TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER O. STATE AND LOCAL SALES AND USE TAXES

34 TAC §3.282

The Comptroller of Public Accounts proposes amendments to §3.282, concerning auditing taxpayer records. The comptroller amends the section to reflect the changes in Tax Code, §151.054 (Gross Receipts Presumed Subject to Tax) and §151.104 (Sale for Storage, Use, or Consumption Presumed) made by Senate Bill 296, 87th Legislature, 2021, effective June 7, 2021.

The comptroller amends subsection (k) to change the time period during which a seller must provide resale or exemption certificates to the comptroller. Currently, sellers must provide certificates within 60 days after receipt of notice from the comptroller. The subsection is amended to state a seller must provide certificates within 90 days or before a later date agreed to in writing by the comptroller. Non-substantive, conforming charges are made throughout the subsection.

The comptroller amends paragraph (2) by adding clarifying language regarding the timeframe in which written notices are issued. No substantive change is intended.

Language from existing paragraph (2) is segregated into paragraphs (2) - (5) for readability. The comptroller adds a cross-reference to §3.286 (relating to Seller's and Purchaser's Responsibilities) to existing language in new paragraph (5) to be consistent with §3.285 (relating to Resale Certificate; Sales for Resale) and §3.286 of this title. The comptroller renumbers paragraph (3) to new paragraph (6).

Brad Reynolds, Chief Revenue Estimator, has determined that during the first five years that the proposed amendment is in effect, the amendment: will not create or eliminate a government program; will not require the creation or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to the agency; will not require an increase or decrease in fees paid to the agency; will not increase or decrease the number of individuals subject to the rules' applicability; and will not positively or adversely affect this state's economy. This proposal amends a current rule.

Mr. Reynolds also has determined that for each year of the first five years the rule is in effect, the proposed amendment would benefit the public by conforming the rule to current statutes. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. The proposed amendment would have no significant fiscal impact on the state government, units of local government, or individuals. There would be no significant anticipated economic costs to the public.

You may submit comments on the proposal to Jenny Burleson, Director, Tax Policy Division, P.O. Box 13528 Austin, Texas 78711 or to the email address: tp.rule.comments@cpa.texas.gov. The comptroller must receive your comments no later than 30 days from the date of publication of the proposal in the Texas Register.

The amendments are proposed under Tax Code, §111.002 (Comptroller's Rules, Compliance, Forfeiture), 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 (State Taxation).

The amendments implement Tax Code, §151.054 (Gross Receipts Presumed Subject to Tax) §151.104 (Sale for Storage, Use, or Consumption Presumed), and §151.0231 (Managed Audits).

§3.282.Auditing Taxpayer Records.

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

(1) Managed audit--A taxpayer self-review and analysis of invoices, checks, accounting records, or other documents or information to determine a taxpayer's liability for tax under Tax Code, Chapter 151, as allowed under a written agreement with the comptroller authorizing a managed audit as described in subsection (f) of this section.

(2) Percentage-based reporting method--A method by which a direct payment permit holder may be authorized to categorize purchase transactions according to standards specified in a letter of authorization issued under the provisions set out in subsection (g) of this section, reviews an agreed-on sample of invoices in those categories to determine the percentage of taxable transactions, and uses that percentage to calculate the amount of tax to be reported.

(b) The comptroller or an authorized representative of the comptroller may audit a taxpayer's accounts and records at any time during regular business hours at the discretion of the comptroller or the comptroller's authorized agent or representative.

(c) The comptroller may use a detailed auditing procedure or a sample and projection auditing method to determine tax liability. Sampling procedure may include manual sampling techniques and computer-assisted audit techniques, whichever produce the most accurate results in the most efficient manner.

(d) A sample and projection auditing method is appropriate if:

(1) the taxpayer's records are so detailed, complex, or voluminous that an audit of all detailed records would be unreasonable or impractical;

(2) the taxpayer's records are inadequate or insufficient, so that a competent audit for the period in question is not otherwise possible; or

(3) the cost of an audit of all detailed records to the taxpayer or to the state will be unreasonable in relation to the benefits derived, and sampling procedures will produce a reasonable result.

(e) Before using a sample technique to establish a tax liability, the comptroller must notify the taxpayer in writing of the sampling procedure to be used.

(f) The comptroller may authorize taxpayers that meet certain requirements to perform managed audits.

(1) A taxpayer who wishes to participate in a managed audit must request authorization from the comptroller's office to conduct a managed audit under this section. Authorization will only be granted as part of a written agreement between the taxpayer and the comptroller's office. The agreement must:

(A) be signed by an authorized representative of the comptroller and the taxpayer; and

(B) specify the period to be audited and the procedure to be followed.

(2) In determining whether to authorize a managed audit, the comptroller may consider, in addition to other factors the comptroller considers relevant:

(A) the taxpayer's history of tax compliance, including:

(i) timely filing of all reports;

(ii) timely payment of all taxes and fees due the state;

(iii) prior audit history;

(iv) delinquency in other taxes;

(v) correction of problems identified;

(vi) collection of tax that was not remitted; and

(vii) whether a penalty waiver had been denied on prior occasions and the reason for denial;

(B) the amount of time and resources the taxpayer has available to dedicate to the audit;

(C) the extent, availability, and completeness of the taxpayer's records for the period to be covered by the managed audit;

(D) the taxpayer's ability to pay any expected liability; and

(E) the size and sophistication of the taxpayer.

(3) The decision to authorize or not authorize a managed audit rests solely with the comptroller.

