improve clarity and readability.

This amendment is adopted 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, §151.006 (Sale for Resale), §151.009 (Tangible Personal Property), §151.0103 (Telecommunications Services), §151.01032 (Telephone Prepaid Calling Card), §151.025(d) (Records Required to be Kept), §151.061 (Sourcing of Charges for Mobile Telecommunications Services), §151.323 (Certain Telecommunications Services), and §322.109(b) (Telecommunications Exemption).

§3.344.Telecommunications 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) Basic local exchange telephone service--The provision by a telephone company of each access line and each dial tone to a fixed location for sending and receiving telecommunications in the telephone company's local exchange network. Services are considered basic irrespective of whether the customer has access to a private or party line, or whether the customer has limited or unlimited access. The term does not include international, interstate, or intrastate long-distance telecommunications services or mobile telecommunications services.

(2) Internet--Collectively the myriad of computer and telecommunications facilities, including equipment and operating software, that comprise the interconnected worldwide network of networks that employ the Transmission Control Protocol/Internet Protocol, or any predecessor or successor protocols to the protocol, to communicate information of all kinds by wire or radio.

(3) Internet access service--A service that enables users to access content, information, electronic mail, or other services offered over the Internet and may also include access to proprietary content, information, and other services as part of a package of services offered to consumers. The term does not include telecommunications services. See §3.366 of this title (relating to Internet Access Services).

(4) Interstate long-distance telecommunication service--A telecommunication service that originates in one state, crosses state lines, and terminates in another state.

(5) Intrastate long-distance telecommunications service--A telecommunication service that originates and terminates within one state, but crosses the boundaries on subdivisions or jurisdictions within the state.

(6) Mobile telecommunications service--The provision of a commercial mobile radio service, as defined in 47 C.F.R. 20.3 of the Federal Communications Commission's (FCC) regulations in effect on June 1, 1999 under the Mobile Telecommunications Sourcing Act (4 U.S.C. §§116-126). The term includes cellular telecommunications services, personal communications services (PCS), specialized mobile radio services, wireless voice over Internet protocol services, and paging services. The term does not include telephone prepaid calling cards or air-ground radio telephone services as defined in 47 C.F.R. 22.99 of FCC regulations in effect on June 1, 1999.

(7) Pay telephone coin sent--Telecommunications service paid for by the insertion of coins into a coin-operated telephone.

(8) Place of primary use--The physical street address that is representative of where a customer primarily uses a mobile telecommunications service. That location must be either the customer's residential street address or the customer's primary business street address that is within the licensed service area of the service provider. The individual or entity that contracts with the service provider is the customer. If the individual or entity that contracts with the service provider is not the end user, then the physical street address where the end user primarily uses the service determines the customer's place of primary use. For example, a business owner who is located in Austin, Texas establishes mobile telecommunication service accounts for employees who are located in other cities. One employee does business from his home in Dallas, Texas. Two other employees work at an office that is located in Houston, Texas. Another employee works at an office that is located in New Orleans, Louisiana. The home street address of the employee in Dallas is the place of primary use for that cellular phone account. The place of primary use for the two Houston employees is the street address of the Houston office. The place of primary use for the employee in Louisiana is the street address of the New Orleans office.

(9) Prepaid telecommunications service--A wireless or wire telecommunications service for which the provider requires a customer to prepay the full amount prior to provision of the service. The term does not include the sale or use of a telephone prepaid calling card as defined in paragraph (15) of this subsection. A card, pin number, access code or similar device that allows a user to access only a specific network, or that is intended for use with a specific user account or device (e.g., to add more minutes to an existing account) is a prepaid telecommunications service and is taxed as the sale of a telecommunications service. Local sales tax is collected as explained in subsection (h) of this section.

(10) Private communication service--A telecommunication service that entitles the customer to exclusive or priority use of a communications channel or group of channels between or among termination points, regardless of the manner in which such channel or channels are connected, and includes switching capacity, extension lines, stations, and any other associated services that are provided in connection with the use of such channel or channels.

(A) As it relates to private communication service, the term "communications channel" means a physical or virtual path of communications over which signals are transmitted between or among customer channel termination points.

(B) As it relates to private communication service, the term "customer channel termination point" means the location where the customer either inputs or receives the communications.

(11) Seller--Any person who sells telecommunications services including a hotel, motel, owner or lessor of an office, residential building or development that contracts and pays for telecommunications services for resale to guests or tenants.

(12) Taxable service--A telecommunications service or other taxable service listed in Tax Code, §151.0101.

(13) Telecommunications services--The electronic or electrical transmission, conveyance, routing, or reception of sounds, signals, data, or information utilizing wires, cable, radio waves, microwaves, satellites, fiber optics, Voice over Internet Protocol (VoIP), or any other method now in existence or that may be devised, including but not limited to long-distance telephone service. The term includes mobile telecommunications services and prepaid telecommunications services. The term does not include:

(A) the storage of data or other information for subsequent retrieval or the processing, or reception and processing, of data or information intended to change its form or content;

(B) the sale or use of a telephone prepaid calling card;

(C) Internet access service; or

(D) pay telephone coin sent.

(14) Telephone company--A person who owns or operates a telephone line or telephone in this state and charges for its use.

(15) Telephone prepaid calling card--A card or other item, including an access code, that represents the right to access telecommunications services, other than prepaid telecommunications services as defined in paragraph (9) of this subsection, through multiple devices, regardless of the network providing direct service to the device used, for which payment is made in incremental amounts and before the call or transmission is initiated. For example, a calling card that allows a user to access a long distance telecommunications network for the purpose of making international calls through a pay phone is a telephone prepaid calling card. The sale of a telephone prepaid calling card is taxed as the sale of tangible personal property.

(16) Voice over Internet Protocol (VoIP)--A telecommunication service where a phone call is transmitted over a data network. The term "Internet Protocol" is a catchall phrase for the protocols and technologies of encoding a voice call that allow the voice call to be slotted in between data on a data network, including the Internet, a company's Intranet, or any other type of data network.

(b) Taxable telecommunications services. The total amount charged for a taxable telecommunications service is subject to sales tax. Sales tax is due on a charge for the following:

(1) basic local exchange telephone services;

(2) enhanced services such as metro service, extended area service, multiline hunting, and PBX trunk;

(3) auxiliary services such as call waiting and call forwarding;

(4) intrastate long-distance telecommunications services;

(5) interstate long-distance telecommunications services that are both originated from, and billed to, a telephone number or billing or service address within Texas such that if a call originates in Texas and is billed to a Texas service address, the charge is taxable even if the invoice, statement, or other demand for payment is sent to an address in another state;

(6) mobile telecommunications services for which the place of primary use is located in Texas;

(7) telegraph services that are both originated from, and billed to, a person within Texas;

(8) a telecommunications service paid for by the insertion of tokens, credit or debit card into a coin-operated telephone located in Texas;

(9) subject to subsection (e) of this section, the lease, rental, or other charges for telecommunication equipment including separately stated installation charges. Separately stated charges for labor to install wiring will not be taxable if the wiring is installed in new structures or residences in such manner as to become a part of the realty. Separately stated charges for labor to install wiring in existing nonresidential real property are taxable. See §3.291 and §3.357 of this title (relating to Contractors; Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance) for additional information. If charges for the installation of wiring and charges for the equipment are not separated, the total charge will be treated as a sale and installation of tangible personal property. Equipment sold by a telecommunications service provider is subject to sales or use tax and is not taxed as part of the telecommunications service if the service provider separately invoices the sale of the equipment. The sale of equipment is not separately invoiced if it is identified on the same bill, receipt or invoice as the sale of the telecommunications service, even if it is identified as a separate line item on the same bill, receipt, or invoice;

(10) installation of telecommunications services, including service connection fees;

(11) private communication services. Taxable receipts include the channel termination charge imposed at each channel termination point within this state, the total channel mileage charges imposed between channel termination points or relay points within this state, and an apportionment of the interoffice channel mileage charge that crosses the state border. An apportionment on the basis of the ratio of the miles between the last channel termination point in Texas and the state border to the total miles between that channel termination point and the next channel termination point in the route will be accepted. If there is a single charge for a private communication service in which the customer has channel termination points both inside and outside of Texas, the apportionment can also be determined by dividing the number of customer channel termination points in Texas by the total number of customer channel termination points to establish the percentage of the charge subject to state sales tax for Texas. Other apportionment methods may be used by the seller if first approved in writing by the comptroller;

(12) charges that are passed through to a purchaser for federal, state, or local taxes or fees that are imposed on the seller of the telecommunications service rather than on the purchaser. Such charges are a cost or expense of the seller and are included in the total price subject to sales tax; and

(13) prepaid wireless telecommunications services as defined by subsection (a)(9) of this section when the purchase is made in person at a Texas business or is made by telephone or the Internet and the purchaser's primary business address or residential address is in Texas.

(c) Nontaxable services. Sales tax is not due on charges for:

(1) interstate long-distance telecommunications services that are not both originated from, and billed to, a telephone number or billing or service address within Texas. Records must clearly distinguish between taxable and exempt long-distance services;

(2) broadcasts by commercial radio or television stations licensed or regulated by the FCC. See §3.313 of this title (relating to Cable Television Service) for the tax status of cable television services;

(3) telecommunications services purchased for resale;

(4) telegraph services that are not both originated from and billed to a person within Texas;

(5) mobile telecommunications services for which the place of primary use is located outside of Texas; and

(6) charges for federal, state, or local taxes or fees that are imposed on the purchaser rather than on the seller of the telecommunications service. For example, no sales tax is due on a separately stated charge for federal excise tax or for 9-1-1 Emergency Service Fee and 9-1-1 Equalization Surcharge because these taxes or fees are imposed on the purchaser and are not a cost of doing business of the seller.

(d) Billing and records requirements. If any nontaxable charges are combined with and not separately stated from taxable telecommunications service charges on the purchaser's bill or invoice from a provider of telecommunications services, the combined charge is subject to tax unless the service provider can identify the portion of the charges that are nontaxable through the provider's books and records kept in the regular course of business. If the nontaxable charges cannot reasonably be identified, the charges from the sale of both nontaxable services and taxable telecommunications services are attributable to taxable telecommunications services. The provider of telecommunications services has the burden of proving nontaxable charges.

(e) Resale of tangible personal property. See §3.285 of this title (relating to Resale Certificate; Sales for Resale).

(1) Transfer of tangible personal property to the care, custody and control of the purchaser. A telecommunications service provider may claim a resale exemption on the purchase of tangible personal property that is transferred by the telecommunications service provider to the care, custody, and control of the purchaser. A telecommunications service provider must collect sales tax on charges for such items.

(2) Wireless voice communication devices. A person may claim a resale exemption on the purchase of a cell phone or other wireless voice communication device as an integral part of a taxable service, regardless of whether there is a separate charge for the wireless voice communication device or whether the purchaser is the provider of the taxable telecommunications service, if payment for the service is a condition for receiving the wireless voice communication device. For example, if a person signs a contract for the purchase of telecommunications services at the location of a retailer and the retailer sells the person a cell phone as a condition of entering the contract for the telecommunications services that will be provided by someone other than the retailer, the retailer can purchase the cell phone tax free with a properly completed resale certificate.

(f) Resale of a telecommunications service. See §3.285 of this title.

(1) Sales tax is not due on the charge by one telephone company to another for providing access to a local exchange network. The telecommunications service provider must collect sales tax from the final purchaser on the total charge for the taxable service including the charge for access.

(2) A telecommunications service may be purchased tax free for resale if resold by the purchaser as an integral part of a taxable service. The purchaser must give the service provider a properly completed resale certificate to purchase the telecommunications service tax free for resale. A telecommunications service is an integral part of a taxable service if the telecommunications service is essential to the performance of the taxable service and without which the taxable service could not be rendered. For example, an Internet access service provider (ISP) may give a resale certificate when purchasing the dedicated dial-up line services to be used by the ISP's customers. However, the ISP must pay sales tax when purchasing its own personal or business use of telecommunications services such as charges for its office phone lines, mobile telecommunications services for its traveling salespersons, or for a customer service call-center.

(3) A mobile telecommunications service provider may purchase roaming services from another mobile telecommunications service provider tax free for resale to its customers that are using the roaming services. For example, an out-of-state mobile telecommunications service provider purchases roaming services in Texas for resale to its out-of-state customers (i.e., persons who have a place of primary use outside Texas). To be exempt from sales tax, the out-of-state mobile telecommunications service provider must give the seller of the roaming services a resale certificate showing either a Texas sales tax permit number or the sales tax permit number or registration number issued by its home state. Effective for billing periods that begin on or after August 1, 2002, these out-of-state customers do not owe Texas sales tax on roaming charges incurred while visiting or traveling through Texas.

(g) Taxable purchases. Subject to the provisions of subsections (e) and (f) of this section, a telecommunications service provider owes sales or use tax on all tangible personal property and services that are used to provide the service. See §3.346 of this title (relating to Use Tax), §3.281 of this title (relating to Records Required; Information Required), and §3.282 of this title (relating to Auditing Taxpayer Records).

(h) Local tax.

(1) Subject to the provisions of paragraph (2) of this subsection, jurisdictions that impose local sales and use taxes may repeal the local sales tax exemption on telecommunications services. See Publication 96-339 (Jurisdictions That Impose Local Sales Tax on Telecommunications Services) for a list of jurisdictions that impose local taxes on telecommunications services.

(2) Taxable interstate long-distance telecommunications are only subject to state sales tax. Local taxing jurisdictions may not repeal the local sales tax exemption on interstate long-distance telecommunications services.

(3) A seller of taxable telecommunications services, with the exception of mobile telecommunications services as explained in paragraph (4) of this subsection and prepaid wireless telecommunications services as explained in paragraph (6) of this subsection, must collect local sales taxes based on the location from which the telecommunications service originates. If the point of origin cannot be determined, the telecommunications service provider must collect local taxes based on the address to which the telecommunications service is billed.

(4) A seller of mobile telecommunications services must collect local sales taxes based on the place of primary use as defined in subsection (a)(8) of this section and per Tax Code, §151.061. The location from which a mobile telecommunications service originates does not determine whether the service is exempt or is subject to state or local sales tax.

(5) A seller of telephone prepaid calling cards is not selling a telecommunications service and must collect state and local sales or use tax on the sale of the cards in the same manner as sales of other tangible personal property.

(6) A seller of prepaid wireless telecommunications services as defined in subsection (a)(9) of this section must collect local tax based on the business address of the seller when the sale occurs in Texas in person. However, if the sale occurs over the telephone or Internet, tax is due if the primary business address of the purchaser or residential address of the purchaser is in Texas.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on October 1, 2010.

TRD-201005676

Ashley Harden

General Counsel

Comptroller of Public Accounts

Effective date: October 21, 2010

Proposal publication date: April 2, 2010

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


SUBCHAPTER MM. TEXAS PREPAID WIRELESS 9-1-1 EMERGENCY SERVICE FEE

34 TAC §3.1271

The Comptroller of Public Accounts adopts new §3.1271, concerning prepaid wireless 9-1-1 emergency service fee, with changes to the proposed text as published in the April 2, 2010, issue of the Texas Register (35 TexReg 2733).

The new section will be in new Subchapter MM, Texas Prepaid Wireless 9-1-1 Emergency Service Fee. The new section implements House Bill 1831, 81st Legislature, 2009, which creates this new fee, effective June 1, 2010, through the creation of Health and Safety Code, §771.0712. The fee is imposed at the rate of 2.0% of the purchase price of prepaid wireless telecommunications services that permit access to 9-1-1 emergency services that are purchased through whatever means. The comptroller is required to adopt rules to implement the new fee by June 1, 2010 and administer the collection of the fee in a manner consistent with Tax Code, Chapter 151.

The agency received comments on the proposed rule. The comments and the agency's responses are as follows:

Stacy Sprinkle Vice President - State Tax Policy, Mid-west Area Verizon Wireless provided the following comments:

By being one of the first states to adopt a legislative solution to mandate collection of 911 fees at the retail point of sale ("POS") with respect to prepaid wireless service, Texas did not have the benefit of the trend, which has since become evident, of other states' enactments based on model prepaid wireless 911 retail POS statutory language from the National Conference of State Legislatures ("NCSL") Executive Committee Task Force on State & Local Taxation of Communications and Electronic Commerce (the "NCSL Model"), promulgated in July 2009. As more states adopt the retail POS solution, this will expand the universe of persons who collect and remit 911 fees from a relatively small group of historical collectors--generally, service providers--to general retailers. With the group of fee collectors expanding, we believe that greater uniformity across the states will enhance retailer compliance. We also believe that uniformity between the regulations required by THSC §771.0712 and other states' implementation of the NCSL Model is achievable, because there are no apparent inconsistencies between THSC §771.0712 and the NCSL Model. Thus, we advocate adopting a regulation that follows the NCSL Model, thereby accomplishing the Legislature's mandate to implement a POS method of collecting 911 fees on prepaid wireless services when the services are sold while also providing retailers with the benefit of greater multistate uniformity.

As discussed in our meeting, we see three primary areas of concern where the proposed regulations unnecessarily deviate from the NCSL Model.