(4) A managed audit may be limited to certain categories of liability under Tax Code, Chapter 151, including tax on:

(A) sales of one or more types of taxable items;

(B) purchases of assets;

(C) purchases of expense items;

(D) purchases under a direct payment permit; or

(E) any other category specified in an agreement authorized by this section.

(5) Before the audit is finalized, the comptroller may examine records that the comptroller determines are necessary to verify the results.

(6) Unless the audit or information reviewed by the comptroller under this subsection discloses fraud or willful evasion of the tax, the comptroller may not assess a penalty and may waive all or part of the interest that would otherwise accrue on any amount identified to be due in a managed audit. This subsection does not apply to any amount collected by the taxpayer that was a tax or represented to be a tax but was not remitted to this state.

(7) Except as provided by applicable law, the taxpayer is entitled to a refund of any tax overpayment disclosed by a managed audit. See §3.325 of this title (relating to Refunds and Payments Under Protest).

(g) The comptroller may authorize direct payment permit holders that meet certain requirements to report tax on purchases using a percentage-based reporting method.

(1) A holder of a direct payment permit may request authorization from the comptroller to use a percentage-based reporting method. The authorized percentage must be used for a three-year period specified by the comptroller, unless the authorization is revoked by the comptroller.

(2) The authorization to report under this subsection may be revoked if the comptroller determines that the percentage being used is no longer representative because of a change in the taxpayer's business operations or in law, including a change in the interpretation of a law or rule. For example, two decisions from the Court of Appeals changed the list of items that may be purchased tax free by manufacturers. Subsequently the legislature passed two bills that significantly changed the tax responsibilities of manufacturers. Each of these changes affected a manufacturer's percentage used to report taxable purchases.

(3) The decision of the comptroller to deny or revoke authorization under this section is not subject to appeal.

(4) When authorizing reporting under this section, the comptroller may categorize transactions by dollar amount, by type of taxable item purchased, by the purpose for which the taxable item will be used, or by other standards appropriate to the taxpayer's operations.

(h) A taxpayer who holds a permit issued under Tax Code, Chapter 151, who has paid Texas tax in error on purchases of taxable items, whether sales tax was remitted directly to this state or to a retailer holding a permit under Tax Code, Chapter 151, may compute the amount of overpayment by use of a projection based on a sampling of transactions.

(1) The sampling method must be one that has been approved by the comptroller.

(2) The taxpayer must record the method by which the projection and computation were performed and must make available, on request by the comptroller, information explaining the method employed and the records on which the projection and computation were based.

(i) A taxpayer who holds a permit issued under Tax Code, Chapter 151, may obtain reimbursement for amounts determined to have been overpaid by taking a credit on one or more sales tax returns or by filing a claim for refund with the comptroller within the limitation period specified by Tax Code, Chapter 111. See §3.325 of this title. A taxpayer is required to keep contemporaneous records to substantiate and enable verification of the taxpayer's credit or refund claim for a minimum of four years from the date on which the record is made, and throughout any period in which any tax, penalty, or interest may be assessed, collected, or refunded by the comptroller, or in which an administrative hearing or judicial proceeding is pending, unless the comptroller authorizes in writing a shorter retention period.

(1) A taxpayer may take a credit by amending the sales tax return for the period in which the tax was originally paid.

(2) If a taxpayer chooses to take the credit by claiming a refund, the claim must identify the period in which the tax was originally paid.

(3) A taxpayer who claims a credit or submits a refund request for local taxes must identify the period in which the local tax was paid and the local taxing jurisdiction to which the local tax was reported.

(4) Interest will be paid on tax amounts found to be erroneously paid for reports due on or after January 1, 2000, whether claimed on a request for refund or claimed in an audit. See also §3.325 of this title and Tax Code, §111.064.

(j) If records are inadequate to accurately reflect the business operations of the taxpayer, the auditor will determine the best information available and base the audit report on that information. See §3.281 of this title (relating to Records Required; Information Required) for information on proper records.

(k) Resale and exemption certificates.

(1) Resale and exemption certificates should be available at the time of the audit. All certificates obtained on or after the date the comptroller's auditor actually begins work on the audit at the seller's place of business or on the seller's records after the entrance conference are subject to verification. All incomplete certificates will be disallowed regardless of when they were obtained.

(2) The seller has 90 [60] days, or until a later date agreed to in writing by the comptroller and the seller, referred to in this section as "the period," from the date written notice is received by the seller from the comptroller in which to deliver the certificates to the comptroller. Written notice shall be given by the comptroller no earlier than [upon] the filing of a petition for redetermination or claim for refund.

(3) For the purposes of this section, written notice given by mail is presumed to have been received by the seller within three business days from the date of deposit in the custody of the United States Postal Service. The seller may overcome the presumption by submitting proof from the United States Postal Service or by other competent evidence showing a later delivery date.

(4) If the seller is not in possession of the certificates by the end of the period [within 60 days from the date written notice is given by the comptroller that certificates pertaining to periods or transactions specified in the notice are required], any deductions claimed which require resale or exemption certificates will be disallowed. Exemptions claimed by those certificates acquired during the [this 60-day] period will be subject to independent verification by the comptroller before the deductions will be allowed.

(5) Certificates delivered after the [60-day ] period will not be accepted. See §3.285 of this title (relating to Resale Certificate; Sales for Resale); §3.286 of this title (relating to Seller's and Purchaser's Responsibilities); §3.287 of this title (relating to Exemption Certificates); and §3.288 of this title (relating to Direct Payment Procedures and Qualifications).

(6) [(3)] When written notice [a 60-day letter] has been received, a resale or exemption certificate is the only acceptable proof that a taxable item was purchased for resale or qualifies for exemption.

(l) Both sellers and purchasers are subject to audit and assessment of tax on any transactions on which tax was due but has not been paid.