The first concern is with the definition of "prepaid wireless telecommunication service," which captures any 911-capable wireless service that is "paid for in advance." However, payment in advance is only one of the two fundamental aspects of prepaid wireless service. The other is that the service will only function, permitting calls to be made, if the customer has a positive prepaid balance. By incorporating only the first aspect of true prepaid wireless service, the proposed regulation's unnecessarily broad definition will arguably capture wireless service plans that are currently--and correctly--treated as postpaid wireless service plans that are subject to the monthly fee imposed under THSC §771.0711. The NCSL Model avoids this potential duplication by defining "prepaid wireless telecommunications service" as "a wireless telecommunications service that allows a caller to dial 911 to access the 911 system, which service must be paid for in advance and is sold in predetermined units or dollars of which the number declines with use in a known amount." That is, when the number of predetermined units or dollars declines to zero, there is no more service available to be used. Accordingly, we recommend that the proposed regulation incorporate the definition of prepaid wireless telecommunications service from the NCSL Model. Furthermore, given that the regulation will need to accommodate future pricing structures that are currently unknown, we also recommend that the regulation be amended to explicitly preclude the application of the fee imposed under THSC §771.0712 to any service that is subject to the emergency service fee for wireless telecommunications connections under THSC §771.0711.

The second concern is with the language contained in §3.1271(d)(4)(B). The purpose of this provision is unclear and appears to goes beyond the statutory mandate--which only extends the 911 fee to the purchase of wireless prepaid services sold in retail transactions. If your concern is that service could be purchased for resale but then consumed instead of sold, this can be addressed in the provision governing sales for resale, without creating a broad use-tax-type provision that is arguably not authorized by the statute.

The last concern is the requirement in §3.1271(e) that sellers determine "primary place of use" to source telephone and Internet sales. First, we note that the actual term is "place of primary use" ("PPU"), not "primary place of use." But, more importantly, we are concerned that by using this postpaid-only term in the prepaid context, the regulation seems likely to create uncertainty for sellers and for the Comptroller, which may even lead to unnecessary litigation. As the regulation notes, PPU is defined in Tax Code §151.061, which in turn implements the requirements of the federal Mobile Telecommunications Sourcing Act, 4 U.S.C. §§116 et seq. (the "MTSA"). Because the MTSA does not apply to prepaid services, id. §116(c)(1), the regulation's incorporation of PPU may unintentionally provide sellers with a legal basis for claiming that they have no obligation to collect the 911 fee with respect to Internet or telephone sales. The resulting uncertainty is unnecessary. Instead of creating grounds for future litigation, we recommend that the regulation simply incorporate the rules for sourcing sales to Texas for sales tax purposes. By doing so, the regulation will avoid the doubt created by incorporating the inapplicable MTSA PPU concept, and will also permit retailers to piggyback their existing sales-tax methods for sourcing sales to Texas--thereby enhancing compliance.

Response: The comptroller deviated from the NCSL model where and when it was necessary to secure the interest of this state and to more effectively administer the fee.

Gilbert Bernal, Attorney with Stahl, Bernal and Davies, L.L.P provided the following comments:

Subsection (b)(7). This subsection states the definition of "mobile telecommunications service." This definition is confusing in that it correctly references the definition of commercial mobile radio service ("CMRS") in 47 C.F.R. 20.3, but then it mentions the Mobil Telecommunications Sourcing Act ("MTSA"). Subsection (b)(7) then states that the definition of "mobile telecommunications service" does not include "telephone prepaid calling cards." There is a definition of "telephone prepaid calling service" in MTSA, which is generally believed to mean prepaid wireless. MTSA does not apply to such service. However, prepaid wireless is CMRS. The definition should just stop at the CFR reference to CMRS.

Response: The comptroller's office does not agree with the statement concerning the use of the term "telephone prepaid calling card" as a reference to prepaid wireless services but believes the reference in the MTSA to be a reference to long distance calling cards instead. No adjustment was made to the rule as proposed.

Subsection (d)(1). The proposed rule states: "(T)he fee shall be collected by the seller from the purchaser at the time of and with respect to each retail sale of prepaid wireless telecommunication services in this state and with respect to each sale of prepaid wireless telecommunication services whose primary place of use is in this state." It would be better to state here that the fee pertains to the "retail purchase" since that is the defined term, and not "retail sale." Further, "primary place of use" should be deleted because this term has no application to prepaid wireless.

Response: We accept the suggestion and subsection (d)(1) is amended for adoption to reflect that the fee pertains to a "retail transaction" instead of a "retail purchase." We do not agree that the sourcing provisions relating to place of primary use under the Mobile Telecommunications Sourcing Act do not apply to all prepaid wireless services. However, we are changing the sourcing provisions in subsection (e) to be consistent with those under §3.344 of this title relating to sales and use taxes imposed on telecommunications services.

Subsection (d)(4)(A) and (B). The proposed rule states: (4) A seller is liable for the fee on: (A) the retail price; or (B) the value of a prepaid wireless telecommunication service not sold at retail but used by a seller or other person in Texas. Subsection (d)(4)(A) of the proposed rule is very confusing and unnecessary in light of the fact that under subsection (d)(1), the fee is collected by the seller from the purchaser, and under subsection (f)(1), the sellers report the collected fees to the Comptroller. As for subsection (d)(4)(B), we simply do not understand what situation is meant to be covered by that subsection and would need an explanation of that in order to comment on whether the language used there works or not. In summary, we suggest that paragraph (4)(A) and (B) be deleted until such time as the proposed rule is redrafted so that it can be clarified and better understood.

Response: The general purpose of this rule is to clarify the treatment of and provide guidance on areas not clearly provided for by statute. Subsection (d) addresses the imposition and collection of the fee and subsection (d)(4) addresses the use of prepaid wireless services that are not subject to a retail transaction, but on which the fee is also due.

Subsection (e). The proposed rule states: "(e) Sourcing. A sale of prepaid wireless telecommunication services is deemed to have occurred in this state when the transaction occurs at a business location in this state or if the transaction would be treated as occurring in the state as provided for under Tax Code, §151.061. Each seller of a prepaid wireless telecommunication service must determine the primary place of use for each purchase of prepaid wireless telecommunication service made by telephone and over the Internet. The fee is due when the primary place of use is in Texas. The term 'primary place of use' has the same meaning as in Tax Code, §151.061." The pertinent provisions of Tax Code §151.061 in subsection (a)(2) state: "'Place of primary use' means the street address that is representative of where the customer's use of the mobile telecommunications service primarily occurs. That location must be the residential street address or the primary business street address of the customer that is within the licensed service area of the home service provider." My comments regarding subsection (e) relate to the problem of attributing "place of primary use" to prepaid wireless service customers. As stated above, this term has no application to prepaid wireless. In fact, in the 911 fee litigation that is still pending against CSEC, the prepaid wireless carriers have argued that the concept of "place of primary use" as envisioned by the provisions of §151.061 does not apply to prepaid customers. Nothing in the Travis County District Court's ruling and judgment that the 911 fee in Chapter 771 of the Texas Health and Safety Code does not apply to prepaid wireless service in any way rejected those arguments. Further, there may be instances where it may not be possible to obtain the residential street address or primary business street address of the customer. Therefore, we suggest that the sourcing provisions of subsection (e) be based simply on the residential street address or primary business street address of the customer as provided by the customer, and if these addresses are not provided, then the address tied to the customer's credit card be used as an option for sourcing.

Response: As explained above, we are changing the sourcing provisions in subsection (e) to be consistent with those under §3.344 of this title relating to sales and use taxes imposed on telecommunications services.

Patrick Tyler, General Counsel, Texas Commission on State Emergency Communications (CSEC) submits the following comments to the Comptroller of Public Accounts' (Comptroller) on proposed new §3.1271. CSEC is the state's authority on emergency communications and is responsible for administering the implementation of 9-1-1 service to approximately eighty-nine percent of the geographical area of Texas and one-third of its population. The state 9-1-1 program is implemented by Texas' twenty-four Regional Planning Commissions and funded through CSEC's legislative appropriations. CSEC offers these comments to help ensure that the prepaid wireless 9-1-1 emergency service fee is competitively neutral and applied in a non-discriminatory manner.

Subsection (b)(1): Consumer: Modify to add the term "subscriber" to the definition as the term is used several times in Health and Safety Code Chapter 771 and is synonymous with "consumer." Delete the phrase "of prepaid wireless telecommunications service" because the phrase is included in the definition in subsection (b)(4) of "Retail purchase." Subsection (b)(3): Prepaid wireless telecommunication service: Change "mobile telecommunication service" to the defined term in subsection (b)(7) "mobile telecommunications service."

Response: The comptroller acknowledges the suggestion and the rule has been amended to add subscriber but declines to delete the phrase "of prepaid wireless telecommunications service." We are also making the correction so "mobile telecommunications service" is consistent with the defined term.

The phrase "paid for in advance," without further qualification, could be read as applying to some "post-paid" wireless telecommunications service. In some instances, customers "pay in advance" the base price for their wireless telecommunications services. The definition could be modified to clarify that in a prepaid arrangement the consumer is not obligated to make additional purchases and/or that payment for services, including taxes and fees, are entirely paid for in advance.

Response: The comptroller accepts the suggestion and subsection (b)(4) has been amended.

Retail Purchase: The phrase "sale for" should be inserted before the term "resale" in order to mirror the defined term in subsection (b)(5).

Response: The comptroller accepts the suggestion and subsection (b)(6) has been amended.

Subsection (b)(7) Seller: The second use of the term "person" should be replaced with the term "consumer," which is defined in subsection (b)(1) to include a person.

Response: The comptroller accepts the suggestion and the rule has been amended.

Subsection (b)(8) Mobile telecommunications service: The word "services" should be added to the term "prepaid wireless" in the second sentence in order to mirror the definition found in §3.344(b)(6).

Response: The comptroller does not accept the suggestion. Based on other comments received we are removing the term prepaid wireless from the definition of mobile telecommunications service in this section and under §3.344 of this title relating to sales and use taxes imposed on telecommunications services.

Subsection (c)(1): Delete the phrase "of prepaid wireless telecommunication services" after the word "seller" because "seller" is defined in subsection (b)(6) as a person "who sells prepaid wireless telecommunications service."

Response: The comptroller accepts the suggestion and the rule has been amended.

Subsection (d): Replace the term "purchaser" with the defined term "consumer" in subsection (b)(1). Replace both instances of the phrase "sale of prepaid wireless telecommunications services" with the defined term "retail purchase" in subsection (b)(4). Insert "of mobile telecommunications service" after the phrase "primary place of use" to make clear that the phrase applies specifically to mobile telecommunications service. Replace all instances of the phrase "primary place of use" with "place of primary use" in order to be consistent with the Tax Code, the Sourcing Act, and §3.344.

Response: The comptroller only accepts the suggestion to replace the term "purchaser" with the defined term consumer in subsection (b)(1) and the rule has been amended. Due to another suggestion the term "place of primary use" is now deleted from the rule entirely.

Replace "prepaid wireless telecommunications service" in subsection (d)(1) with the defined term "retail purchase" in subsection (b)(4). Replace "service is purchased" with "retail transaction is made" in order to consistently use defined terms.

Response: The comptroller does not accept the suggestion and the rule has not been amended.

Modify the list of documents in subsection (d)(3) on which the fee may be separately stated to mirror those listed in subsection (b)(5).

Response: The comptroller accepts the suggestion and the rule has been amended.

In subsection (d)(4) delete "of prepaid wireless telecommunication services or wireless service provider," because the term "seller" is defined in the rule as "a person who sells prepaid wireless telecommunication services."

Response: The comptroller does not accept the suggestion and the rule was not amended.

Modify the list of documents in subsection (d)(5) on which the fee may be separately stated to mirror those listed in subsection (b)(3).

Response: The comptroller accepts the suggestion and the rule has been amended.

In subsection (d)(6), delete everything after the word "allowed" and insert "except as provided in Health and Safety Code §771.074." Section 771.074 exempts the state and federal government from any fee or surcharge imposed by Subchapter D of Chapter 771. Subchapter D includes new §771.0712. Accordingly, the state and federal government are exempt from the prepaid wireless 9-1-1 emergency service fee.

Response: The comptroller acknowledges the suggestion but only amends the rule to provide an exemption for this state and the federal government. No references to the Health and Safety Code were added.

Subsection (d)(7)(A): Replace the first sentence in its entirety with: "Any seller in this state must collect the fee unless a valid and properly completed resale certificate is received from the purchaser." The term "seller" is defined in the rule as a "person who sells prepaid wireless telecommunications service." The term "fee" is defined to mean "the prepaid wireless 9-1-1 emergency service fee a seller collects from a consumer in the amount required under Health and Safety Code, §771.0712."

Response: The comptroller accepts the suggestion and the rule has been amended.

Subsection (e) Sourcing: Insert "retail purchase" after "A" in the first sentence and then delete "of a prepaid wireless telecommunication services." "Retail purchase" is defined in subsection (b)(4) to mean an individual purchase of prepaid wireless telecommunications service. Delete "of a prepaid wireless telecommunication service" after the word "seller" in the second sentence because "seller" is defined in subsection (b)(6) as a "person who sells prepaid wireless telecommunications services." Insert "retail" between the words "each" and "purchase" in the second sentence to make clear that the obligation to determine place of primary use is only applicable to retail purchases.

Response: We did not adopt these suggested changes. We are omitting all references to primary place of use.

Subsection (f)(1): Delete "of prepaid wireless telecommunication services" following the word "sellers" as the term seller is defined in subsection (b)(6) as "a person who sells prepaid wireless telecommunication services."

Response: The comptroller accepts the suggestion and the rule has been amended.

Subsection (j)(1): Replace "persons subject to collecting the fee" with the defined term "sellers" in subsection (b)(6). Subsection (j)(2): Replace "person who is liable for collecting the fee" with the defined term "seller" in subsection (b)(6). Subsection (j)(3): Replace "person" with the defined term "seller" in subsection (b)(6).

Response: The comptroller acknowledges these suggestions but only amends the rule to add the seller as an option.

Subsection (k): Is the term "purchasers" intended to denote the defined term "consumer"? If not, is purchaser intended to denote a subset of consumers?

Response: The comptroller accepts the suggestion and the rule has been amended.

Subsection (l)(1), (2), and (3): Replace "taxpayer" with the defined term "seller" in subsection (b)(6). Alternatively, the definition of seller could be modified to include "taxpayer."

Response: The comptroller accepts the suggestion and the rule has been amended.

Subsection (m)(1) and (2): Replace "purchaser" with the defined term "consumer" in subsection (b)(1). Paragraph (4)(A)(ii): Modify to mirror the list of documents in subsection (d)(3) and (5). Paragraph (4)(A)(iii); Insert "retail" before the word transaction to make the reference be to a defined term. Paragraph (4)(A)(iv): Replace "item(s)" with "service(s)" to reflect that the fee is imposed on the purchase price of services.

Response: The comptroller accepts the suggestion and the rule has been amended.

Kathy Hamilton, General Attorney, AT&T Texas, following are Southwestern Bell Telephone Company d/b/a AT&T Texas' ("AT&T Texas") comments on the Comptrollers proposed new §3.1271 ("proposed rule") which Implements the prepaid 911 emergency services fee created by Texas Health and Safety Code §771.0712 ("§771.0712"). For ease of consideration, AT&T Texas' comments are presented below consistent with the order of the proposed rule.

Definitions: Proposed §3.1271(b). AT&T Texas recommends the following changes to the "definitions" section of the proposed rules. These changes are necessary to bring the rules in line with the statutory obligations under §771.0712.

Proposed §3.1271(b)(4) should be amended to define "retail transaction" and not "retail purchase." §771.0712 states that the fee shall be collected "at the time of each retail transaction ... ." Consequently, the rules should be amended to reflect this specific statutory language. Additionally, in order to ensure the consistent use of definitions throughout the rules, the reference to "resale" should be amended to state "a sale for resale," which is defined under proposed §3.1271(b)(5).

Response: The comptroller accepts the suggestion and the rule has been amended.

Similarly, the definition of "consumer" in proposed §3.1271(b)(1) should be amended to state "a customer, person, or purchaser who makes a retail transaction as defined by this section."

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

The definition of "mobile telecommunications service" should be amended to state that the "term includes, but is not limited to" the listed examples. This change will ensure the definition is not tied to any specific technologies. Further, "paging services" should be deleted a listed example of a "mobile telecommunication service."

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

A new definition for "purchase price" should be added as follows: "'Purchase Price' shall have the same meaning as 'sales price' in §151.007. Tax Code." This definition is necessary because proposed §3.1271(d)(2) implements the fee on the "purchase price of each prepaid wireless telecommunications service," and "purchase price" is not currently defined.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

The proposed definition of "wireless service provider" should be deleted in whole because the definition is unnecessary. The term "wireless service provider" appears only one additional time in the proposed rule (see proposed §3.1271(d)(4)), which, as discussed further below, is improper in that instance as well). Section 771.0712 places no obligation on a "wireless service provider," instead placing all obligations on the "seller" to collect and remit the prepaid 911 emergency services fee.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Registration: Proposed §3.1271(c): AT&T Texas' sole comment on this section is that any bond or other security required under proposed §3.1271(c)(2) shall be consistent with Chapter 151, Tax Code. Such a requirement is consistent with §771.0712's requirement that the fee be collected and remitted consistent with Chapter 151, Tax Code.

Response: The comptroller accepts the suggestion and the rule has been amended.

Imposition and Collection of Fee: Proposed §3.1271(d): AT&T Texas recommends the following changes to the "imposition and collection of fee" section of the proposed rules. These changes are necessary to make the rules consistent with the statutory obligations in §771.0712.