(m) The comptroller may proceed against either the seller or purchaser, or against both, until the tax, penalty, and interest have been paid.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 15, 2022.

TRD-202200546

William Hamner

Special Counsel for Tax Administration

Comptroller of Public Accounts

Earliest possible date of adoption: April 3, 2022

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


34 TAC §3.285

The Comptroller of Public Accounts proposes amendments to §3.285, concerning resale certificates; sales for resale. The comptroller amends the section to reflect the changes in Tax Code, §151.054 (Gross Receipts Presumed Subject to Tax) and §151.104 (Sale for Storage, Use, or Consumption Presumed) made by Senate Bill 296, 87th Legislature, 2021, effective June 7, 2021.

The comptroller amends subsection (c)(3)(C) to state the seller has 90 days, or a later date agreed to in writing by the comptroller and the seller, from the date written notice is received by the seller from the comptroller in which to deliver the resale certificates to the comptroller, as opposed to the current 60-day period. The comptroller moves existing language to new subparagraphs (C)(i)-(C)(iii) for readability. Non-substantive, conforming charges are made throughout the subsection.

The comptroller amends new subsection (c)(3)(C)(i) by adding clarifying language regarding the timeframe in which written notices are issued. No substantive change is intended.

Brad Reynolds, Chief Revenue Estimator, has determined that during the first five years that the proposed amendment is in effect, the amendment: will not create or eliminate a government program; will not require the creation or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to the agency; will not require an increase or decrease in fees paid to the agency; will not increase or decrease the number of individuals subject to the rules' applicability; and will not positively or adversely affect this state's economy. This proposal amends a current rule.

Mr. Reynolds also has determined that for each year of the first five years the rule is in effect, proposed amendment would benefit the public by conforming the rule to current statutes. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. The proposed amendment would have no significant fiscal impact on the state government, units of local government, or individuals. There would be no significant anticipated economic costs to the public.

You may submit comments on the proposal to Jenny Burleson, Director, Tax Policy Division, P.O. Box 13528 Austin, Texas 78711 or to the email address: tp.rule.comments@cpa.texas.gov. The comptroller must receive your comments no later than 30 days from the date of publication of the proposal in the Texas Register.

The amendments are proposed under Tax Code, §111.002 (Comptroller's Rules, Compliance, Forfeiture), 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 (State Taxation).

This section implements Tax Code, §151.054 (Gross Receipts Presumed Subject to Tax), §151.104 (Sale for Storage, Use, or Consumption Presumed), and §151.0231 (Managed Audits).

§3.285.Resale Certificate; Sales for Resale.

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

(1) Equipment--Any apparatus, device, or simple machine used to perform a service.

(2) Federal government--The government of the United States of America and its unincorporated agencies and instrumentalities, including all parts of the executive, legislative, and judicial branches and all independent boards, commissions, and agencies of the United States government unless otherwise designated in this section.

(3) Integral part--An essential element without which the whole would not be complete. One taxable item is an integral part of a second item if the taxable item is necessary, as opposed to desirable, for the completion of the second item, and if the second item could not be provided as a whole without the taxable item.

(4) Internet hosting service--The provision to an unrelated user of access over the Internet to computer services using property that is owned or leased and managed by the service provider and on which the unrelated user may store or process the user's own data or use software that is owned, licensed, or leased by the unrelated user or service provider. The term does not include telecommunications services as defined in §3.344 of this title (relating to Telecommunications Services).

(5) Machinery--All power-operated machines.

(6) Mexico--Within the geographical limits of the United Mexican States.

(7) Purchaser--A person who is in the business of selling, leasing, or renting taxable items.

(8) Seller--Every retailer, wholesaler, distributor, manufacturer, marketplace provider, or any other person who sells, leases, rents, or transfers ownership of tangible personal property or performs taxable services for consideration. Specific types of sellers, such as direct sales organizations, pawnbrokers, marketplace providers, and auctioneers, are further defined in §3.286 of this title (relating to Seller's and Purchaser's Responsibilities).

(9) Taxable item--Tangible personal property and taxable services. Except as otherwise provided by Tax Code, Chapter 151, the sale or use of a taxable item in an electronic form instead of on physical media does not alter the item's tax status.

(10) Tax-free inventory--A stock of tangible personal property purchased tax-free for resale, whether from out-of-state or by issuing a properly completed resale certificate, by a purchaser who, at the time of purchase:

(A) holds a valid Texas sales and use tax permit;

(B) makes sales of taxable items in the regular course of business; and

(C) does not know whether the tangible personal property will be resold in the normal course of business or used in the performance of a service.

(11) United States--Within the geographical limits of the United States of America or within the territories and possessions of the United States of America.

(b) Sale for resale.

(1) Except as provided in paragraphs (3) - (6) of this subsection, each of the following is a sale for resale:

(A) the sale of a taxable item to a purchaser who acquires the taxable item for the purpose of reselling it as a taxable item in the United States or Mexico in the normal course of business:

(i) in the form or condition in which it is acquired; or

(ii) as an attachment to or as an integral part of another taxable item;

(B) the sale of tangible personal property to a purchaser who acquires the property for the sole purpose of leasing or renting it in the United States or Mexico in the normal course of business to another person, but not if incidental to the leasing or renting of real estate, as described in §3.294(k) of this title (relating to Rental and Lease of Tangible Personal Property);

(C) the sale of tangible personal property to a purchaser who acquires the property for the purpose of transferring the property to a customer in the United States or Mexico as an integral part of a taxable service;

(D) the sale of a taxable service performed on tangible personal property that the purchaser of the service holds for sale, lease, or rental;

(E) the sale of tangible personal property or a taxable service to a purchaser who acquires the tangible personal property or service for the purpose of transferring it as an integral part of performing a contract, or a subcontract of a contract, for the sale, other than the lease or rental, of tangible personal property with an entity or organization exempted from the taxes imposed by this chapter under Tax Code, §151.309 (Governmental Entities) or Tax Code, §151.310 (Religious, Educational, and Public Service Organizations) only if the purchaser:

(i) allocates and bills to the contract the cost of the tangible personal property or service as a direct or indirect cost; and

(ii) transfers title to the tangible personal property to the exempt entity or organization under the contract or subcontract and any applicable acquisition regulations;

(F) the sale of a wireless voice communication device, such as a cellular telephone, to a purchaser who acquires the device for the purpose of transferring the device as an integral part of a taxable telecommunication service when the purchase of the service is a condition for receiving the device, regardless of whether there is a separate charge for the device or whether the purchaser is the provider of the taxable service. See §3.344 of this title for information about telecommunication services; and

(G) the sale of a computer program to a provider of Internet hosting services who acquires the computer program from an unrelated vendor for the purpose of selling the right to use the computer program to an unrelated user of the provider's Internet hosting services in the normal course of business and in the form or condition in which the provider acquired the computer program, without regard to whether the provider transfers care, custody, and control of the computer program to the unrelated user. The performance by the provider of routine maintenance of the computer program that is recommended or required by the unrelated vendor of the computer program does not affect the application of this subsection. For purposes of this subsection, the purchase of the computer program by the provider qualifies as a sale for resale only if:

(i) the provider offers the unrelated user a selection of computer programs that are available to the public for purchase directly from an unrelated vendor;

(ii) the provider executes a written contract with the unrelated user that specifies the name of the computer program sold to the unrelated user and includes a charge to the unrelated user for computing hardware;

(iii) the unrelated user purchases the right to use the computer program from the provider through the acquisition of a license; and

(iv) the provider does not retain the right to use the computer program under that license.

(2) To qualify as a sale for resale, the taxable item must be acquired for the purpose of selling, leasing, or renting it in the regular course of business or for the purpose of transferring it as an integral part of a taxable service performed in the regular course of business.

(3) A sale for resale does not include the sale of internal or external wrapping, packing, or packaging supplies to a purchaser who acquires the supplies for use in wrapping, packing, or packaging tangible personal property, or in the performance of a service, for the purpose of furthering the sale of the tangible personal property or the service. See §3.314 of this title (relating to Wrapping, Packing, Packaging Supplies, Containers, Labels, Tags, Export Packers, and Stevedoring Materials and Supplies).

(4) A sale for resale does not include the sale of tangible personal property or a taxable service to a purchaser who acquires the property or service for the purpose of performing a service not listed as a taxable service under Tax Code, §151.0101 ("Taxable Services"), regardless of whether title transfers to the service provider's customer, unless the tangible personal property or taxable service is purchased for the purpose of performing a contract, or a subcontract of a contract, for a service, including a taxable service under Tax Code, §151.0101, with any branch of the Department of Defense, Department of Homeland Security, Department of Energy, National Aeronautics and Space Administration, Central Intelligence Agency, National Security Agency, National Oceanic and Atmospheric Administration, or National Reconnaissance Office to the extent allocated and billed to the contract with the federal government.

(5) A sale for resale does not include the sale of a taxable item to a purchaser who acquires the taxable item for the purpose of reselling or transferring the taxable item outside the territorial limits of the United States or Mexico. Refer to §3.323 of this title (relating to Imports and Exports).

(6) Tangible personal property used to perform a taxable service is not considered resold unless the care, custody, and control of the tangible personal property is transferred to the purchaser of the service. The care, custody, and control of tangible personal property is transferred to the purchaser of the service when the purchaser has primary possession of the tangible personal property.

(A) Except as provided in subparagraphs (B) and (C) of this paragraph, to have primary possession, the purchaser or the purchaser's designee must have:

(i) physical possession of the tangible personal property off of the premises of the service provider;

(ii) a contractual duty to care for the tangible personal property. At a minimum, the contract must prohibit the purchaser from damaging the tangible personal property or impose liability if the purchaser damages the tangible personal property; and

(iii) a superior right to use the tangible personal property for a contractually specified period of time.

(B) The purchaser may have primary possession of tangible personal property if the purchaser or the purchaser's designee has physical possession of the tangible personal property and directly consumes the tangible personal property during the provision of the taxable service. Property is considered consumed if it can no longer be used for its intended purpose in the normal course of business or is not retained or reusable by the service provider.

(C) A purchaser may have primary possession of a computer program if the purchaser acquires a license to use the computer program from the service provider and the service provider does not retain the right to use the computer program under that license.

(7) A person performing services taxable under Tax Code, Chapter 151 is the consumer of machinery and equipment used by the person in performing the services. A person performing a taxable service is not using the machinery or equipment in performing the service if the person has transferred primary possession, as that term is described in paragraph (6) of this subsection, of the machinery or equipment to the purchaser of the service.

(8) Aircraft. See §3.280 of this title (relating to Aircraft) for the definition of "sale for resale" as it applies to aircraft.

(9) A sale for resale does not include the sale of tangible personal property to a purchaser who acquires the property for the purpose of using, consuming, or expending it in, or incorporating it into, an oil or gas well in the performance of an oil well service taxable under Tax Code, Chapter 191 (Miscellaneous Occupation Taxes).

(c) Issuance and acceptance of resale certificates.

(1) A sale for resale as defined in subsection (b) of this section is not taxable.

(2) Who may issue a resale certificate.