Proposed §3.1271(d)(1) should be amended to read as follows: "(1) Effective June 1, 2010, the fee shall be collected by the seller from the consumer at the time of and with respect to each retail transaction of prepaid wireless telecommunication service occurring in this state." These changes are necessary to make the proposed rules consistent with §771.0712, which states that the fee is "collected by the seller from the consumer at the time of each retail transaction of prepaid wireless telecommunications service occurring in this state." Additionally, the current reference to the "place of primary use" to source the fee is inappropriate. The issue of sourcing is addressed in proposed §3.1271(e). As discussed in detail below, the fee should be sourced consistent with any other retail transaction, and such sourcing does not involve identifying the "place of primary use."

Response: The rule is amended to strike the reference to place of primary use, but no other changes are made to this version as filed for adoption.

Proposed §3.1271(d)(3) should be amended to state that "the amount of the fee shall be separately stated on ... that is provided to the consumer by the seller, or otherwise disclosed to the consumer by the seller."

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Additionally, this subsection should be amended to state that, in addition to "any other tax or fee imposed by Tax Code, Title 2," the fee is not subject to any other tax or fee "by any political subdivision of this state, or by any intergovernmental agency." This provision will ensure that there is no double taxation of the fee, either at the state or local level.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Proposed §3.1271(d)(4) should be deleted in its entirety. This section attempts to place an obligation on a seller or wireless service provider to "owe" the fee and is inconsistent with §771.0712. For the following reasons, this obligation is inappropriate and should be removed from the proposed rule. First, §771.0712 places the obligation on the seller to collect and remit. Thus, as with the sales tax (on which the prepaid 911 emergency services fee is modeled), the ultimate obligation to pay the fee is on the consumer, and the seller's obligation is to collect and remit to the Comptroller. Second, §771.0712 places no obligation on a "wireless service provider," instead placing all obligations on the "seller" to collect and remit the prepaid 911 emergency services fee. Thus including "wireless service provider" under this proposed section is inappropriate and inconsistent with §771.0712.

The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

In place of proposed §3.1271(d)(4), AT&T Texas recommends the Comptroller adopt the following, which accurately reflects responsibility under §771.0712: "The Fee is the obligation of the consumer and not of the seller or of any provider of prepaid wireless telecommunications service, except that the seller shall be obligated, as provided by this section. to remit to the comptroller the Fees that the seller collects from consumers. Consistent with Chapter 151. Tax Code, a seller has no obligation to pursue collection of the fee from the consumer if the consumer fails or refuses to pay."

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

For clarification, proposed §3.1271(d)(5) should be amended to read as follows: "If, on the invoice, receipt, other similar document, or disclosure related to a sale, charges for items that are not subject to the fee are combined with and not separately stated from charges subject to the fee, and a seller cannot identify the portion of the charges that are not subject to the fee through the seller's books and records kept in the regular course of business, then all charges related to the sale are subject to the fee. The seller of prepaid wireless services has the burden of proving what charges are not subject to the fee. "

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Proposed §3.1271(d)(7) regarding "sale for resale" should be deleted and replaced with the following: "The comptroller shall establish procedures for a seller to document that a sale for resale is not a retail transaction under this section. The procedures shall substantially conform to procedures for documenting a sale for resale under Chapter 151 Tax Code." This change will ensure that, consistent with legislative intent, the sale for resale provisions conform with those already in place under Chapter 151, Tax Code. In order to ensure prepaid wireless service is not subjected to multiple 911 fees, the following new subsection should be added to proposed §3.1271(d) as follows: "Prepaid wireless telecommunications service subject to the fee is not subject to the C emergency services fee for wireless telecommunications connections in Section 771.0711, Health & Safety Code."

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Sourcing: Proposed §3.1271(e): As discussed above, proposed §3.1271(e) provides the necessary definition of what constitutes "occurring" in this state for purposes of the fee, i.e. sourcing of the fee. AT&T Texas agrees that the new prepaid wireless 911 emergency services fee should be sourced according to Chapter 151 of the Tax Code. However, for the following reasons §151.061, Tax Code (as in the proposed rule) is not the appropriate sourcing provision. Instead, the proposed rules should make generic reference to sourcing under Chapter 151 of the Tax Code in order to allow the fee to be applied in the same manner as the sales and use tax is applied to other Texas retail transactions.

First, §151.061, Tax Code reflects Texas' adoption of the Federal Mobile Telecommunications Sourcing Act, Pub. L. No. L06-252, 114 Stat. 626, codified at 4 U.S.C. §§116-126 ("MTSA"). MTSA §116(c)(1) specifically excludes prepaid wireless telecommunications service from the MTSA sourcing rules. This is because, by its nature, the place of primary use provisions in the mobile telecommunications sourcing rules are inapplicable to prepaid wireless service. Consequently, consistent with the federal rules, §151.061, Tax Code does not apply to prepaid wireless telecommunications service, and cannot serve as the basis for sourcing under the proposed rules. Rather, for purposes of the fee, the sale of prepaid wireless telecommunication services should be sourced in the same manner as the sale of prepaid telecommunications services (including prepaid wireless services) are sourced for purposes of the Texas sales tax, i.e., as the sale of tangible personal property.

Second, §771.0712 explicitly states that the fee is "two of the purchase price" and is "collected by the seller from the consumer at the time of each retail transaction." Further, §771.0712 states that the fee shall be collected and remitted "consistent with Chapter 151, Tax Code," which governs sales and use tax in Texas. Taken together, these provisions make it clear that the fee is to be collected on the "retail transaction" (and not the service itself) and should be administered consistent with existing sourcing procedures for the sales and use tax. Thus, the sourcing of the fee should be consistent with the sourcing of prepaid telecommunications services in Texas (i.e., as the sale of tangible personal property), which, as discussed above, is not governed by Tax Code §151.061.

Consequently, specific citation to §151.061 in the proposed rule is inappropriate. AT&T Texas instead recommends that this section of the proposed rule be amended to make generic reference to sourcing under Chapter 151 of the Tax Code. By doing so, retailers will be required to collect the fee consistent with how they currently collect the sales and use tax for other Texas retail sales of tangible personal property. This was the result mandated by §771.0712, and should thus be reflected in the adopted rule.

Response: We do not agree that the sourcing provisions relating to place of primary use under the Mobile Telecommunications Sourcing Act do not apply. However, we are changing the sourcing provisions in subsection (e) to be consistent with those under §3.344 of this title relating to sales and use taxes imposed on prepaid wireless telecommunications services.

Audits: Proposed §3.1271(k): AT&T Texas' sole comment on this section is that proposed §3.1271(k) should be amended to state that any audit may be performed concurrent with an audit performed pursuant to Chapter 151, Tax Code. Inclusion of this provision will ensure that synergies between audits performed pursuant to proposed §3.1271 and otherwise under Chapter 151, Tax Code can potentially be taken advantage of by the Comptroller.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Ron Hinkle, Ratliff Company provided the following comments: By being one of the first states to adopt a legislative solution to mandate collection of 911 fees at the retail point of sale ("POS") with respect to prepaid wireless service, Texas did not have the benefit of the trend, which has since become evident, of other states' enactments based on model prepaid wireless 911 retail POS statutory language from the National Conference of State Legislatures ("NCSL") Executive Committee Task Force on State & Local Taxation of Communications and Electronic Commerce (the "NCSL Model"), promulgated in July 2009. As more states adopt the retail POS solution, this will expand the universe of persons who collect and remit 911 fees from a relatively small group of historical collectors--generally, service providers--to general retailers. With the group of fee collectors expanding, we believe that greater uniformity across the states will enhance retailer compliance. We also believe that uniformity between the regulations required by THSC §771.0712 and other states' implementation of the NCSL Model is achievable, because there are no apparent inconsistencies between THSC §771.0712 and the NCSL Model. Thus, we advocate adopting a regulation that follows the NCSL Model, thereby accomplishing the Legislature's mandate to implement a POS method of collecting 911 fees on prepaid wireless services when the services are sold while also providing retailers with the benefit of greater multistate uniformity.

The first concern is with the definition of "prepaid wireless telecommunication service," which captures any 911-capable wireless service that is "paid for in advance." However, payment in advance is only one of the two fundamental aspects of prepaid wireless service. The other is that the service will only function, permitting calls to be made, if the customer has a positive prepaid balance. By incorporating only the first aspect of true prepaid wireless service, the proposed regulation's unnecessarily broad definition will arguably capture wireless service plans that are currently--and correctly--treated as postpaid wireless service plans that are subject to the monthly fee imposed under THSC §771.0711. The NCSL Model avoids this potential duplication by defining "prepaid wireless telecommunications service" as "a wireless telecommunications service that allows a caller to dial 911 to access the 911 system, which service must be paid for in advance and is sold in predetermined units or dollars of which the number declines with use in a known amount." That is, when the number of predetermined units or dollars declines to zero, there is no more service available to be used. Accordingly, we recommend that the proposed regulation incorporate the definition of prepaid wireless telecommunications service from the NCSL Model. Furthermore, given that the regulation will need to accommodate future pricing structures that are currently unknown, we also recommend that the regulation be amended to explicitly preclude the application of the fee imposed under THSC §771.0712 to any service that is subject to the emergency service fee for wireless telecommunications connections under THSC §771.0711.

The second concern is with the language contained in §3.1271(d)(4)(B). The purpose of this provision is unclear and appears to goes beyond the statutory mandate--which only extends the 911 fee to the purchase of wireless prepaid services sold in retail transactions. If your concern is that service could be purchased for resale but then consumed instead of sold, this can be addressed in the provision governing sales for resale, without creating a broad use-tax-type provision that is arguably not authorized by the statute.

The last concern is the requirement in §3.1271(e) that sellers determine "primary place of use" to source telephone and Internet sales. First, we note that the actual term is "place of primary use" ("PPU"), not "primary place of use." But, more importantly, we are concerned that by using this postpaid-only term in the prepaid context, the regulation seems likely to create uncertainty for sellers and for the Comptroller, which may even lead to unnecessary litigation. As the regulation notes, PPU is defined in Tax Code §151.061, which in turn implements the requirements of the federal Mobile Telecommunications Sourcing Act, 4 U.S.C. §§116 et seq. (the "MTSA"). Because the MTSA does not apply to prepaid services, id. §116(c)(1), the regulation's incorporation of PPU may unintentionally provide sellers with a legal basis for claiming that they have no obligation to collect the 911 fee with respect to Internet or telephone sales. The resulting uncertainty is unnecessary. Instead of creating grounds for future litigation, we recommend that the regulation simply incorporate the rules for sourcing sales to Texas for sales tax purposes. By doing so, the regulation will avoid the doubt created by incorporating the inapplicable MTSA PPU concept, and will also permit retailers to piggyback their existing sales-tax methods for sourcing sales to Texas--thereby enhancing compliance.

Response: The comptroller deviated from the NCSL model where and when it was necessary to secure the interest of this state and to more effectively administer the fee. We do not agree that the sourcing provisions relating to place of primary use under the Mobile Telecommunications Sourcing Act do not apply. However, we are changing the sourcing provisions in subsection (e) to be consistent with those under §3.344 of this title relating to sales and use taxes imposed on telecommunications services.

Ronnie Volkening, Texas Retailer's Association provided the following: This draft follows the earlier proposal's wording and requirements, and in-line with other states that have implemented the collection of the E-911 fee by retailers during the past year. The only area I see that may cause an issue is with an exemption; subsection (d)(7). The draft mentions that only purchases for "resale" are exempt with the completion of a valid resale certificate and the acceptance in good faith by the retailer. It does not mention about exempt organizations that may purchase prepaid wireless services, such as churches, or organizations working with the homeless, or other shelters. Since these organizations are exempt for sales tax purposes, are they exempt from the E-911 fee? We may request some type of clarification within the proposed ruling. I do not see any other problems with the regulation.

Response: The comptroller acknowledges the suggestion but only amends the rule to provide an exemption for this state and the federal government to be consistent with the exemption provided under Health and Safety Code, §771.074.

Peter Lurie, Senior Vice President, Sprint Nextel, Prepaid Legal and Business Affairs submitted the following comments on behalf of Virgin Mobile USA: Without prejudice to litigation between the Commission on State Emergency Communications and Virgin Mobile USA, LP concerning the applicability of §771.0711, Texas Health and Safety Code, to certain of Virgin Mobile's Services, Sprint would like to propose amendments to the new §3.1271, concerning prepaid wireless 9-1-1 emergency service fee, in new Subchapter MM, Texas Prepaid Wireless 911 Emergency Service Fee.

Please note the following suggestions.

Section 3.1271(a). This subsection states that Chapter 151 of the Tax Code applies "as deemed necessary by the Comptroller." The quoted language should be struck. The Comptroller should state beforehand what sections do or do not apply.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Section 3.1271(c). This subsection states that the Comptroller may require at 'its discretion' a prepaid seller to post a bond. This language should be struck or the Comptroller should set forth the circumstances in which a bond would be required.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Section 3.1271(d)(3). This subsection speaks to a transaction "invoice, receipt, or other similar document." This subsection should be changed to read 'invoice, receipt, acknowledgement of other similar document or electronic communication' to capture transactions evidenced without physical documents.

Response: The comptroller accepts the suggestion in part and amends the rule to address electronic communications.

Section 3.1271(d)(4). This subsection appears to impose a tax on the seller of prepaid wireless. This subsection is inconsistent with the remainder of the rule and with §771.0712(a), Texas Health and Safety Code, which imposes the fee on the customer at the time of a retail transaction.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Section 3.1271(d)(5). This subsection places the burden of proof on the seller to prove what charges are subject to or not subject to the fee and the proof must be made by records kept in the ordinary course of business of the company. This language should be struck. As a taxing statute, the state has the burden of proof to show that the tax applies and a taxpayer should not be limited to records kept in the ordinary course of business if a question arises as to the applicability of the fee.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Section 3.1271(d)(6). This subsection states that there are no exemptions to the fee except for sales for resale. The subsection should just say there are no exemptions or be struck in its entirety. Sales for resale are not an exemption because §771.0712(a), Texas Health and Safety Code, only applies to retail transactions.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Section 3.1271(e). This subsection refers to the 'place of primary use' of the customer. Because prepaid carriers does not have a place of primary use under the Federal Mobile Telecommunications Sourcing Act, language should be added to the Rule to make clear that a seller can determine a customer's 'place of primary use' for the purpose of the §771.0712(a) fee based upon the street address associated with the credit card purchaser uses for purchases or, where this information is not available, upon a phone number that is associated with Texas.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Section 3.1271(f)(3). This subsection concerns extension of deadlines in the Rule due to disasters. Language should be added to make clear that the seller can apply for the extension.

Response: Subsection (f)(3) tells a seller how to apply for the extension. Therefore, the comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Section 3.1271(h)(3). This subsection imposes a 50% penalty for evasion of fee. The language should make clear that a fraudulent intent is required. The subsection also imposes a penalty where records are changed to affect the course of an audit. As written, even a change to correct an error would impose a penalty. The language should be changed to make clear that the change must be fraudulent.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Section 3.1271(j)(3). This subsection imposes criminal liability for record keeping violations. As written, even if a person has no intent to defraud, it purports to impose criminal liability. This subsection should be struck or rewritten in its entirety.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

Section 3.1271(m)(6)(B). This subsection says that a person may not re-file a refund claim for the same reason that was previously denied by the Comptroller. Because the Comptroller is not the final authority on the applicability of the fee, this subsection should be struck.

Response: The comptroller does not accept the suggestion and no rule amendment is made to the version proposed for adoption.

The comptroller has also made additional changes to the rule not based on comments received. In subsection (b) we have reorganized the order of the terms so all are in alphabetical order.

The new section is adopted under Health and Safety Code, §771.0712(b), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of Health and Safety Code, §771.0712.

The new section implements Health and Safety Code, §771.0712 (Prepaid 9-1-1 Emergency Service Fee).

§3.1271.Prepaid Wireless 9-1-1 Emergency Service Fee.

(a) Application of Tax Code, Chapter 151. The statutory provisions, administrative rules, and agency policies applicable to Chapter 151 will apply as deemed necessary by the comptroller for administration of the fee to the extent not addressed expressly in this section.

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

(1) "Consumer" means a customer, person, purchaser or subscriber of a prepaid wireless telecommunication service or the user of a prepaid wireless telecommunication service.

(2) "Fee" means the prepaid wireless 9-1-1 emergency service fee a seller collects from a consumer in the amount required under Health and Safety Code, §771.0712.

(3) "Mobile telecommunications service" means the provision of a commercial mobile radio service, as defined in 47 C.F.R. 20.3 of the Federal Communications Commission's (FCC) regulations in effect on June 1, 1999 under the Mobile Telecommunications Sourcing Act (4 U.S.C. §§116-126). The term includes cellular telecommunications services personal communications services (PCS), specialized mobile radio services, wireless voice over Internet protocol services, and paging services. The term does not include telephone prepaid calling cards or air-ground radio telephone services as defined in 47 C.F.R. 22.99 of FCC regulations in effect on June 1, 1999.

(4) "Prepaid wireless telecommunication service" means a mobile telecommunications service that allows a person to access 9-1-1 emergency communication services and is paid for entirely in advance.

(5) "Purchase price" means the total amount paid for a prepaid wireless service, valued in money without a deduction for:

(A) the cost of items sold, leased, or rented with the service;

(B) the materials used, labor or service employed, interest, losses, or other expenses;

(C) the transportation or delivery; or

(D) other charges incident to the performance of a prepaid wireless service.

(6) "Retail transaction" means an individual purchase of a prepaid wireless telecommunication service from a seller for any purpose other than a sale for resale.

(7) "Sale for resale" means a sale of a prepaid wireless telecommunication service to a purchaser who acquires the service for the purpose of reselling it in the United States in the normal course of business either in the form or condition in which it is purchased or as an integral part of a taxable item as defined by Tax Code, Chapter 151.

(8) "Seller" means a person who sells prepaid wireless telecommunication services to any consumer. The term includes "seller" and "retailer" as defined by Tax Code, §151.008.

(9) "Wireless service provider" means a provider of commercial mobile service under the Federal Telecommunication Act of 1996, §332(d), (47 U.S.C. §151 et seq.), Federal Communications Commission rules, and the Omnibus Budget Reconciliation Act of 1993 (Pub. L. No. 103-66), and includes a provider of wireless two-way communication service, radio-telephone communications related to cellular telephone service, network radio access lines or the equivalent, and personal communication service. The term does not include a provider of:

(A) a service whose users do not have access to 9-1-1 emergency services;

(B) a communication channel used only for data transmission;

(C) a wireless roaming service or other nonlocal radio access line service; or

(D) a private telecommunications service.

(c) Registration.

(1) Every seller must register to collect and remit the fee by completing and submitting to the comptroller Form AP-201, Texas Application for Sales and Use Tax Permit. A seller's registration number for purposes of collecting the fee will be the same as the seller's sales and use tax permit number.

(2) A bond or other security may be required at the comptroller's discretion. If a bond or security is required the provisions of Tax Code, §§151.251 - 151.260 will apply. A seller who registers for the prepaid wireless fee may be required to post a bond or security in an amount that is equal to four times the amount of the average monthly tax liability but the minimum amount may not be less than $500 and the maximum cannot exceed $100,000.

(d) Imposition and collection of fee.

(1) Effective June 1, 2010, the fee shall be collected by the seller from the consumer at the time of and with respect to each retail transaction of prepaid wireless telecommunication services in this state.

(2) The fee is 2.0% of the purchase price of each prepaid wireless telecommunication service sold by way of retail transaction or used by a seller in this state.

(3) The amount of the fee shall be separately stated on an invoice, receipt, electronic communication, or other similar document that is provided to the consumer by the seller and is not subject to any other tax or fee imposed by Tax Code, Title 2.

(4) A seller or a wireless service provider is liable for the fee on:

(A) the retail price; or

(B) the value of a prepaid wireless telecommunication service not sold at retail but used by a seller or other person in Texas. Examples of prepaid wireless telecommunication service not sold at retail but used by a person in Texas include:

(i) a seller of prepaid wireless telecommunication service provides free prepaid wireless service to its employees;

(ii) a seller of prepaid wireless telecommunication service provides free of charge prepaid wireless service to participants at a local golf tournament in exchange for the tournament displaying a banner or sign with the retailer's logo or name; and

(iii) a seller of prepaid wireless telecommunication service donates prepaid wireless calling cards to a local high school sports team booster club to be used in a silent action as part of a fund raiser.

(5) If charges for items that are not subject to the fee are combined with and not separately stated from charges subject to the fee on the consumer's invoice, receipt, electronic communication, or similar document for prepaid wireless telecommunication services, the combined charge is subject to the fee unless the seller can identify the portion of the charges that are not subject to the fee through the seller's books and records kept in the regular course of business. If the charges that are not subject to the fee cannot reasonably be identified, all charges related to the sale are subject to the fee. The seller has the burden of proving what charges are not subject to the fee.

(6) Exemptions. The fee imposed by this section may not be imposed on or collected from this state or the federal government. A person operating under a contract with the federal government is not exempt from the fee.

(7) Sales for resale.

(A) Every seller must collect the fee on services sold unless a valid and properly completed resale certificate is received from the purchaser. Evidence that a purchaser is properly registered with the comptroller for the collection of the fee is not sufficient to relieve the seller from the responsibility for collecting the fee without the issuance of a properly completed certificate. A properly completed resale certificate must show:

(i) the name and address of the purchaser;

(ii) the registration number held by the purchaser or a statement that an application for a registration is pending before the comptroller with the date the application for registration was made. If the application is pending, the resale certificate is valid for only 60 days, after which time the resale certificate must be renewed to show the permanent registration number. If the purchaser registered for the 911 prepaid wireless fee, the number must consist of 11 digits that begin with a 1, or 3. Federal employer's identification (FEI) numbers or social security numbers are not acceptable evidence of a purchase for resale;

(iii) the signature of the purchaser or an electronic form of the purchaser's signature authorized by the comptroller and the date; and

(iv) the name and address of the seller.

(B) A seller may accept a resale certificate only from a purchaser who is in the business of reselling the prepaid wireless telecommunication services within the geographical limits of the United States of America, its territories, and possessions.

(C) The seller must act in good faith when accepting the resale certificate. If a seller has actual knowledge that the exemption claimed is invalid, the seller must collect the fee.

(D) A person who intentionally or knowingly makes, presents, uses, or alters a resale certificate for the purpose of evading the fee is guilty of a criminal offense. An offense is:

(i) a Class C misdemeanor if the tax evaded by the invalid certificate is less than $20;

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

(iii) a Class A misdemeanor if the tax evaded by the invalid certificate is $200 or more but less than $750;

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

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

(e) Sourcing. A retail transaction is deemed to have occurred in this state when the transaction occurs at a business location in this state or when the consumer's primary business address or residential address is in Texas. Each seller must determine the consumer's address for each retail transaction made by telephone and over the Internet. The fee is due when the consumer's primary business address or residential address is in Texas.

(f) Reports and due dates.

(1) All sellers must report collections of the fee on comptroller form 54-104 (Texas Prepaid Wireless 9-1-1 Emergency Service Fee Report). The fact that a seller does not receive the form or does not receive the correct form from the comptroller does not relieve the seller of the responsibility of filing a report and remitting the fees collected.

(2) Each report is due on or before the 30th day of the month following the end of each calendar quarter which is January 30, April 30, July 30, and October 30. The first report is due on or before July 30, 2010 and will cover the calendar month of June. Reports and payments due on Saturdays, Sundays, or legal holidays may be submitted on the next business day.

(A) Reports submitted by mail must be postmarked on or before the due date to be considered timely.

(B) Reports filed electronically must be completed and submitted by 11:59 p.m., central time, on the due date to be considered timely.

(C) Electronic Funds Transfer (EFT) system payments. To be considered timely, a payment submitted through an EFT system must enter into the applicable EFT program by 6:00 p.m., central time, on any day on or before the due date other than a weekend or banking holiday.

(D) A person who files tax reports and makes payments through the electronic data interchange (EDI) system must enter the payment information into the EDI system by 2:30 p.m., central time, to meet the 6:00 p.m. central time requirement that is noted in subparagraph (A) of this paragraph.

(E) If the due date falls on a weekend or banking holiday, payment information must be submitted by the time parameters noted in subparagraphs (A) and (B) of this paragraph on the business date prior to the due date to be considered timely. For more information see §3.9 of this title (relating to Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers).

(3) Extensions due to disasters. The comptroller may grant to a seller or other person whom the comptroller finds to be a victim of a disaster an extension of not more than 90 days to make or file a report or pay the fee. The person owing the fee may file a written request for an extension at any time before the expiration of 90 days after the original due date. If an extension is granted, interest on the unpaid fee does not begin to accrue until the day after the day on which the extension expires and penalties are assessed and determined as though the last day of the extension were the original due date.

(g) Seller compensation. A seller may deduct and retain 2.0% of the fees it collects during each report period to offset its costs in collecting and remitting the fee.

(h) Penalties.

(1) A penalty of 5.0% of the fee due shall be imposed upon a seller who fails to timely remit the fee imposed or file a report required by this section.

(2) If a seller fails to file the report or remit the fee within 30 days after the day on which the fee or report is due, an additional 5.0% penalty shall be imposed.

(3) An additional penalty of 50% of the fee due shall be imposed if it is determined that:

(A) the failure to remit the fee or file a report when due was a result of fraud or an intent to evade the fee; or

(B) the seller alters, destroys, or conceals any record, document, or thing, or presents to the comptroller any altered or fraudulent record, document, or thing, or otherwise engages in fraudulent conduct, for the apparent purpose of affecting the course or outcome of an audit, investigation, redetermination, or other proceeding before the comptroller.

(i) Interest. Interest due on unpaid, unremitted, or delinquent fees shall be imposed as provided by Tax Code, §111.060.

(j) Records required.

(1) All sellers or other persons subject to collecting and/or remitting the fee must keep adequate records in order to accurately determine the amount of fee due for a period of four years.

(2) The comptroller has the right to examine, copy, and photograph any records or equipment of any seller or other person who is liable for collecting the fee in order to verify the accuracy or any report or to determine the fee liability in the event that no report is filed.

(3) A seller or other person commits a criminal offense by intentionally or knowingly concealing, destroying, entering false information in, or failing to make an entry in, records that are required to be made or kept under this section.

(k) Audits. Records of sellers or consumers may be audited by the comptroller or the comptroller's representative. The audit will be performed by examining any records, books, or other information which are maintained by the seller or consumer. If the records are inadequate or do not accurately reflect the fees due, the auditor will base the audit report on the best available information.

(l) Statute of limitations for assessments.

(1) Unless otherwise provided by this section, the comptroller has four years from the date the fee becomes due and payable in which to assess a liability for unpaid fees. Before the expiration of the statute of limitations, the comptroller and a seller or consumer may agree in writing to an extension. The agreement must comply with the provisions of Tax Code, §111.203. An extension applies only to the periods specifically mentioned in the agreement. Any assessment or refund request 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 authorized.

(2) In cases of fraud, or if reports have not been filed, the statute of limitations does not apply and the comptroller may assess and collect fees, penalties, and interest at any time. The statute of limitations does not apply when information contained in the report of a seller contains a gross error and the amount of fee due and payable after correction of the error is 25% or more greater than the amount initially reported.

(3) The statute of limitations does not apply to any period for which a seller has filed a timely claim for a refund. If, while investigating the merits of the refund claim, the comptroller determines that additional fee is due, an assessment may be made for that period until a final decision is made on the claim for refund.

(4) A redetermination proceeding does not toll the statute of limitations, except for the issues contested.

(m) Refund claims by registered sellers.

(1) Fees, penalties, or interest will not be refunded by the comptroller to a registered seller who has collected the fee in error from a consumer until all such fees are first refunded or credited with the consumer's written consent. A registered seller is entitled to claim a credit or request a refund of fees equal to the amount of fees refunded to a consumer when the consumer receives a full or partial refund of the sales price of a returned item subject to the fee.

(2) After the registered seller has refunded or credited the fee to the account of the consumer or when a seller has incorrectly reported the amount of the fee due on a report, the registered seller may then seek reimbursement from the comptroller in accordance with the procedures that are outlined in paragraph (4) of this subsection, or take a credit on a future report filed by the seller in the amount refunded or credited to the account of the consumer.

(3) Reports and documentation. The registered seller must retain all documentation that is necessary to support the refund or credit claimed.

(4) Requirements for refund claims filed with the comptroller.

(A) A registered seller who requests a refund from the comptroller must submit a claim in writing that identifies the period during which the claimed overpayment was made and must state fully and in detail the specific grounds upon which the claim is based, including, at a minimum, each of the following about each transaction upon which a refund is requested:

(i) consumer or seller's name, as appropriate;

(ii) invoice, receipt, electronic communication or similar document, if applicable;

(iii) date of retail transaction;

(iv) description of the services purchased or sold;

(v) specific reason for the refund, such as applicable statutory authority;

(vi) purchase or sale amount subject to refund; and

(vii) total amount of fee refund requested.

(B) A registered seller must submit the claim within the applicable limitations period as provided by paragraph (7) of this subsection.

(C) Supporting documentation required by the comptroller to verify any refund claimed or credit taken must be maintained and made available upon request.

(5) Interest.

(A) Except as provided by subparagraph (B) of this paragraph, in a comptroller's final decision on a claim for refund, interest accrues at the rate that is set in Tax Code, §111.064, on the amount that is found to be erroneously paid:

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

(ii) 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.

(B) Credits taken by a fee payer on the fee payer's report do not accrue interest.

(6) Denial of refund.

(A) 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.

(B) A person may not re-file a refund claim for the same transaction or item, fee type, period, and ground or reason that was previously denied by the comptroller.

(7) Statute of limitations for refund claims.

(A) A claim for refund must be made within four years from the date on which the fee was due and payable.

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

(i) four years from the date on which the fee was due and payable; or

(ii) six months after the date on which the jeopardy deficiency determination for the periods becomes final, and is subject to the restriction imposed by subparagraph (C) of this paragraph.

(C) A refund claim filed within six months after the date on which a jeopardy deficiency determination becomes final is within the limitations period for all items included in the jeopardy deficiency determination. A refund claim for all other items is subject to the limitations period in subparagraph (A) of this paragraph.

(D) Extension of limitations period. Before the expiration of the statute of limitations, the comptroller and a fee-payer may agree in writing to extend the limitation period in accordance with Tax Code, §111.203. An extension applies only to the periods specifically mentioned in the agreement and no single extension agreement may be for a period that exceeds 24 months from the date of the expiration of the limitations period being extended. Any refund request 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 refund requests as if no extension had been authorized.

(E) A refund proceeding does not toll the statute of limitations, except for the issues contested.

(F) 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.

(G) The informal review of a refund claim by the comptroller is not a hearing or contested case and does not toll the limitation period for any subsequent claim for refund on the same period and type of fee for which the claim was fully or partially denied.

(n) Payments under protest. A person subject to collecting this fee may file suit under Tax Code, Chapter 112, Subchapter B. A person who intends to file a protest suit must submit to the comptroller a letter of protest with the payment of the fee that is the subject of the protest. See §3.9(e) of this title. The letter of protest must state fully and in detail every reason that the fee-payer 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 fee-payer's convenience, the comptroller will advise the fee-payer of the amount of payment under protest that the comptroller has received and the date of the payment.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on October 1, 2010.

TRD-201005677

Ashley Harden

General Counsel

Comptroller of Public Accounts

Effective date: October 21, 2010

Proposal publication date: April 2, 2010

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


CHAPTER 4. TREASURY ADMINISTRATION

SUBCHAPTER A. POOLED COLLATERAL PROGRAM

34 TAC §§4.100 - 4.121

The Comptroller of Public Accounts adopts new Chapter 4, Treasury Administration, §§4.100 - 4.121. Sections 4.101, 4.104 - 4.118 and 4.120 are adopted with changes to the proposed text as published in the April 9, 2010, issue of the Texas Register (35 TexReg 2835) and will be republished. Sections 4.100, 4.102, 4.103, 4.119 and 4.121 are adopted without changes and will not be republished. The new chapter includes new Subchapter A, Pooled Collateral Program. Subchapter A implements Senate Bill 638, 81st Legislature, 2009. The rules within the subchapter establish administrative and procedural guidelines for a new program for a centralized pooled collateralization of deposits of public funds and for monitoring collateral maintained by participating depository institutions.

Section 4.100 explains the purpose of the rules and §4.101 contains the definitions applicable to Subchapter A. Section 4.102 contains the criteria for public entity eligibility and participation.

Sections 4.103 through 4.106 relate to depository institutions. Section 4.103 includes the criteria for depository institutions eligibility and participation. Section 4.104 explains the application process for depository institutions, and §4.105 includes the criteria for the comptroller's approval of a depository institution to participate in the pooled collateral program. Section 4.106 sets out the process for an approved depository institution or a public entity to voluntarily withdraw from the pooled collateral program.

Sections 4.107 through 4.112 relate to the collateral requirements for depository institutions and the designation of a custodian trustee. Section 4.107 contains the general collateral requirements and §4.108 sets out acceptable collateral to pledge for the pooled collateral program. Section 4.109 explains the required amount of collateral needed to secure the deposit of public funds, and the comptroller's market valuation of collateral securities. Section 4.110 discusses the process and requirements for the pledge and withdrawal of collateral securities. Section 4.111 covers the recovery of public deposits in the event a participating depository institution fails to satisfy a claim against the deposits of public funds or becomes insolvent. Section 4.112 explains the criteria for designation to act as a custodian trustee, and related requirements for participation as a custodian trustee in the pooled collateral program.

Section 4.113 sets out the reporting requirements for both the participating depository institutions and the comptroller, and provides that the reports will be posted on the comptroller's website. Section 4.114 relates to a public entity's deposits and related responsibility to review and monitor the accuracy of posted itemized deposit reports. Section 4.114 also requires a public entity to inform its participating depository institution of a significant change in the amount or activity of its deposits within a reasonable time before the change occurs.

Section 4.115 sets out record keeping requirements for depository institutions, custodian trustees and permitted institutions, and allows a public entity with deposits or collateral held in that institution to review the records pursuant to the terms of its account agreement. Section 4.116 concerns certification of compliance requirements for a participating depository institution. Section 4.117 covers compliance with applicable laws and venue.