(A) In general, a purchaser who holds a Texas sales and use tax permit may issue a resale certificate instead of paying tax at the time of purchase of a taxable item that the purchaser intends to resell, lease, rent, or transfer as an integral part of a taxable service in the normal course of business. A purchaser may also issue a resale certificate instead of paying tax at the time of purchase of a taxable item that the purchaser intends to maintain in a valid tax-free inventory, if the purchaser does not know at the time of purchase whether the item will be resold or used in the performance of a service. The purchaser must collect, report, and remit tax to the comptroller as required by §3.286 of this title when the purchaser sells, leases, or rents taxable items.

(B) A purchaser may not issue a resale certificate in lieu of paying tax on the purchase of a taxable item, including tangible personal property to maintain in a valid tax-free inventory, that the purchaser knows, at the time of purchase, will be used or consumed by the purchaser.

(3) Accepting a resale certificate.

(A) All gross receipts of a seller are presumed subject to sales or use tax unless a properly completed resale or exemption certificate is accepted by the seller. A properly completed resale certificate contains the information required by subsection (g) of this section. See also §3.287 of this title (relating to Exemption Certificates).

(B) A seller does not owe tax on a sale, lease, or rental of a taxable item if the seller accepts a properly completed resale certificate in good faith. A resale certificate is deemed to be accepted in good faith if:

(i) the resale certificate is accepted at or before the time of the transaction;

(ii) the resale certificate is properly completed, meaning that all of the information required by subsection (g) of this section is legible; and

(iii) the seller does not know, and does not have reason to know, that the sale is not a sale for resale. It is the seller's responsibility to be familiar with Texas sales tax law as it applies to the seller's business and to take notice of the information provided by the purchaser on the resale certificate. For example, a jewelry seller should know that a resale certificate from a landscaping service is invalid because a landscaping service is not in the business of reselling jewelry.

(C) The seller should obtain a properly executed resale certificate at the time the taxable transaction occurs. All certificates obtained on or after the date the comptroller's auditor actually begins work on the audit at the seller's place of business or on the seller's records after the entrance conference are subject to verification. All incomplete certificates will be disallowed regardless of when they were obtained.

(i) The seller has 90 [60] days, or until a later date agreed to in writing by the comptroller and the seller, referred to in this section as "the period," from the date written notice is received by the seller from the comptroller in which to deliver the certificates to the comptroller. Written notice shall be given by the comptroller no earlier than [upon] the filing of a petition for redetermination or claim for refund.

(ii) For the purposes of this section, written notice given by mail is presumed to have been received by the seller within three business days from the date of deposit in the custody of the United States Postal Service. The seller may overcome the presumption by submitting proof from the United States Postal Service or by other competent evidence showing a later delivery date.

(iii) Any certificates delivered to the comptroller during the [60-day] period will be subject to independent verification by the comptroller before any deductions will be allowed. Certificates delivered after the [60-day] period will not be accepted and the deduction will not be granted. See §3.282 of this title (relating to Auditing Taxpayer Records) and §3.286 of this title.

(D) Resale certificates are subject to the provisions of §3.281 of this title (relating to Records Required; Information Required). A seller is required to keep resale certificates for a minimum of four years from the date on which the sale is made and throughout any period in which any tax, penalty, or interest may be assessed, collected, or refunded by the comptroller or in which an administrative hearing or judicial proceeding is pending.

(4) Blanket resale certificate. A purchaser may issue to a seller a blanket resale certificate describing the general nature of the taxable items purchased for resale. The seller may rely on the blanket certificate until it is revoked in writing.

(5) Bulk commodities. A resale certificate is not required to be issued by a broker or dealer that buys and sells only raw commodities in bulk, such as natural gas, raw cotton bales, or raw aluminum, from producers or other commodity brokers or dealers solely for resale in the normal course of business. However, if requested by the seller, a properly completed resale certificate, absent a sales tax permit number, may be issued by the purchaser of such raw commodities even if the purchaser does not hold a sales and use tax permit.

(6) Electricity sales and purchases by independent organization certified under Texas Utilities Code, §39.151. A resale certificate is not required to be issued by a person who purchases electricity solely for the purpose of resale from the independent organization certified under Texas Utilities Code, §39.151. The independent organization certified under Texas Utilities Code, §39.151 is not required to issue a resale certificate to a person from whom it purchases electricity solely for the purpose of resale.

(d) Retailers outside Texas.

(1) A seller in Texas may accept a resale certificate in lieu of tax from a retailer located outside Texas who purchases taxable items for resale in the United States or Mexico in a transaction that is a sale for resale, as defined in subsection (b) of this section.

(2) The resale certificate must show the signature and address of the purchaser, the date of the sale, the state in which the purchaser intends to resell the item, the sales tax permit number or the registration number assigned to the purchaser by the state in which the purchaser is authorized to do business or a statement that the purchaser is not required to be permitted in the state in which the purchaser is authorized to do business. Mexican retailers who purchase taxable items for resale must show their Federal Taxpayers Registry (RFC) identification number for Mexico on the resale certificate and give a copy of their Mexican Registration Form to the Texas seller. An invoice describing the taxable item purchased and showing the exact street address or office address from which the taxable item will be resold must be attached to the resale certificate. The resale certificate must also state the type business engaged in by the purchaser and the type items sold in the regular course of business. A resale certificate may be accepted from the out-of-state retailer even if the Texas retailer ships or delivers the taxable item directly to a recipient located inside Texas.

(3) The Texas retailer is not responsible for determining whether the out-of-state retailer is required to hold a Texas sales and use tax permit or to enter a Texas permit number on the resale certificate.