Section 4.118 sets out the process for imposing an administrative penalty against a depository institution for failure to maintain collateral, to timely file a report, or to pay an assessment as required. The rule provides for notice of a violation, informal resolution, and a contested case process. Section 4.119 discusses the formula to determine penalty amounts for an administrative violation.

Section 4.120 discusses the required annual assessment of participating depository institutions to pay the costs of administering the pooled collateral program. Section 4.121 discusses contact information for the comptroller and pooled collateral program participants.

The agency received comments from seven interested individuals and groups on various aspects of the new rules. Comments recommending changes were submitted by The Federal Home Loan Bank of Dallas, the Texas Bankers Association, the Independent Bankers Association of Texas, Patterson & Associates, Wells Fargo Bank, N.A., Bank of America, and J.P. Morgan Chase Bank, N.A.

The following comments and responses are broken down by subject matter.

DEPOSIT OF PUBLIC FUNDS DEFINITION.

Wells Fargo Bank, N.A. submitted a comment on the definition of Deposit of Public Funds under §4.101(4) stating that it should include the term "savings deposit." The agency responds that the definition of deposit of public funds is taken from the definitions in Government Code, Chapter 2257, which apply to the entire chapter, including Subchapter F, Pooled Collateral to Secure Deposits of Certain Public Funds. The definition of Deposit of Public Funds found in §2257.002(3), does not include the term "savings deposit," and the agency will not disturb the definition.

DEPOSITORY INSTITUTION APPLICATION PROCESS.

J.P. Morgan Chase Bank, N.A., the Independent Bankers Association of Texas, Texas Bankers Association, Wells Fargo Bank N.A., commented on the depository institution application process in §4.104. J.P. Morgan Chase Bank, N.A., Wells Fargo Bank, and the Texas Bankers Association commented on the need to apply every two years. J.P. Morgan Chase, N.A. asked if the comptroller would use a renewal process for a participating depository institution in good standing so they would not be required to reissue every document required in the application process, or if the renewal application would coincide with the application process. Wells Fargo Bank N.A. proposed lengthening the time period that a depository institution would be approved to participate in the program or providing an exemption from the renewal process for adequately capitalized depository institutions. Texas Bankers Association suggested providing a time line for the approval process, including approval of the Collateral Security Agreement, to provide some certainty for the length of the application process.

The Independent Bankers Association of Texas commented that the two year approval term will not match the terms of certain public entity deposit contracts authorized in the Local Government Code, which may have longer terms. They suggested that there be clearly identified deadlines in advance of the expiration so that a public entity's participation in the program will not lapse.

The agency responds that it will use a two-year application and approval cycle to provide for a complete review and approval process for depository institutions. The two years will begin on September 1 of each odd-numbered year and end on August 31 of the next odd-numbered year. This process will enable the agency to fully review the applicant's updated information and best insure the validity and integrity of the program, which is in the best interest of the participants. The agency has determined that using a two-year term for the depository institutions can be coordinated with the state depository institution application process, and provide greater efficiencies for both the agency and the financial institutions. For these reasons, the agency will not use a renewal process for depository institutions already participating in the program, and will require that a new application with supporting documentation be submitted every two years.

The agency agrees that a timeline for the application process would provide some certainty to the length of the application process. To provide a time line for the approval process, and to avoid a lapse in participation at the end of each two-year approval cycle, the agency has revised §4.104(c) to include a notification of the upcoming application process to the depository banks from the agency by June 1st and a deadline of August 1st of each odd-numbered year for the agency to receive the application. However, an applicant may apply at any time during the two-year cycle.

The Texas Bankers Association and the Independent Bankers Association of Texas commented on §4.104(h) and the need for a reapplication or an appeal process for a depository institution that is not approved to participate in the program. The Independent Bankers Association of Texas commented that there is not a process to appeal a disapproved application. The Texas Bankers Association commented that there was no process or criteria to reapply to participate in the program, and requested a subsection to address reapplication. The Texas Bankers Association also commented that §4.105(d) establishes that the agency's decision to deny approval for a depository institution application is final, but does not establish for how long the decision is final, and suggests that the rules specifically include the timeframe after which a bank can reapply to participate in the pooled collateral program.

The agency responds that during the application process it will notify the applicant of any deficiencies in its application. If the agency finally disapproves a depository institution's application to participate in the program, it will notify the depository institution in writing of the basis of its decision, as set out in §4.104(i).

The agency further responds that it will provide an informal review process to appeal a disapproved application. The agency will add §4.104(j) to provide for an informal review process. Except as provided in §4.104(i), during the informal review process an applicant may not act as a participating depository institution. An applicant must request an informal review in writing, including the basis for the request and evidence that it has cured the deficiency in its application. The comptroller will complete an informal review on written submission and issue a final written decision.

The agency has added §4.104(l) to provide that after the informal review process, an applicant disapproved for a deficiency in its application may reapply for approval once the deficiency is cured. However, after the informal review process an applicant that has been disapproved for administrative penalties for noncompliance under §4.118 would not be considered eligible to apply until the application process begins again in the next odd-numbered year.

Wells Fargo Bank, N.A. commented on §4.104(g) relating to the agency providing notice of its approval of the application to both the depository institution and the public entity. Wells Fargo Bank, N.A. stated that if a depository institution has many public funds customers, some of which may want to participate in the program and some of which may not, it was concerned that notification of all these customers could be quite awkward. Wells Fargo Bank, N.A. suggested that it would prefer to have the agency notify only the depository institution, and allow it to notify the appropriate public funds customers. The agency responds that each application is for one depository institution and one public entity. The agency will only provide notification of the outcome to the one specific public entity that is a party to application and has signed the Collateral Security Agreement together with the depository institution.

The Federal Home Loan Bank of Dallas asked if the agency will publish a list of depository institutions approved to participate in the pooled collateral program on its website. The agency responds that it will publish a current list of approved depository institutions on its website.

COLLATERAL SECURITY AGREEMENT.

Wells Fargo Bank, N.A. submitted a comment on the definition of a Collateral Security Agreement in §4.101(2), stating that participating depository institutions should be able to submit a form of a Collateral Security Agreement for approval to the agency. The agency agrees that a participating depository institution may either enter into a Collateral Security Agreement provided by the agency or submit its own form to the agency for approval under Government Code, §2257.103(3).

J.P. Morgan Chase Bank, N.A. recommended that the agency incorporate a standard uniform Collateral Security Agreement for all banks and entities participating in the program, to eliminate the need for the agency to approve other agreements created by the participants in the program as set out in §4.103(b)(2). The agency agrees and has developed a standard uniform Collateral Security Agreement for use in the program to create greater efficiency for the program participants. The agency will review the form of the agreement every odd-numbered year and update it as appropriate.

Wells Fargo Bank N.A. and J.P. Morgan Chase Bank, N.A. commented on the form of a Collateral Security Agreement developed by the agency and the opportunity to comment or provide assistance on the agreement. The agency responds that it will publish the draft Collateral Security Agreement on agency's website and invite comments on the agreement before it is finalized.

BOOKS & RECORDS/AUDIT.

The Independent Bankers of Texas commented on §4.105 and §4.115 regarding the requirements that a depository institution applicant provide its most recent financial statement and that its books and records will be open at all times for inspection by the agency, a representative of the agency, and at reasonable times for the public entity depositing funds with the depository institution. They further commented that these provisions violate the visitorial powers provision of federal law for national banks and cited 12 USC, §484, and that states may not access the books and records of a national bank.

Wells Fargo Bank, N.A. commented on §4.105(a)(4) and §4.115(b) and (c) that the books and records of a depository institution should only be required to be open for inspection during regular business hours upon reasonable advance notice.

J.P. Morgan Chase Bank, N.A. commented on §4.115(c) regarding the public entity's right to examine and verify the depository institution's books and records, and expressed concern that it would be burdensome. The bank also indicated that the public entities have the right to verify its deposits under account agreements and applicable law, and will receive a daily report of the market value of the collateral pool on the agency's website, and will therefore have access to all of the information obtained in an examination.

J.P. Morgan Chase Bank, N.A. commented on §4.116(b) relating to audit that it was uncertain if their external auditors could be required by rule to report noncompliance to the agency, and suggested that there should be clarity that external auditors are not required to perform such examination. The bank suggested that it may be appropriate to require internal auditors to perform such an examination.

The agency agrees that 12 USC, §484 allows only the federal government to audit national banks or inspect their books and records, with a few specified exceptions. With regard to a public entity's inspection of books and records, the agency further agrees that public entities will have the right to review their account information as a bank customer as provided under the terms of their bank agreements and applicable law. The agency will revise §4.105(a)(4) to delete the statement that the books and records of the depository institution will be available for inspection and revise it to require a depository institution provide, upon request, the comptroller or a public entity information or confirmation regarding a deposit of public funds or a pledge of collateral.

The agency has also deleted §4.112(f)(7) which allowed the agency to examine and verify a pledge of collateral or the transaction records related to the collateral.

The agency will also delete §4.115(b), regarding inspection of books and records and replace it with a new subsection (b) stating that a depository institution, custodian trustee and a permitted institution will provide, upon request, the comptroller or a public entity information or confirmation regarding a deposit of public funds or a pledge of collateral. The agency will revise §4.115(c) to provide a public entity may, pursuant to the terms of its account agreement, review the records related to its deposit of its public funds in the pooled collateral program and the related pledge of collateral to secure those deposits.

The agency will change the title of §4.116 from Audit to Certification of Compliance. The agency will also delete §4.116(b) to eliminate the requirement that an external auditor or regulator examine compliance with the books and records requirements under Government Code, Chapter 2257 and report noncompliance to the agency. The agency will renumber subsection (c) of §4.116 as subsection (b) and revise it to state that the comptroller may require written confirmation from the depository institution, custodian trustee, or permitted institution that it is in compliance with the books and record requirements under Government Code, Chapter 2257 and this chapter.

However, the agency notes it has a duty to approve or disapprove a depository institution's participation in the program under Government Code, §2257.103, and as part of that duty the agency will determine the financial condition of the institution. The agency notes that in accordance with §4.105(d), it will designate those depository institution applicants that are acceptable and may reject those whose management or condition, in the opinion of the comptroller, does not warrant the placing of public funds in their possession. Accordingly, the agency will not revise the depository institution application requirement in §4.105(a)(2), which includes a statement of the applicant's condition according to the most recent financial statement.

VOLUNTARY WITHDRAWAL FROM THE PROGRAM.

The Independent Bankers Association of Texas, Texas Bankers Association and Wells Fargo Bank, N.A. commented on §4.106, and expressed concern that the public entity be required to give more than the "reasonable written notice" for voluntary withdrawal from the pooled collateral program, and each pointed out that the depository institution had to provide the public entity with 90 days written notice of withdrawal. Texas Bankers Association and Wells Fargo Bank, N.A. suggested that the public entities be required to provide 90 days notice, and the Independent Bankers Association suggested a 30 day notice.

The agency responds that the public entity may choose to withdraw its deposits from a depository institution at any time, making a mandatory notice of withdrawal unnecessary. The agency further responds that a public entity will require at least 90 days notice from the depository institution due to its requirements to timely transition deposits from one depository institution to another.

COLLATERAL REQUIREMENTS.

The Federal Home Loan Bank of Dallas, the Texas Bankers Association, the Independent Bankers Association of Texas, Patterson & Associates, Wells Fargo Bank, N.A., Bank of America, and J.P. Morgan Chase Bank, N.A. submitted comments regarding collateral requirements for the program in §§4.107 - 4.111. These comments concerned the timing of pledging and maintaining the collateral, the amount of collateral, valuation of the collateral, and other related collateral matters.

Timing of Pledging and Maintaining Collateral.

Texas Bankers Association and Wells Fargo Bank, N.A. commented on the timing of pledging and maintaining the collateral in §4.107(b). Texas Bankers Association expressed concern that §4.107(b) required that a participating depository institution pledge collateral before public deposits are received and stated that requirement could double the amount of collateral pledged for an existing bank customer moving to the pooled collateral program, since the depository institution would have to pledge collateral under its existing depository agreement and for the program. Texas Bankers Association suggested that instead the depository institution pledge collateral when public deposits are received, in a simultaneous transaction designed to protect the public entity and the depository institution. Wells Fargo Bank N.A. also suggested that the requirement to pledge collateral be concurrent with the time of deposit, in keeping with industry standards. Wells Fargo Bank, N.A. indicated that the advance pledging presents problems with their automated collateralization system, since the precise amount is not known until the deposit is actually made. The agency responds that it will revise §4.107(b) to require that a depository institution use its best efforts to pledge collateral at the same time as it receives the deposit, but no later than the close of business on the same day of the deposit.

J.P. Morgan Chase Bank, N.A. commented on the requirement in §4.107(b) to maintain collateral at all times, and stated it was not practicable due to fluctuating and unexpected deposits, market value fluctuations in security prices pledged as collateral and circumstances beyond a financial institution's control. The bank suggested the agency change or omit the language "at all times." J.P. Morgan Chase Bank, N.A. also recommended that the agency change the wording in §4.109(c), providing that when the market value of pledged collateral becomes less than the required amount, the agency shall require that additional collateral be pledged "immediately." The bank indicated that procurement of securities for pledging purpose is not always an immediate possibility, and suggested changing the word "immediately" to "promptly."

The agency responds that the depository institution must pledge collateral at the same time as public deposits are received, and has revised §4.07(b) with a requirement to use its best efforts to pledge collateral at the same time but not later than the close of business on the same day of the deposit.

The agency responds that §4.109(c) is written to ensure that the public funds in a depository institution are sufficiently collateralized at all times. By using the word "immediately," the intent of these rules is to convey the serious nature of this responsibility. The responsibility to maintain sufficient collateral at all times is upon the depository institution. The word "promptly" does not convey the same sense of urgency as "immediately." The agency believes this is an acceptable requirement to properly secure the public deposits in the pooled collateral program. The agency has revised §4.109(c) to include that the collateral must be pledged immediately, but no later than the close of business on the same day the comptroller notifies the depository institution that it does not meet collateral requirements.

The Independent Bankers Association of Texas commented that §4.107(g) provides most of the requirements of the Federal Deposit Insurance Act and the D'Oench Duhme doctrine protection of security interests for a participating depository institution's pledge of collateral, but it omits the requirement that the security interest be reflected in the bank's board minutes. The agency responds that this provision is based upon Government Code, §2257.048, which provides when a security interest arising from a pledge of collateral to secure a deposit of public funds is created, attaches, and is perfected. The agency notes that the Collateral Security Agreement will include the requirement that the security interest be reflected in the bank board's minute books, and other requirements to meet the terms of the Federal Deposit Insurance Act and the D'Oench Duhme doctrine protection. The agency declines to include this language in this subsection.

Patterson & Associates commented that the custodian trustee is the bailee for assets and that the bailee should have complete control over the pledged collateral as confirmed by §4.112(f)(2). Patterson & Associates expressed concern about §4.112(f)(5), which provides that the agreement between the comptroller and the custodian trustee provide that the custodian trustee shall surrender the collateral to the comptroller upon written demand, without any conditions set by the rules. Patterson & Associates suggested that the bailee must have the assets under its control and custody. The agency responds that Government Code, §2257.044 states that the custodian is for all purposes the bailee or agent of the public entity. The agency further responds that the pooled collateral program does not disturb the role of the custodian trustee.

However, to clarify the agency's role it will add §4.113(e) to provide that the public entity will authorize the comptroller to act as its agent to monitor collateral held in trust for the benefit of the pooled collateral program. The agency will renumber the §4.113(e) as subsection (f). The agency will also create a new §4.110(a) to provide that the public entity will authorize the comptroller to act as its agent to and that the comptroller may approve, as appropriate, the pledge and withdrawal of collateral into and out of the custodian trustee account. The agency will also revise the agreement between the comptroller and custodian trustee accordingly. The agency will renumber the subsections of §4.110 accordingly.

Acceptable Collateral vs. Eligible Collateral.

Bank of America, Federal Home Loan Bank of Dallas, Patterson & Associates, and Wells Fargo Bank, N.A. commented on the securities deemed acceptable to pledge as collateral by the agency in §4.108. Patterson & Associates and Wells Fargo Bank, N.A. objected to the agency's list of acceptable securities, which is a smaller subset of the collateral permitted under Government Code, Chapter 2257. Wells Fargo Bank, N.A. suggested the agency establish clear criteria for choosing acceptable securities and allow a depository institution to withdraw from the pool reasonably quickly if at any time the remaining acceptable securities as determined by the agency are not compatible with the institution's investment criteria.

Patterson & Associates objected to the agency's changes regarding the collateral that may be pledged under §4.108 as unacceptable without adding any safety value. Patterson & Associates indicated that the collateral deemed acceptable by the agency do not match bank portfolios eligible for pledging, and that this would lead to higher costs.

Patterson & Associates suggested that the collateral standards should be those set out by Chapter 2257, and objected to the agency's placing itself in a position to judge the efficacy of the collateral. Patterson & Associates commented that the agency has arbitrarily limited the acceptable collateral available to the banks, including those securities authorized under Chapter 2256. Patterson & Associates also commented that the list of acceptable collateral and the restrictions placed on the depository institutions do not reflect the reality of their portfolios, and can seriously impede the program by raising the cost of the collateral appreciably without justification. Patterson & Associates objected to §4.108(d), allowing a depository institution to request the agency's approval to pledge a security not currently deemed as acceptable, and expressed concern that the agency would change the rules on acceptable collateral over time and from institution to institution for unnamed or fully justified reasons.

The agency responds that its designation of acceptable collateral is a subset of those instruments that are already allowed under the definition of an eligible security in Government Code, §2257.002(4). The agency further responds that it intends to use the same standards for collateral required to secure the deposit of public entity funds in the pooled collateral program that it does for collateral to secure the deposit of state funds. The agency further responds that it will rely on its long-term experience of determining acceptable collateral for state deposits to determine the acceptable collateral for public deposits held in the pooled collateral program. The agency believes that collateral standards for deposits in the pooled collateral program should be no less secure than those required for state deposits.

In response to the comments received, the agency has elaborated on the criteria it will use to designate acceptable collateral for the program. The agency has revised §4.108(b) to provide that it will designate acceptable collateral based on its associated risks, its preservation of market value, its operational efficiencies, including the ability to determine its market value, and such other appropriate criteria that may be developed by the agency.

The agency further responds that in response to the concern expressed in the comments regarding the timing of designation of acceptable securities, it will revise §4.108(c) to provide that if the agency revises the list of acceptable securities it will provide 180 days notice to the participating depository institutions to allow substitution of collateral that is no longer deemed acceptable, unless a shorter notice is required to protect the security of public deposits.

Mortgage Backed Securities.

Bank of America objected to the rule's designation of a mortgage backed security with a remaining maturity of greater than 15 years as not acceptable to pledge as collateral under §4.108(e)(2). The bank pointed out that most mortgage backed securities are issued with a 30 year stated maturity term, and this restriction bars depository institutions from using a large share of their investment securities portfolio. The bank noted that the restriction does not exist in the Texas Public Funds Collateral Act and asked that the restriction be removed.

Patterson & Associates commented that §4.108(e)(2) should refer to mortgage backed securities "with a stated maturity of 15 years," rather than "with a remaining maturity of 15 years or less." Patterson & Associates indicated that maturity restrictions are an understandable attempt to manage volatility and objected to using maturity restrictions, and instead suggested the agency use the bank test used by the Federal Reserve to judge collateral which can then be pledged to the Federal Reserve by banks.

Wells Fargo Bank, N.A. commented that it would like to see the "remaining maturity" requirement for certain mortgage-backed securities be extended to 30 years rather than 15 years.

The agency responds that it intends to keep the rule that mortgage backed securities with a remaining maturity of 15 years or less are acceptable collateral for deposits covered in the pooled collateral program. This has been the agency's current policy for security of state deposits for many years, and the agency has determined that collateral standards for deposits in the pooled collateral program should be no less secure that those required for state deposits.

Letters of Credit.

The Federal Home Loan Bank of Dallas commented on the Federal Home Loan Bank Beneficiary letters of credit that may be pledged as acceptable collateral under §4.108(e)(4). The bank indicated it offers two types of standby letters of credit and asked if they would be considered acceptable collateral under the program, and asked what type of documentation would be required by the agency to sign off on a custodial standby letter of credit. The bank also requested guidance on the mechanics of how each type of letter of credit will be used in the program and to identify any additional documentation the agency may require.

Patterson & Associates objected to the use of Federal Home Loan Bank Beneficiary letters of credit as collateral, and requested they be eliminated from the list of acceptable security.

The agency responds that Federal Home Loan Bank Beneficiary standby letters of credit that are collateralized may be pledged as acceptable collateral, as they are considered secure collateral, and the agency will revise §4.108(e)(4) accordingly.

State of Texas Bonds.

Patterson & Associates commented that §4.108(e)(9) has arbitrarily limited municipal bonds only to those issued in Texas, and requests that this limitation be removed. Patterson & Associates indicted that the existing law protects the government entity by setting the standard of an "A" or equivalent rating by at least one nationally recognized rating agency and that is a better standard than limiting the bonds to those issued in Texas.

The agency responds that municipal bonds issued in Texas with a rating of not less than "A" or its equivalent value (that are issued by a nationally recognized investment rating firm) has been used by the agency to secure state deposits for many years. The agency believes that the collateral standards for deposits in the pooled collateral program should be no less secure than those required for state deposits.

List of Unacceptable Securities.

Patterson & Associates commented on the list of unacceptable securities in §4.108(f), objecting that it limits the banks from using their existing portfolios as collateral and adds to the ultimate costs for the public entity. Patterson & Associates specifically objected to eliminating Adjustable Rate Mortgages, Collateralized Mortgage Obligations, and step-ups, indicating they could rely on daily pricing and adjustments to allow these securities as collateral. Patterson & Associates also objected to the term "securities not found on common pricing systems" in §4.108(f)(5) as ambiguous, and stated that these issues may be totally safe and simply may not be on a standard search because of holding. Patterson & Associates commented that restrictions on the acceptable collateral ultimately add costs for the public entity.

The agency responds that the list of acceptable collateral has not substantially changed from the list in the statute, but has been reduced to create a subset of the list in the statute. The resulting list of approved instruments has been the current policy for securing state deposits for many years, and the agency believes that collateral standards for deposits in the pooled collateral program should be no less secure than those required for state deposits. Government Code, §2257.105(c) requires the agency to provide a daily report of the market value of the securities held in each pool. The agency intends to price all collateral securities on a daily basis using an industry recognized pricing service. The agency responds that it would not be safe or efficient to determine the value of securities unless a common pricing system could be used.

Mark to Market Valuation of Securities.

Patterson & Associates and Wells Fargo Bank, N.A. commented on the agency's valuation of collateral in §4.108(b). Wells Fargo Bank, N.A. requested assurance that the agency will use a standard and accepted market valuation criteria or an industry recognized service to make its determination of value. Patterson & Associates objected that the on-going reporting of market value is from the banks and no daily or weekly verification appears to be forthcoming from the agency. Patterson & Associates requested a more proactive role by the agency in the valuation of collateral.

The agency responds that Government Code, §2257.105(c) and (d) requires the agency to provide a daily report of the market value of the securities held in each pool and requires that each report be posted on the agency's website. The agency will provide a daily report of the market value of the collateral pool on its website daily and will use an industry recognized pricing service to value the collateral.

Required Amount of Collateral.

The Federal Home Loan Bank of Dallas, the Texas Bankers Association, the Independent Bankers Association of Texas, Patterson & Associates, Wells Fargo Bank, N.A., Bank of America, and J.P. Morgan Chase Bank, N.A. commented on the amount of collateral that a depository institution would be required to pledge as collateral in §4.109.

Bank of America N.A., Patterson & Associates, Texas Bankers Association, and Wells Fargo Bank, N.A objected to the requirement in §4.109(d) to pledge acceptable collateral with a total value of at least 105% of the amounts on deposit in the pool, less federal deposit insurance. They pointed out that the agency did not adhere to the statutory language in Government Code, §2257.104(a) which provides that each depository institution in the pooled collateral program secure its deposits of public funds with eligible securities which equal at least 102% of the amount of deposits of public funds covered by the security agreement. Wells Fargo Bank, N.A. pointed out that the 105% requirement seemed inconsistent with Government Code, §2257.104(a) and that the proposed rule seems to exceed the scope of the statutory mandate. Patterson & Associates suggested a more reasonable position would be to apply a daily mark to market to collateral and maintenance at 102%.

J.P. Morgan Chase Bank, N.A. asked whether a financial institution would be considered deficient in collateral if it meets the statutory requirement of 102% but not the 105% requirement promulgated by §4.109(d).

The agency responds that §4.109(d) is consistent with Government Code, §2257.102(a), which sets a collateral requirement of at least 102% of the amount of deposits of public funds covered by the security agreement, reduced to the extent of federal deposit insurance coverage. The agency's proposed requirement of 105% of the amount of deposits of public funds is also consistent with current policy requirements for state deposits. The agency finds that collateral standards for deposits in the pooled collateral program should be no less secure than those required for state deposits. The 105% coverage margins will help to manage fluctuations in the market and in a shared pool of deposits in which participants have no control over the actions of their co-participants. If large deposits are made into the pool without adequate notification to the depository, the higher margins provide extra coverage to secure public deposits. A depository institution must comply with the 105% collateral requirement in §4.109(d).

Bank of America, the Independent Bankers Association of Texas, Wells Fargo Bank, N.A., and Patterson & Associates objected to §4.109(e) which requires that securities with a declining principal balance have a market value of not less than 125% of the amount of the deposits of public funds to be secured, reduced by the amount of federal deposit insurance.

Bank of America, N.A. mentioned that deposits of education based public agencies require a collateral margin of 110% when declining principal balance securities are pledged. The bank indicated that a 25% margin would be an expensive and unwarranted burden, and suggested that the option of marking to market value daily and a margin of 105% for all collateral types should be offered.

The Independent Bankers Association of Texas commented that the agency has significant flexibility under the statute with regard to collateral, with a minimum of 102%, and that 125% seemed excessive provided the agency regularly monitored the value of such securities. The Independent Bankers Association of Texas commented that a significant margin is appropriate to protect public entities, and suggested that a smaller amount such as 110% may be adequate in this area.

Patterson & Associates commented that the increased margins on declining principal bonds will only act to increase the cost of collateral and provides no additional safety. Patterson & Associates commented that had the legislature determined a 125% collateralization level was necessary for securities with declining principal balances, they would have specifically provided for it in the legislation, and that the language in §4.109(f) is outside the statutory scope of Chapter 2257, and requested that it be stricken in its entirety.

Wells Fargo also objected to §4.109(e) as being inconsistent with Government Code, §2257.104(a) and requested the required collateral percentage under §4.109 be established at 102%.

The agency responds that the state legislature mandated that the agency establish by rule a program for centralized pooled collateralization of deposits of public funds and for monitoring collateral maintained by participating institutions. The legislature has previously determined that 125% collateralization level was necessary for securities with a declining principal balances for state deposits as set out in Government Code, §404.0221(c). The agency has determined that collateral standards for deposits in the pooled collateral program should be no less secure than those required for state deposits.

Pledge and Withdrawal of Collateral.

Federal Home Loan Bank of Dallas and Wells Fargo Bank, N.A. commented on §4.110 and §4.112(f), regarding the pledge and withdrawal of collateral. Federal Home Loan Bank of Dallas indicated it acts as a custodian for a state depository institution and that as custodian, it does not hold pledged securities in one identifiable account for the agency, but rather in a safekeeping account the state depository has with the Federal Home Loan Bank of Dallas, with the pledge of securities in that account denoted with a unique numeric code reporting system. The Federal Home Loan Bank of Dallas requested that the terms of the custodian trust agreement and the procedures for pledging and withdrawing collateral allow a custodian trustee to keep all collateral in the pooled collateral program in either one identifiable trust account as currently contemplated in the proposed rules, or in the safekeeping account that the depository institution has with the Federal Home Loan Bank of Dallas and identify the collateral as pledged using a unique numeric code reporting system. The Federal Home Loan Bank of Dallas asked to review the custodian trustee agreement and procedures to be posted on the agency's website in connection with this issue and §4.112.

The agency responds that it will add revise §4.107 and will add §4.112(g)(2) to provide that the custodian trustee must properly identify and hold the pledged collateral in trust for the benefit of the pooled collateral program. The agency will also require that the custodian trustee either keep all collateral pledged for the benefit of the program in one identifiable pooled collateral account or in an account in the name of the participating depository institution where the collateral is clearly pledged and identified for the pooled collateral program using a unique code reporting system. The agency further responds that it will include this requirement in the Collateral Security Agreement and the custodian trust agreement terms, as well as in §4.112(g)(2). The agency will also post the collateral security agreement and the custodian trustee agreement for comment on the agency's website.

Wells Fargo Bank, N.A. commented that in §4.110(a)(2) the word "withdrawal" in the second line should be "pledge." The agency agrees that this is correct and will change the word from "withdrawal" to "pledge" in the subsection of the rule, which is now renumbered to §4.110(b)(2).

Recovery of Public Deposits.

J.P. Morgan Chase Bank, N.A., Wells Fargo Bank, N.A., and Patterson & Associates offered comments regarding §4.111, concerning the recovery of public funds. J.P. Morgan Chase Bank, N.A. suggested that the agency change the wording in §4.111(a) from "...to satisfy a claim" to "to satisfy an uncured claim..." Wells Fargo Bank, N.A. suggested that the criteria for a custodian's surrender of collateral should focus exclusively on its insolvency or failure, and objected to the criteria in the rule of failure to satisfy a claim or of sustaining a loss as vague and overly broad, and could potentially permit a demand for turnover of collateral in inappropriate or unnecessary situations. Patterson & Associates objected to the rule and noted that the rules clearly establish the custodian trustee as the bailee and that the bailee should retain full control of the collateral and the process for dissolution of collateral if necessary for the recovery of public funds. Patterson & Associates objected to the agency's being able to take possession of the collateral, and stated that the agency should not involve itself in the bailee's responsibilities.

The agency responds that it has reconsidered the issue of recovery of public deposits in §4.111 and that the public entity is the secured party with the right to assert a claim for the recovery of public funds if the depository institution fails. The agency notes that accounts held by government depositors are treated in 12 CFR 330.15. The agency has revised §4.111 to provide that a public entity may make a claim for a deposit of public funds and has deleted the remaining subsections.

CUSTODIAN TRUSTEE.

The Federal Home Loan Bank of Dallas submitted a comment inquiring about the definition of a custodian trustee under §4.101(3) and §4.105(b) and whether the Federal Home Loan Bank of Dallas would be required to apply with the agency to be designated as a custodian trustee.

The agency responds that only a state or national bank is required to be designated by the agency under Government Code, §2257.041(d)(1) and (5). The Federal Home Loan Bank, as well as certain other entities, may act as a custodian trustee under Government Code, §2257.104(c) or §2257.041(d) without being designated by the agency, or being required to enter into a custodian agreement. The agency will revise the definition of custodian trustee in §4.101(3), as well as make changes to §§4.105(b)(4) and (5), 4.107(c), and 4.112(b) and (f) to clarify this issue.

Custodian Trustee Designation and Participation.

J.P. Morgan Chase Bank, N.A., the Federal Home Loan Bank of Dallas, and Wells Fargo Bank, N.A. commented on §4.112, regarding the custodian trustee designation and Participation. J.P. Morgan Chase Bank, N.A. objected to the public entity approving the custodian under §4.112(b) and suggested revising the rule to state that the agency will approve the custodian trustee. Wells Fargo Bank, N.A. requested a requirement that in §4.112(f)(5), any demand for surrender of collateral be accompanied by a statement of the basis for the surrender under §4.111(a). Wells Fargo Bank, NA. noted that the word "is" should be removed at the beginning of each of the subsections of §4.112(e)(3) - (5).

The agency responds that Government Code, §2257.041(d) requires that a public entity approve the custodian trustee, and will provide for this approval of the custodian trustee selected by the depository institution in the collateral security agreement so that no separate approval will be required. The agency responds that it has revised §4.111 to remove the agency's request for surrender of collateral, eliminating the need for a statement of the basis for surrender of collateral. The agency further responds that it has revised §4.112(b) and (f) and has added a new subsection (g) to clarify the custodian trustee qualification. The agency agrees with Wells Fargo Bank, NA., that the word "is" should be removed at the beginning of each of the subsections of §4.112(e)(3) - (5).

REPORTING REQUIREMENTS.

J.P. Morgan Chase Bank, N.A., Wells Fargo Bank, N.A., and Patterson & Associates commented on §4.113, Reporting Requirements for depository institutions. J.P. Morgan Chase Bank, N.A. asked if the agency employed a financial institution to evaluate collateral, would the financial institution still have to file the weekly reports required by §4.113. J.P. Morgan Chase Bank, N.A. also inquired whether the agency has finalized the reporting requirements, format, and data for the reports.

Patterson & Associates indicated they understood the need for disclosure and transparency, but expressed concern about posting individual public entity accounts on the agency's website daily. Patterson & Associates stated that posting such account information would not add to collateral safety, and would increase the public entity liability. Patterson & Associates also indicated that collateral is based on the entity's total accounts under their single tax-identification number, and that if posting of account balances is really needed, then only a single amount for the entity to be collateralized should be posted on the website.

Wells Fargo Bank, N.A. also inquired about posting of public entity balances under §4.113(b) and asked that the agency clarify whether those balances will only be accessible by the particular public entity and the particular depository institution to which a given report pertains. The bank also expressed concern about the reporting of ledger balances under §4.113(c)(1) and indicated it has historically collateralized collected balances on Texas public funds accounts, and believes this practice is consistent with Texas law. Wells Fargo Bank, N.A. indicated that it strongly believes that any collateralization requirement should be limited to deposits actually on hand, namely collected balances, rather than ledger balances. The bank also requested that some flexibility be built into the daily reporting requirements in §4.113(c)(1) and (e) to allow for the possibility of systems issues, and to permit a reasonable amount of time to address them. Wells Fargo Bank, N.A. suggested that the agency allow an alternate method of submitting reports at a slightly later deadline under such circumstances. The bank also inquired about the daily reporting deadlines being contemplated by the agency.

The agency responds that the online reporting requirements and format have been finalized and will be posted on the agency's website. There will be two methods of report submission, but both must be accomplished through the agency's website. If system issues on the part of the agency prevent report submission, the report deadline will be extended accordingly. Otherwise the depository institution must meet the reporting deadline by one of the two methods of submission.