(4) Foreign purchasers, other than purchasers from Mexico, who are not engaged in business in Texas and do not hold a Texas sales and use tax permit, may issue a properly completed resale certificate, as described in paragraph (2) of this subsection, in lieu of paying tax on the purchase of taxable items for sale in the normal course of business when the items are delivered or shipped to a location outside of Texas but within the United States or Mexico.

(5) An out-of-state or foreign purchaser who acquires goods or services from a Texas seller for resale in Texas should refer to §3.286 of this title for information on their responsibilities.

(6) A purchaser, whether from Texas, Mexico, or another foreign country, may not issue a resale certificate for taxable items purchased for resale outside the United States or Mexico. See subsection (b)(5) of this section. Purchasers who purchase taxable items in Texas for sale outside the United States or Mexico must comply with the requirements of §3.323 of this title to claim exemption from the Texas sales tax.

(e) Taxable use of items purchased for resale; items removed from tax-free inventory.

(1) Divergent use; paying tax on fair market rental value. When a taxable item is removed from a valid tax-free inventory for use in Texas, Texas sales tax is due. When a taxable item purchased under a resale certificate is used for any purpose other than retention, demonstration, or display while holding it for sale, lease, or rental, or for transfer as an integral part of a taxable service, the purchaser is liable for sales tax based on the value of the taxable item for the period of time used.

(A) The value of tangible personal property is the fair market rental value of the tangible personal property. The fair market rental value is the amount that a purchaser would pay on the open market to rent or lease the tangible personal property for use. If tangible personal property has no fair market rental value, sales tax is due based upon the original purchase price.

(B) The value of a taxable service is the fair market value of the taxable service. The fair market value is the amount that a purchaser would pay on the open market to obtain that taxable service. If a taxable service has no fair market value, sales tax is due based upon the original purchase price.

(C) At any time the person using a taxable item may stop paying tax on the value of the taxable item and instead pay sales tax on the original purchase price. When the person elects to pay sales tax on the original purchase price, credit will not be allowed for taxes previously paid based on value.

(2) Donation of taxable item. A purchaser who gives a valid resale certificate instead of paying tax on the purchase of a taxable item is not liable for sales tax on the taxable item when donated to an organization exempt under Tax Code, §151.309 (Governmental Entities), or §151.310(a)(1) and (2) (Religious, Educational, And Public Service Organizations), provided the purchaser did not make a taxable use of the donated taxable item prior to its donation.

(3) Use of taxable item as a trade-in. A purchaser who gives a valid resale certificate instead of paying tax on the purchase of a taxable item is liable for sales tax if the purchaser uses the taxable item as a trade-in on the purchase of another taxable item. Tax must be paid on the original purchase price of the taxable item used as a trade-in.

(4) Use of taxable item outside Texas. Texas sales or use tax is not due on a taxable item removed from a valid tax-free inventory for use by the purchaser outside the state.

(5) Lost or destroyed inventory. Texas sales or use tax is not due on tangible personal property purchased under a valid resale certificate that is totally destroyed or permanently disposed of by the purchaser in a manner other than for use or sale in the normal course of business. For example, documented theft, casualty damage or loss, or disposal in a landfill. This does not apply to consumable items that are completely used up or destroyed by the purchaser in the course of performing a service in Texas.

(f) Improper use of a resale certificate; criminal offenses.

(1) A person may not issue a resale certificate at the time of purchase for a taxable item if the person knows the item is being purchased for a specific taxable use.

(2) Any person who intentionally or knowingly makes, presents, uses, or alters a resale certificate for the purpose of evading Texas sales or use tax is guilty of a criminal offense. For more information, see §3.305 of this title (relating to Criminal Offenses and Penalties).

(g) Content of a resale certificate. A resale certificate must show:

(1) the name and address of the purchaser;

(2) the number from the sales tax permit held by the purchaser or a statement that an application for a permit is pending before the comptroller with the date the application for a permit 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 permit number. If the purchaser holds a Texas sales and use tax permit, 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 resale. See also subsection (d)(2) of this section regarding registration numbers for retailers outside Texas;

(3) a description of the taxable items generally sold, leased, or rented by the purchaser in the regular course of business and a description of the taxable items to be purchased tax free by use of the certificate. The item to be purchased may be generally described on the certificate or itemized in an order or invoice attached to the certificate;

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

(5) the name and address of the seller.

(h) Form of a resale certificate. A resale certificate must be substantially either in the form of a Texas Sales and Use Tax Resale Certificate or a Border States Uniform Sale for Resale Certificate. Copies of both certificates are available at comptroller.texas.gov or may be obtained by calling our toll-free number 1-800-252-5555. A seller may also accept as a resale certificate the Uniform Sales and Use Tax Certificate-Multijurisdiction promulgated by the Multistate Tax Commission and available online at http://www.mtc.gov. The Streamlined Sales and Use Tax Agreement Certificate of Exemption may not be accepted as a resale certificate.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 15, 2022.

TRD-202200547

William Hamner

Special Counsel for Tax Administration

Comptroller of Public Accounts

Earliest possible date of adoption: April 3, 2022

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


34 TAC §3.287

The Comptroller of Public Accounts proposes amendments to §3.287, concerning exemption certificates. The comptroller amends the section to reflect the changes in Tax Code, §151.054 (Gross Receipts Presumed Subject to Tax) and §151.104 (Sale for Storage, Use, or Consumption Presumed) made by Senate Bill 296, 87th Legislature, 2021, effective June 7, 2021.

The comptroller amends the title of subsection (d) to be consistent with the wording in §3.285 of this title (relating to Resale Certificate; Sales for Resale).