With regard to reporting the collected versus ledger balance the agency notes that Government Code, §2257.105(a)(1), requires "a daily report of the aggregate ledger balance of deposits..." The agency will require that depository institutions report the ledger balance.

The agency will use an independent industry recognized third party pricing service to value the collateral, and a depository institution that chooses pursuant to §4.113(c)(2) to adopt by reference the agency's daily report indicating the market value of the collateral as its weekly summary report need not file a separate weekly summary report.

The agency will post a public entity's account balances on its website to facilitate account reconciliation by the public entity. Only the public entity that owns the account and their depository institution will able to access the public entity account information for review.

Public Entity Deposits & Notice to Participating Depository Institutions.

Patterson & Associates commented on the public entity's duty in §4.114 to monitor the daily reports of its deposits of public funds on the agency's website, verify the accuracy of the reports, and report any discrepancies to its depository institution. Patterson & Associates objected to the rule, and stated that it places all responsibility and liability on the public entity for monitoring the posted reports and verifying the amounts, adding significant work to the public entity.

Patterson & Associates also commented on §4.114(e) regarding the duty of the public entity to inform its depository institution of a significant change in the amount or activity of its deposits. Patterson & Associates stated that the rules have elevated this to an unacceptable level of liability by stating in that the failure to inform could be judged a "mitigating factor" if it causes the depository institution to be in violation of the collateral requirements under Government Code, §2257.104 and this chapter. Patterson & Associates expressed concern that this could represent a legal liability on one public entity that could inadvertently cause a system-wide failure of margins. Patterson & Associates suggested that the agency could provide a service by assuring that its receipt of balance and collateral value information daily is matched and problems identified, and indicated that without such a failsafe the agency is providing little value.

The agency responds that, with regard to the public entity's duty to monitor the daily reports of its deposits on the agency's website, since the agency will not have access to the public entity's account information or bank statements the agency must rely on the public entity to monitor and verify the accuracy of the balance reports submitted by its depository institution. This is to ensure the integrity and accuracy of the information reported by the depository institution, which is vital to the success of the pooled collateral program.

With regard to §4.114(d) and (e), relating to the failure of a public entity to properly inform the participating depository institution of a significant change in the amount or activity in its deposits, the agency responds that it will revise subsection (d) to add the word "repeatedly" so that the notice is only required if the public entity repeatedly fails to inform the depository institution of a significant change in the amount or activity in deposits. The agency believes that repeated violations may affect the stability of the pool.

The agency will revise §4.114(e) and renumber it as §4.118(b) to clarify that a public entity's failure to notify the depository institution may be considered a mitigating factor in an administrative penalty action under Government Code, §2257.108 against a depository institution for failure to meet collateral requirements. The agency further responds that there would be no liability for the public entity from the agency perspective (except as repeated instances could affect a future application to participate in the program). The agency notes that due to the renumbering of §4.114(e) as §4.118(b), it will renumber the remaining subsections of each rule.

With regard to the comment on the need to compare daily ledger balances and collateralization, the agency responds that, as part of its duty to monitor collateral, it will be comparing the daily ledger balances it receives against the collateral value daily and resolve any problems.

COMPLIANCE WITH LAWS.

Federal Home Loan Bank of Dallas commented on the requirement in §4.117(a) to comply with all applicable laws, including the Federal Reserve regulations and Operating Circulars, in connection with the pooled collateral program. The bank noted the requirement and inquired why the comptroller's office specifically mentioned the Federal Reserve regulations and Operating Circulars. Federal Home Loan Bank of Dallas noted that it is not subject to all laws applicable to commercial banks, and requested that the agency identify the particular federal and state statutes and regulations that the agency believes are applicable to the pooled collateral program.

The agency responds that the rule requires compliance with all applicable laws, and notes that not all laws may be applicable to each participant in the program. Each participant is responsible for compliance with those laws that are applicable to them only. The agency included federal statutes, Federal Reserve regulations and Operating Circulars in this rule because many of the participants in the program may be subject to those laws.

ADMINISTRATIVE PENALTIES.

Patterson & Associates expressed concern about §4.118 and the penalty against a depository institution for failure to meet the collateralization requirements and requested that under-collateralization be recognized by the agency and punished. Patterson & Associates noted that the rules underestimate the impact on local governments when under-collateralization occurs, and that the public entity is being held responsible for a situation over which it has no control and no effective means of monitoring. Patterson & Associates also commented that the long time frame allowed to report and react to this type of situation is not sufficient, and could leave a public entity under-collateralized for days, and is unacceptable. Patterson & Associates indicated that under-collateralization caused by the banks should not be allowed more than two or three times, and that multiple failures should eliminate the banks from designation as a public depository for at least two to three years. Patterson & Associates commented that the high fiduciary trust taken on by the banks must be emphasized and remembered by all parties.

The agency responds that the legislature provided the penalty provisions for failure to properly collateralize deposits of public funds in Government Code, §2257.108(b). This provision allows the agency to penalize the depository institution if it has not remedied the collateral violation before the third business day after the date a notice is issued of a violation of the collateral requirements under §2257.104 and the rules of the agency. The agency notes that it will assess such penalties to enforce compliance with the program rules. The rules also require a depository institution to be approved for participation in the pooled collateral program every two years. During the application process, the agency may consider the past performance of a participating depository institution in the program and disapprove its participation in the program under §4.105(c).

Texas Bankers Association commented that the penalty structure in §4.119 was unnecessarily complicated. The association commented that the language in §4.120(b) was confusing and it was unable to determine whether the agency is attempting to set a $200 baseline for all penalties or just for those for which there is a continuing violation after 14 business days. Texas Bankers Association suggested the agency adopt clarifying language to remove the confusion.

The agency responds that it drafted the rule in accordance with the penalty structure guidelines set out in Government Code, §2257.110. The agency further responds that the rules set a $200 baseline just for those penalties for which there is a continuing violation after 14 business days. The agency further responds that it may provide additional guidance on the penalty structure through its website or upon request.

ASSESSMENT.

The Independent Bankers Association of Texas, J.P. Morgan Chase Bank, N.A., and Wells Fargo Bank, N.A. offered comments on §4.120 dealing with the annual assessment of participating depository institutions under Government Code, §2257.106. The Independent Bankers Association of Texas commented in favor of a formula for the assessment that acknowledges the importance of the volume of activity for a particular depository institution. J.P. Morgan Chase Bank, N.A. requested the agency clarify §4.120(b) as to "...the assessment based on the number of public entity accounts a participating depository institution maintains..." and asked if this is the number of accounts within the pooled collateral program or overall accounts held at a financial institution. J.P. Morgan Chase Bank, N.A. also asked if the assessment fees for start-up will be prorated over a five year period, as discussed in a September 29, 2009 presentation. Wells Fargo Bank, N.A. requested further clarity on the specifics of the assessment procedures and calculation guidelines.

The agency responds that it will follow the assessment formula set out in Government Code, §2257.106, and will assess the fees in a fair and equitable manner. With regard to §4.120(b), the agency responds that it interprets the "number of public entity accounts a participating depository institution maintains..." to be the number of public entity accounts the depository institution maintains within the pooled collateral program. The agency will also publish information regarding the annual assessment on its website.

The agency has revised §4.120 to include a specific formula to assess the depository institutions based upon the cost of administering the pooled collateral program each state fiscal year. This formula is based on factors set out in Government Code, §2257.106. The assessment is based on each depository institution's participation in the program and the agency believes it is an equitable way to distribute the costs of operating the program. Because the assessment is based on a depository institution's participation in the program, there is no need to prorate an assessment if a depository institution has been in the program for less than a year, and the agency has deleted this provision from subsection (a).

The depository institution assessment formula is the sum of three items: the collateral transaction fee, the public entity account maintenance fee, and the depository institution's average weekly deposits fee based on its share of the total average weekly deposits of public funds collateralized in the program. The collateral transaction fee will be $5.00 per pledge or withdrawal of collateral, and the account maintenance fee will be $50.00 per month per public entity.

To determine each depository institution's average weekly deposits fee, the agency will calculate its average weekly deposits as a percentage share of the total average weekly deposits of the program for the state fiscal year, as detailed in the rule. The agency will next calculate the remaining program administration costs by subtracting all collateral transaction fees and public entity account maintenance fees from the total program administrative costs for the year. The agency will apply each depository institution's percentage share of average weekly deposits to the remaining program administration costs to obtain each depository institution's average weekly deposits fee. However, depository institutions with less than one million dollars of average weekly deposits over the year will be excluded from the average weekly deposit fee, but will still be assessed the collateral transaction fee and the public entity account maintenance fee.

With regard to allocation of program costs, the agency responds that it will, when appropriate, allocate program costs over a period of time, like start up costs. The agency will add this allocation language to §4.120(a).

The new sections are adopted under Government Code, §2257.102, which provides the comptroller with the authority to establish a program for centralized pooled collateralization of deposits of public funds and for monitoring collateral maintained by participating institutions.

The new sections implement Government Code, Chapter 2257, Subchapter F, §§2257.101 - 2257.114. The new pooled collateral program requirements also incorporate related statutory requirements for depositories and custodians in Government Code, Chapters 404 and 2257.

§4.101.Definitions.

The following words and terms, when used in this chapter, have the following meanings:

(1) Acceptable collateral--An eligible security under Government Code, §2257.002(4) that is deemed acceptable by the comptroller to pledge as collateral to secure the deposit of public funds in the pooled collateral program.

(2) Collateral security agreement--A binding security agreement between a public entity and a participating depository institution to secure the deposit of public funds in the pooled collateral program. The collateral security agreement must be on a form provided or approved by the comptroller.

(3) Custodian trustee--A custodian as provided under Government Code, §2257.104(c) and §2257.041(d).

(4) Deposit of public funds--Public funds of a public entity that the comptroller does not manage under Government Code, Chapter 404 held as a demand or time deposit by a participating depository institution.

(5) Depository institution--A state or national bank, savings and loan association, federal savings bank, or credit union that is insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, and maintains a home or branch office in Texas.

(6) Participating depository institution--A depository institution that has been approved by the comptroller for participation and holds deposits of public funds in the pooled collateral program.

(7) Permitted institution--A financial institution defined in Government Code, §2257.002(6).

(8) Pooled collateral program--The centralized pooled collateralization of deposits of public funds administered by the comptroller under Government Code, Chapter 2257, Subchapter F and this chapter.

(9) Public entity--A state or a political or governmental entity, agency, instrumentality, or subdivision of the state, including a municipality, a conservation or reclamation district created under Texas Constitution, Article XVI, Section 59, and a public hospital, but the term does not include an institution of higher education, as defined by Education Code, §61.003.

(10) State fiscal year--September 1st through August 31st.

§4.104.Depository Institution Application Process.

(a) The comptroller will post on its website the depository institution application, collateral security agreement, related documents, and guidance for application and participation in the pooled collateral program.

(b) The comptroller's approval of a depository institution's participation in the pooled collateral program is effective for two years from September 1 of each odd-numbered year until August 31st of the next odd-numbered year. A depository institution may apply for approval every two years in the pooled collateral program, according to the instructions posted on the comptroller's website, but may also apply at any time during the two-year period.

(c) The comptroller will notify a participating depository institution of the deadline for application by June 1st of each odd-numbered year. A depository institution must apply by August 1st of each odd-numbered year for the comptroller's approval to be effective for September 1 of each odd-numbered year for the next two-year term.

(d) The parent institution of a depository institution must apply to be a participating depository institution and be approved if deposits are to be held in any of its Texas branch locations. Branch institutions may not apply. The parent institution may apply for approval by submitting a completed application and executed collateral security agreement to the comptroller at any time.

(e) Once a depository has been approved for participation in the pooled collateral program, it will submit each new collateral security agreement with a public entity to the comptroller for approval before accepting its deposits as part of the pooled collateral program and in accordance with the comptroller's instructions on its website.

(f) A successor institution to a participating depository institution must apply for approval to act as a depository institution and comply with pooled collateral program law, rules and requirements as soon after the change in ownership as is practicable.

(g) The comptroller at its discretion may require the participating depository institution to update the application form and collateral security agreement.

(h) If the depository institution has been approved for participation, the comptroller will notify the depository institution and the public entity. The comptroller will provide them both with instructions and requirements for participation in the pooled collateral program, including access to the pooled collateral program website.

(i) If the depository institution has not been approved for participation, the comptroller will notify it in writing of the reason for disapproval. If the applicant that was not approved was a participating depository institution, it will comply with the requirements of §4.106(b) of this title (relating to Voluntary Withdrawal from the Pooled Collateral Program) for the orderly withdrawal from the pooled collateral program within ninety days of the comptroller's written disapproval.

(j) Within thirty days after the written disapproval of its application an applicant may request an informal review in writing. The applicant must include the basis for its request and submit evidence that it cured any deficiency in its application. The comptroller will conduct an informal review based on the applicant's written submission. Except as provided in subsection (i) of this section for a participating depository institution, an applicant may not act as a depository institution in the program during the informal review process.

(k) The agency's decision in the informal review is a final decision.

(l) After the informal review process is complete, an applicant that has been disapproved for a deficiency may reapply to act as a depository institution once the deficiency in its application has been cured; however an applicant that has been disapproved for violation of §4.118 of this title (relating to Administrative Penalties for Noncompliance by Participating Depository Institution) would not be considered eligible to apply to act as a depository institution until the next odd-numbered year.

§4.105.Depository Institution Approval Criteria.

(a) The depository institution will submit a completed application and required documents, with original signatures as required. The application must include a statement:

(1) of the amount of the applicant's paid capital stock and permanent surplus, if any;

(2) of the applicant's condition according to the most recent financial statement on the date the application is submitted;

(3) that the applicant will maintain a separate, accurate, and complete records relating to a pledge of collateral, a deposit of public funds, and a transaction related to a pledge of collateral;

(4) that the applicant will provide, upon request, the comptroller or a public entity information or confirmation regarding a deposit of public funds or a pledge of collateral; and

(5) that the applicant will provide such other information as the comptroller or public entity may require to verify the condition of the depository institution.

(b) The depository institution must also meet the following conditions before being approved to participate in the pooled collateral program:

(1) the applicant must maintain its main office or a branch office in Texas;

(2) the applicant shall submit a binding collateral security agreement for each public entity, with original signatures as required, using a form provided or approved by the comptroller;

(3) each related public entity must be eligible for participation in the pooled collateral program;

(4) the applicant shall provide for the collateral securities to be held by a custodian trustee in trust for the benefit of the pooled collateral program;

(5) the applicant's named custodian trustee qualifies under Government Code, §2257.104(c) or §2257.041(d)

(6) the comptroller and custodian trustee have executed a custodian trust agreement when the custodian trustee is qualified to act under Government Code, §2257.041(d)(1) or (5); and

(7) the applicant must meet the requirements in Government Code, Chapter 2257, this chapter, or other applicable law.

(c) In addition to the foregoing requirements for approval to participate in the pooled collateral program, if the applicant has previously participated in the pooled collateral program the comptroller may refuse to approve its participation in the pooled collateral program for:

(1) failure to maintain compliance with Government Code, Chapter 2257, this chapter, or other applicable law;

(2) failure to remedy a violation of Government Code, Chapter 2257 and this chapter within a reasonable time after receiving written notice of the violation;

(3) audit or examination findings that include noncompliance with Government Code, Chapter 2257 and this chapter;

(4) failure to comply with the terms of the collateral security agreement; or

(5) failure to provide information requested by the comptroller, which information the comptroller considers necessary to evaluate compliance with Government Code, Chapter 2257 and this chapter, and for the benefit of the pooled collateral program.

(d) The comptroller may approve those applicants that are acceptable and may reject those whose management or condition, in the opinion of the comptroller, does not warrant the placing of public funds in their possession or do not meet the requirements of this chapter. The comptroller may consider financial indicators that concern capital adequacy, asset quality, earnings and liquidity.

§4.106.Voluntary Withdrawal from the Pooled Collateral Program.

(a) An approved depository institution or public entity may withdraw from the pooled collateral program by providing written notice to the comptroller and the other named party to its collateral security agreement(s) (either the depository institution or public entity). The depository institution must provide notice in writing at least 90 days before the effective date of withdrawal. The public entity must provide reasonable written notice of withdrawal from the program as soon as practicable.

(b) As part of the withdrawal process a participating depository institution must:

(1) maintain the required amount of acceptable collateral in the pooled collateral program until the effective date of withdrawal;

(2) continue to provide the required reports detailing required information through the effective date of withdrawal;

(3) continue to comply with the terms of collateral security agreements through the effective date of withdrawal; and

(4) provide written notice to the comptroller that it has taken all appropriate steps to provide for the orderly transition of public entity deposits.

§4.107.General Collateral Requirements.

(a) A participating depository institution must enter into a binding collateral security agreement with each public entity to secure public deposits.

(b) A participating depository institution is responsible for pledging sufficient collateral when public deposits are received, and for maintaining sufficient collateral at all times. A depository institution must use its best efforts to pledge collateral at the same time it receives a deposit of public funds, but no later than the close of business on the same day of the deposit. Collateral is not required for deposits to the extent that the deposits are insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund. The comptroller will apply the full amount of federal deposit insurance coverage for a public entity to determine the amount of collateral required to secure the deposit of public funds in the program.