The comptroller amends subsection (d)(1) to state that a properly completed exemption certificate contains the information required by subsection (f) of this section. This change is consistent with §3.285.

The comptroller amends subsection (d)(4) to state the seller has 90 days, or a later date agreed to in writing by the comptroller and the seller, from the date written notice is received by the seller from the comptroller in which to deliver the exemption certificates to the comptroller as opposed to the current 60-day period. Non-substantive, conforming charges are made throughout the subsection. The comptroller moves existing language to new paragraphs (4)(A)-(C) for readability. The comptroller adds cross references in paragraph (4)(C) to §3.282 and §3.286 to be consistent with §3.285.

The comptroller amends new subsection (d)(4)(A) by adding clarifying language regarding the timeframe in which written notices are issued. No substantive change is intended.

Brad Reynolds, Chief Revenue Estimator, has determined that during the first five years that the proposed amendment is in effect, the amendment: will not create or eliminate a government program; will not require the creation or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to the agency; will not require an increase or decrease in fees paid to the agency; will not increase or decrease the number of individuals subject to the rules' applicability; and will not positively or adversely affect this state's economy. This proposal amends a current rule.

Mr. Reynolds also has determined that for each year of the first five years the rule is in effect, proposed amendment would benefit the public by conforming the rule to current statute. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. The proposed amendment would have no significant fiscal impact on the state government, units of local government, or individuals. There would be no anticipated significant economic costs to the public.

You may submit comments on the proposal to Jenny Burleson, Director, Tax Policy Division, P.O. Box 13528 Austin, Texas 78711 or to the email address: tp.rule.comments@cpa.texas.gov. The comptroller must receive your comments no later than 30 days from the date of publication of the proposal in the Texas Register.

The amendments are proposed under Tax Code, §111.002 (Comptroller's Rules, Compliance, Forfeiture), 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 (State Taxation).

This section implements Tax Code, §§151.054 (Gross Receipts Presumed Subject to Tax), 151.104 (Sale for Storage, Use, or Consumption Presumed), and 151.0231 (Managed Audits).

§3.287.Exemption Certificates.

(a) Definition. Exemption certificate--A document that, when properly executed, allows the tax-free purchase of an item that would otherwise be subject to tax. Except as otherwise stated, the exemption certificate described in this section refers to the Texas Sales and Use Tax Exemption Certification, Form 01-339 (Back) or a document substantially in the same format. There is no provision in Tax Code, Chapter 151 (Limited Sales, Excise, and Use Tax) for an exemption number or a tax exempt number to be issued or used in connection with the Texas Sales and Use Tax Exemption Certification, Form 01-339 (Back).

(b) Who may issue an exemption certificate. An exemption certificate of the type described in this section may only be issued by one of the following:

(1) an organization that has qualified for exemption under Tax Code, §151.309 (Governmental Entities) or §151.310 (Religious, Educational, and Public Service Organizations). See §3.322 of this title (relating to Exempt Organizations); or

(2) a person purchasing an item that is exempt under Tax Code, Chapter 151, Subchapter H (Exemptions).

(c) Exemptions addressed by other sections of this title: Direct payment permit holders, maquiladoras, agriculture, timber, qualifying data centers, qualified research, prior contracts and sales for resale.

(1) Purchasers using direct pay permits should refer to §3.288 of this title (relating to Direct Payment Procedures and Qualifications).

(2) Purchasers using maquiladora exemption permits should refer to §3.358 of this title (relating to Maquiladoras).

(3) Purchasers claiming an agriculture exemption should refer to §3.296 of this title (relating to Agriculture, Animal Life, Feed, Seed, Plants, and Fertilizer).

(4) Purchasers claiming a timber exemption should refer to §3.367 of this title (relating to Timber Items).

(5) Purchasers claiming a qualifying data center exemption should refer to §3.335 of this title (relating to Property Used in a Qualifying Data Center or Qualifying Large Data Center Project; Temporary State Sales Tax Exemption).

(6) Purchasers claiming a qualified research exemption should refer to §3.340 of this title (relating to Qualified Research).

(7) Purchasers claiming a prior contract exemption should refer to §3.319 of this title (relating to Prior Contracts) and §3.334 of this title (relating to Local Sales and Use Taxes).

(8) Purchasers claiming a sale for resale exemption should refer to §3.285 of this title (relating to Resale Certificate; Sales for Resale).

(d) Accepting an [Acceptance of] exemption certificate.

(1) All gross receipts of a seller are presumed subject to sales or use tax unless a valid and properly completed resale or exemption certificate is accepted by the seller. A properly completed exemption certificate contains the information required by subsection (f) of this section. Resale certificates are addressed in detail in §3.285 of this title.

(2) A seller does not owe tax on a sale, lease, or rental of a taxable item if the seller accepts a properly completed exemption certificate in good faith. An exemption certificate is deemed to be accepted in good faith if:

(A) the exemption certificate is accepted at or before the time of the transaction;

(B) the exemption certificate is properly completed, meaning that all of the information required by subsection (f) of this section is legible; and

(C) the seller does not know, and does not have reason to know, that the sale is not exempt. It is the seller's responsibility to be familiar with Texas sales tax law as it applies to the seller's business and to be familiar with the exemptions that are available for the items the seller sells.

(3) A person commits an offense if the person: intentionally or knowingly makes a false entry in, or a fraudulent alteration of, an exemption certification; makes, presents, or uses an exemption certificate with knowledge that it is false and with the intent that it be accepted as a valid exemption certificate; or intentionally conceals, removes, or impairs the verity or legibility of an exemption certificate or unreasonably impedes the availability of an exemption certificate.

(A) If the tax evaded by the invalid certificate is less than $20, the offense is a Class C misdemeanor.

(B) If the tax evaded by the invalid certificate is $20 or more but less than $200, the offense is a Class B misdemeanor.

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

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

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

(4) The seller should obtain the properly executed exemption certificate at the time the transaction occurs. All certificates obtained on or after the date the comptroller's auditor actually begins work on the audit at the seller's place of business or on the seller's records after the entrance conference are subject to verification. All incomplete certificates will be disallowed regardless of when they were obtained.

(A) The seller has 90 [60] days from the date written notice is received by the seller from the comptroller, or until a later date agreed to in writing by the comptroller and the seller, referred to in this section as "the period," in which to deliver the certificates to the comptroller. Written notice shall be given by the comptroller no earlier than [upon] the filing of a petition for redetermination or claim for refund.

(B) For the purposes of this section, written notice given by mail is presumed to have been received by the seller within three business days from the date of deposit in the custody of the United States Postal Service. The seller may overcome the presumption by submitting proof from the United States Postal Service or by other competent evidence showing a later delivery date.

(C) Any certificates delivered to the comptroller during the [60-day] period will be subject to independent verification by the comptroller before any exemptions will be allowed. Certificates delivered after the [60-day] period will not be accepted and the exemption will not be granted. See §3.282 of this title (relating to Auditing Taxpayer Records) and §3.286 (relating to Seller's and Purchaser's Responsibilities) of this title.

(5) A seller may accept a blanket exemption certificate given by a purchaser who purchases only items that are exempt. For information on blanket exemption certificates received for agricultural exemptions, see §3.296 of this title. For information on blanket exemption certificates received for timber items see §3.367 of this title.

(6) An exemption certificate is not acceptable when an exemption is claimed because tangible personal property is exported outside the United States. For proper documentation required for proof of export, see §3.323 of this title (relating to Imports and Exports) and §3.360 of this title (relating to Customs Brokers).

(7) Exemption certificates are subject to the provisions of §3.281 of this title (relating to Records Required; Information Required). A seller is required to keep exemption certificates for a minimum of four years from the date on which the sale is made and throughout any period in which any tax, penalty, or interest may be assessed, collected, or refunded by the comptroller or in which an administrative hearing or judicial proceeding is pending.

(e) Taxable use of items purchased under an exemption certificate; improper use of an exemption certificate.

(1) When an item purchased under a valid exemption certificate is used in a taxable manner, whether the use is in Texas or outside the state, the purchaser is liable for payment of sales tax based on the value of the tangible personal property or taxable service for the period of time used. If the exemption certificate was invalid at the time of its issuance, the purchaser owes tax on the original purchase price.

(2) The value of tangible personal property is the fair market rental value of the tangible personal property. The fair market rental value is the amount that a purchaser would pay on the open market to rent or lease the tangible personal property for use. If tangible personal property has no fair market rental value, sales tax is due based upon the original purchase price.

(3) The value of a taxable service is the fair market value of the taxable service. The fair market value is the amount that a purchaser would pay on the open market to obtain that taxable service. If a taxable service has no fair market value, sales tax is due based upon the original purchase price.

(4) At any time, the person who purchased tangible personal property or a taxable service under a valid exemption certificate and is using the tangible personal property or taxable service in a divergent taxable manner may stop paying tax on the value of tangible personal property or taxable service and instead pay sales tax on the original purchase price. When the person elects to pay sales tax on the purchase price, credit will not be allowed for taxes previously paid based on value.

(5) Sales tax is not due when a taxable item purchased under a valid exemption certificate is donated to an organization exempt from tax under Tax Code, §151.309 or §151.310(a)(1) or (2), provided the purchaser does not use the donated tangible personal property or the donated taxable service.

(6) This subsection is not applicable when an item purchased under Tax Code, §151.318 (Property Used in Manufacturing) is used in a taxable manner. A purchaser who uses such items in a taxable manner is liable for sales or use tax and should refer to §3.300 of this title (relating to Manufacturing; Custom Manufacturing; Fabricating; Processing).

(f) Content of an exemption certificate. An exemption certificate must show:

(1) the name and address of the purchaser;

(2) a description of the item to be purchased;

(3) the reason the purchase is exempt from tax;

(4) the signature of the purchaser and the date; and

(5) the name and address of the seller.

(g) Purchases of taxable items by agents of the Federal Deposit Insurance Corporation (FDIC). The FDIC may purchase items tax-free for use in operating a property or business to which it has title. An exemption certificate may be issued by the FDIC or by persons acting as agents for the FDIC when purchasing items that are incorporated into or used on the property or business being managed. The certificate must state that the purchases are being made by or for the FDIC. The FDIC or persons managing property or a business for the FDIC may issue an exemption certificate when:

(1) the FDIC provides documentation to the person managing the property or business showing that title to the property or business being managed was transferred to the FDIC; and

(2) the FDIC has entered into a written agreement with the person managing the property or business that designates that person as its agent and authorizes that person to make purchases on its behalf. The agreement must be in the person's files for review by the comptroller. It is not necessary to provide a copy of the agreement to suppliers.

(h) Form of an exemption certificate. An exemption certificate must be in substantially the form of a Texas Sales and Use Tax Exemption Certification, Form 01-339 (Back). Copies of the form may be obtained from the Comptroller of Public Accounts, Tax Policy Division or by calling 1-800-252-5555. The form is also available online at https://comptroller.texas.gov/forms/01-339.pdf.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on February 15, 2022.

TRD-202200550

William Hamner

Special Counsel for Tax Administration

Comptroller of Public Accounts

Earliest possible date of adoption: April 3, 2022

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