(c) A participating depository institution is required to pledge acceptable collateral with a custodian trustee qualified to act under Government Code, §2257.104(c) or §2257.041(d) to secure the deposits of public funds. The custodian trustee shall properly identify and hold the pledged collateral in trust for the benefit of the public entities participating in the depository institution's specific pooled custodian account in the pooled collateral program.

(d) A participating depository institution may pledge its pooled collateral to more than one participating public entity under contract with the participating depository institution. The collateral security may be pledged using a single custodial account instead of an account for each public entity.

(e) Each participating depository institution's collateral may not be combined, cross-collateralized with, or aggregated with, or pledged to any other depository institution's collateral pools.

(f) The custodian trustee may either keep all collateral pledged for the benefit of the program in one identifiable pooled collateral account or in an account in the name of the participating depository institution where the collateral is clearly pledged and identified for the pooled collateral program using a unique code reporting system.

(g) The security interest for a participating depository institution's pledge of collateral is created, attaches, and is perfected when the custodian trustee records the pledge on its books and records and issues a trust receipt.

(h) The custodian trustee is for all purposes the bailee or agent of the public entity depositing the public funds as part of the pooled collateral program.

§4.108.Acceptable Collateral.

(a) To properly secure the deposit of public funds and to preserve the integrity and viability of the pooled collateral program, the comptroller will designate those instruments in this section and on its website that it deems acceptable to pledge as collateral. The comptroller's decision regarding whether an instrument is deemed acceptable collateral, either on its own determination or upon petition by a participating depository institution, is final and not subject to review.

(b) The comptroller will designate acceptable collateral for the program from those instruments allowed as eligible collateral under Government Code, §2257.02(4). The comptroller will designate acceptable collateral based upon its associated risks, its preservation of market value, its operational efficiencies, and such other appropriate criteria that may be developed by the comptroller.

(c) The comptroller will review its designation of acceptable collateral each state fiscal year and more often if needed. At its discretion the comptroller may add or remove its designation of acceptable collateral from time to time as appropriate to protect the deposit of public funds and the integrity of the pooled collateral program. The comptroller will provide at least 180 days notice of the same to participating depository institutions to allow substitution of a pledged instrument that is no longer deemed acceptable collateral, unless a shorter notice is required to adequately secure the deposit of public funds.

(d) A participating depository institution may make a written request that the comptroller approve an instrument that is not currently deemed as acceptable collateral. The participating depository institution will provide appropriate documentation to substantiate its request. The comptroller will review the request and notify the participating depository institution of its decision of whether to add the instrument to the designation of acceptable collateral that may be pledged by a participating depository institution and the rationale for its decision. The comptroller may accept or reject a proposed instrument based on the criteria for designating acceptable collateral.

(e) Except as provided in subsection (c) or (f) of this section, the following instruments are deemed acceptable to be pledged as collateral in the pooled collateral program:

(1) United States Treasury obligations;

(2) Mortgage-backed securities (Federal National Mortgage Association discount notes, primary debt instruments or debentures) with a remaining maturity of 15 years or less;

(3) Federal Home Loan Bank system consolidated bonds and discount notes issued in book-entry form;

(4) Federal Home Loan Bank Beneficiary Standby Letters of Credit that are fully collateralized;

(5) Federal Farm Credit Banks consolidated system-wide bonds and discount notes issued in book-entry form;

(6) Government National Mortgage Association securities;

(7) Federal Home Loan Mortgage Corporation discount notes and primary debt instruments or debentures, and only those mortgage-backed securities with a remaining maturity of 15 years or less;

(8) State of Texas bonds issued by various state agencies and four year educational institutions of the State of Texas; and

(9) Municipal bonds issued by governmental entities of the State of Texas with a rated investment quality by a nationally recognized investment rating firm of not less than "A" or its equivalent. By way of illustration, and not limitation, governmental entities include independent school districts, junior colleges, incorporated cities, certain road districts, certain municipal water and/or utility districts, hospital districts (excluding health facility bonds), and water and air pollution control districts.

(f) The following instruments are not deemed acceptable to be pledged as collateral in the pooled collateral program:

(1) Adjustable Rate Mortgages (ARM);

(2) Collateralized Mortgage Obligations (CMO);

(3) step-up securities;

(4) variable rate securities; and

(5) securities not found on common pricing systems.

§4.109.Required Amount of Collateral.

(a) If the balance of deposits of public funds in a participating depository institution is increased, the participating depository institution will increase the collateral for the deposits to the required amount.

(b) The comptroller shall determine the market value of acceptable collateral pledged by participating depository institutions to determine if the collateral amount is adequate. The comptroller's valuation of acceptable collateral is final and not subject to review.

(c) If the market value of the collateral pledged by a participating depository institution becomes less than the required amount, the comptroller shall require that additional collateral be pledged immediately, but not later than the close of business on the same day the comptroller notifies the depository institution that it does not meet collateral requirements.

(d) Except as provided in subsection (e) of this section, each participating depository institution shall pledge acceptable collateral with a total value of at least 105% of the amount of deposits of public funds in its pool, reduced to the extent deposits are insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund.

(e) If pledged collateral consists of securities with a declining principal balance, the market value of the collateral pledged may not be less than 125% of the amount of the deposits of public funds to be secured, reduced to the extent deposits are insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund.

(f) The collateralization requirements of Government Code, §2257.022(b) do not apply to a deposit of public funds held by a participating depository institution and collateralized in the pooled collateral program.

§4.110.Pledge and Withdrawal of Collateral.

(a) The comptroller will, as the designated agent of the public entity, monitor collateral pledged as part of the program and approve as appropriate, the pledge and withdrawal of collateral into and out of the custodian trustee account for pooled collateral.

(b) The comptroller will post procedures for pledging acceptable collateral on its website. The procedures will address the following:

(1) the pledge of acceptable collateral by the participating depository institution;

(2) the comptroller's review of the proposed pledge of collateral and notification to a participating depository institution if the proposed pledge is not approved;

(3) the comptroller's authorization to the custodian trustee to accept the pledge of collateral; and

(4) the custodian trustee's identification of the pledge of collateral on its books and records and issuance of a safekeeping trust receipt to the comptroller in an acceptable manner.

(c) The comptroller will post procedures for withdrawal of collateral on its website. The procedures will address the following:

(1) notice by the participating depository institution of the proposed withdrawal of collateral from its pooled collateral program pool;

(2) the comptroller's review of the proposed withdrawal of collateral and notification to the participating depository institution if the comptroller rejects the withdrawal of collateral;

(3) the comptroller's authorization to the custodian trustee to allow the withdrawal of collateral; and

(4) the custodian trustee's acknowledgement to the comptroller of receipt of approval to withdraw collateral and confirmation of the withdrawal.

§4.111.Recovery of Public Deposits.

If a participating depository institution fails to satisfy a claim against a deposit of public funds or becomes insolvent, the official custodian of a public entity (as set out in 12 CFR 330.15) may make a claim to recover their deposits of public funds.

§4.112.Custodian Trustee Qualification and Participation.

(a) A custodian trustee holds in trust the collateral pledged to secure deposits of public funds by the participating depository institution.

(b) A custodian trustee must qualify as a custodian under Government Code, §2257.104(c) or §2257.041(d) before acting as a custodian trustee in the pooled collateral program.

(c) A custodian trustee must be approved by a public entity before the custodian trustee may accept collateral to secure the deposit of its public funds.

(d) A custodian trustee or a permitted institution may not own, may not be owned by, and must be independent of the participating depository institution or institutions for which it holds the public entity's collateral in trust.

(e) The comptroller shall ensure that the custodian trustee is:

(1) a state or national bank that:

(A) is designated by the comptroller as a state depository;

(B) has its main office or a branch office in this state; and

(C) has a capital stock and permanent surplus of $5 million or more;

(2) the Texas Treasury Safekeeping Trust Company;

(3) a Federal Reserve Bank or a branch of a Federal Reserve Bank;

(4) a banker's bank as defined by Texas Finance Code, §34.105;

(5) a federal home loan bank; or

(6) a financial institution authorized to exercise fiduciary powers and that is designated by the comptroller as a custodian pursuant to Government Code, §404.031(e).

(f) If the custodian trustee qualified is to act under the terms of Government Code, §2257.041(d)(1) or (5), the comptroller will enter into an agreement to protect the security interests of collateral pledged for the pooled collateral program. If the custodian trustee is qualified to act under Government Code, §2257.104(c)(1) - (3) or §2257.041(d)(2) - (4), it is not required to enter into such an agreement with the comptroller.

(g) A qualified custodian trustee will comply with the following requirements to participate in the pooled collateral program:

(1) the custodian trustee shall comply with all procedures for pledge or withdrawal of collateral in the pooled collateral program;

(2) the custodian trustee shall properly identify and hold the pledged collateral in trust for the benefit of the pooled collateral program. The custodian trustee may either keep all collateral pledged for the benefit of the program in one identifiable pooled collateral account or in an account in the name of the participating depository institution where the collateral is clearly pledged and identified for the program using a unique code reporting system;

(3) the custodian trustee shall issue a trust receipt, advice of transaction, or other evidence of transaction to the comptroller indicating the pledge or withdrawal of collateral in a manner acceptable to the comptroller;

(4) the custodian trustee shall not allow a withdrawal of the collateral without permission of the comptroller; and

(5) the custodian trustee shall keep accurate and detailed records of all transactions related to the collateral.

§4.113.Reporting Requirements.

(a) The comptroller will publish instructions on the required electronic reporting procedures, deadlines, requirements, and format on its website.

(b) The comptroller will provide an electronic acknowledgement of each report received and post each report on its website.

(c) Each participating depository institution will file the following reports in accordance with the comptroller's instructions:

(1) daily report--the participating depository institution will file a daily report of its prior business day's aggregate ledger balance of deposits of public funds. The daily report will be itemized by each public entity and account. The participating depository institution will report deposits by account type, indicating interest bearing and non-interest bearing accounts;

(2) weekly summary report--the participating depository institution will file a weekly report of the total par and market value of collateral held by a custodian trustee on its behalf. As part of the participating depository institution's weekly summary report, it may either report the market value itself or adopt by reference the comptroller's daily report indicating the market value of the collateral for the due date of the weekly report. If a participating depository institution elects to adopt the comptroller's reported market value of the collateral by reference, it must elect to do so either during the application process or if during the two-year term, in accordance with the comptroller's guidelines posted on its website;

(3) monthly report--the participating depository institution will file a monthly report listing the collateral instruments held by a custodian trustee on behalf of the participating depository institution, together with the par and market value of the securities with their CUSIP numbers if applicable; and

(4) annual reporting--during even-numbered years beginning in 2012 the participating depository institution will file appropriate annual reports as the comptroller may require, including its annual report and financial statements. The comptroller will post any such annual reporting requirements on its website.

(d) The comptroller will provide a daily report on the market value of the collateral held in each pool on its website.

(e) The comptroller will, as the designated agent of the public entity, monitor the reports and related collateral held in trust for the benefit of the public entity and the pooled collateral program.

(f) The comptroller may impose an administrative penalty against a participating depository institution that fails to timely file a report as required under Government Code, §2257.107 and this chapter.

§4.114.Public Entity Deposits and Notice to Participating Depository Institutions.

(a) A public entity is responsible for reviewing and monitoring the reports posted on the comptroller's website related to its deposits of public funds.

(b) A public entity is responsible for verifying the accuracy of the daily reports of its itemized deposits and reporting any discrepancies to its participating depository institution.

(c) A public entity shall inform its participating depository institution of a significant change in the amount or activity of its deposits within a reasonable time before the change occurs.

(d) A participating depository institution must notify the comptroller if a public entity repeatedly fails to inform it of a significant change in the amount or activity in deposits as required in subsection (c) of this section.

(e) The comptroller in its discretion may disapprove a collateral security agreement between a participating depository institution and a public entity if that public entity fails to comply with the notice requirement in subsection (c) of this section more than two times within a one-year period.

§4.115.Books and Records.

(a) A participating depository institution, custodian trustee, and a permitted institution will maintain separate, accurate and complete records relating to each deposit of public funds, each pledge of collateral, and each transaction related to a pledge of collateral.

(b) A depository institution, custodian trustee and a permitted institution will provide, upon request, the comptroller or a public entity with information or confirmation regarding a deposit of public funds or a pledge of collateral.

(c) A public entity may, pursuant to the terms of its account agreement, review the records of its participating depository institution, custodian trustee, and permitted institution related to that public entity's deposit and collateralization of public funds in the pooled collateral program.

§4.116.Certification of Compliance.

(a) The comptroller at its discretion may require annual certification by a participating depository institution that it is in compliance with Government Code, Chapter 2257, Subchapter F and this chapter.

(b) The comptroller may require written confirmation from a participating depository institution, custodian trustee, or permitted institution that it is in compliance with the books and records requirements under Government Code, Chapter 2257 and this chapter.

§4.117.Compliance with Laws; Venue.

(a) The comptrollers' office and all participants in the pooled collateral program will comply with all applicable laws, including the Federal Reserve regulations and Operating Circulars, in connection with the pooled collateral program.

(b) A legal action brought by or against a public entity that arises out of or in connection with the duties of a depository institution, custodian trustee or permitted institution must be brought and maintained as provided by the contract with the public entity.

(c) Venue for any suit brought in connection with the pooled collateral program will be in State District Court in Travis County, Texas, and no other county.

§4.118.Administrative Penalties for Noncompliance by Participating Depository Institution.

(a) The comptroller may, in addition to other penalties provided by law, impose an administrative penalty against a participating depository institution for:

(1) failure to maintain collateral in an amount and in the manner required by Government Code, §2257.104 and this chapter, if the participating depository institution has not remedied the violation before the third business day after the date the notice is issued;

(2) failure to timely file a report required under Government Code, §2257.105 and this chapter; or

(3) failure to pay an assessment within 45 calendar days after the date it receives the notice.

(b) In an action under Government Code, §2257.108, the comptroller may consider the failure of a public entity to properly inform the participating depository institution of a significant change in amount or activity in its deposits as a mitigating factor if it causes the participating depository institution to be in violation of the collateral requirements under Government Code, §2257.104 and the rules of the comptroller.

(c) The comptroller will notify a participating depository institution if it is in violation of any reporting requirements, collateral requirements, or in the event of failure to pay the annual assessment.

(d) The comptroller and the participating depository institution may agree to informally resolve a pending violation and penalty.

(e) A proceeding to impose a penalty under Government Code, §§2257.107, 2257.108, and 2257.109 and this section, is a contested case under Government Code, Chapter 2001.

(f) If, after a determination that a penalty is due, the participating depository institution fails to pay the penalty, the comptroller may refer the matter to the attorney general for enforcement.

(g) The participating depository institution may stay enforcement of the penalty during the time the order is under judicial review in the manner provided in Government Code, §2257.113.

§4.120.Assessment.

(a) In accordance with Government Code, §2257.106, the comptroller shall impose an annual assessment each state fiscal year on each participating depository institution in an amount sufficient to pay the costs of administering the pooled collateral program. The comptroller will publish instructions on the required assessment procedure, formula, deadlines, and requirements on its website. The comptroller may, in its discretion and when appropriate, allocate program costs over a period of years.

(b) The formula for determining the amount of the assessment will be based on the following factors:

(1) the number of collateral transactions a participating depository institution conducts;

(2) the number of public entity accounts a participating depository institution maintains in the program; and,

(3) the depository institution's average weekly deposits of public funds collateralized during that state fiscal year.

(c) The annual assessment formula is the sum of the: depository institution's collateral transaction fee, public entity account maintenance fee, and depository institution's average weekly deposits fee based on its share of the total average weekly deposits of public funds collateralized in the program. The cost to administer the program each state fiscal year will be the sum of these three fees for all participating depository institutions. The annual assessment formula includes the following:

(1) a collateral transaction fee of $5.00 per collateral pledge or withdrawal transaction;

(2) a public entity account maintenance fee of $50.00 per public entity per month, or any part of a month, for the months of participation during the state fiscal year; and

(3) an average weekly deposits fee based on each depository institution's percentage of the total average weekly deposits of public funds collateralized in the program. The average weekly deposits fee is determined as follows:

(A) calculate each depository institution's average weekly deposit of public funds collateralized in the program;

(B) exclude those depository institutions with less than a $1 million in average weekly deposits, as they will not be subject to this fee;

(C) calculate the percentage share for each depository institution (with average weekly collateralized deposits of at least $1 million or more) of the total average weekly deposits of public funds (for all depository institutions with average weekly deposits of at least $1 million or more);

(D) determine the remaining annual program costs by subtracting all collateral transaction fees and public entity account maintenance fees from the total annual program costs; and

(E) apply each depository institution's percentage share obtained in subparagraph (C) of this paragraph to the remaining annual program costs in subparagraph (D) of this paragraph to obtain each depository institution's fee based on its percentage share of the average weekly deposits of public funds collateralized in the program.

(d) The comptroller shall calculate the annual assessment based on the formula in subsection (c) of this section and send a notification to each participating depository institution after the close of the state fiscal year.

(e) The participating depository institution will remit payment to the comptroller by Automated Clearing House (ACH) credit according to the instructions provided by the comptroller within 45 calendar days after the date it receives the notice.

(f) The comptroller may impose an administrative penalty against a participating depository institution if it does not timely pay the assessment.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on September 29, 2010.

TRD-201005631

Ashley Harden

General Counsel

Comptroller of Public Accounts

Effective date: October 19, 2010

Proposal publication date: April 9, 2010

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