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Tax Update from the Texas 86th Legislative Session

Image: Tax ReportMajor tax legislative updates occurred as part of the 86th Texas Legislature: 

Sales and Use Taxes

Marketplace providers (HB 1525)
Texas, and several other states, have enacted  legislation that requires marketplace providers to collect and remit sales tax on behalf of their third-party sellers’ transactions. These laws benefit the states because they can collect more sales tax from fewer taxpayers, which results in simpler compliance for the states. 

HB 1525 provides that a “marketplace provider” is required to collect, report, and remit taxes imposed on all sales of taxable items made through the marketplace to the comptroller. A “marketplace provider” is a person who owns or operates a “marketplace” and processes sales or payments for “marketplace sellers.” A “marketplace” is a physical or electronic medium through which persons other than the owner or operator of the medium make sales of taxable items. The term includes a store, internet website, software application or catalog. Finally, a “marketplace seller” is a seller, other than the marketplace provider, who makes a sale of taxable items through a marketplace.

HB 1525 also provides that a marketplace provider is the seller of the items sold on its marketplace platforms. Furthermore, a marketplace provider must certify to each individual selling taxable items through the marketplace that the provider assumed the statutory rights and duties of a seller or retailer.

Effective: October 1, 2019

Single local use tax rate for remote sellers (HB 2153)
In response to the Wayfair decision, “remote sellers” (who were previously not required to collect and remit sales and use tax) may be required to collect Texas sales and use taxes on sales in Texas. A “remote seller” is a seller that does not have a physical presence in Texas, but who sells products or services for delivery in Texas of $500,000 or more (this amount is not aggregated with marketplace sales).

According to HB 2153:

  • Remote sellers will be subject to a single local use tax rate 
    • 1.75% for the period of October 1, 2019 – December 31, 2019
    • The Comptroller is required to compute the tax rate and publish it in the Texas Register prior to the beginning of each calendar year
  • A remote seller may choose to collect the single local use tax rate (instead of calculating and remitting local tax for numerous local jurisdictions) by notifying the Comptroller

Effective: October 1, 2019

Sale-for-resale (SB 1525)
SB 1525 makes the following changes to the sale-for-resale exemption from sales and use tax:

  • A sale for resale does not include a sale of tangible personal property to be used, consumed, expended in, or incorporated into an oil or gas well in the performance of an oil well service taxable under Chapter 191
  • Labor to repair, remodel, maintain, or restore tangible personal property is exempt from sales and use tax if: 
    • The repair is required by statute or ordinance to protect the environment
    • The charge for the labor is billed separately from the material
  • 65% of a lump sum charge for labor and materials to repair, model, maintain or restore tangible personal property is exempt from sales and use tax if: 
    • The repair is required by statute or ordinance to protect the environment

Effective: June 10, 2019

Oil and Gas Production Taxes

Exemption for Oil and Gas Produced from Certain Inactive Wells (SB 533)
S.B. 533 incentivizes operators to bring inactive wells back into production by reinstating a previous program that provided a severance tax exemption. Reactivating inactive wells benefits the state through increased sales taxes, property taxes, and employment. Previously, inactive wells were eligible for a severance tax exemption if they were designated as either a "3-year inactive well" or a "2-year inactive well" through certification from the Railroad Commission of Texas (the “RRC”). Under the law, the RRC could no longer designate wells as 3-year or 2-year inactive wells after 1996 and 2009, respectively. Furthermore, wells certified as inactive were eligible for a severance tax exemption that lasted for 10 years. 

This bill reinstates a program which the RRC may certify the 2 year inactive wells for the purposes of a severance tax exemption.  The bill repeals the definition of a 3 year inactive well.  The bill also reduces the time period for the tax exemption from 10 years to 5 years.  Furthermore, the bill clarifies that this tax exemption does not apply to wells used for enhanced oil recovery, drilled wells that are not completed, and wells that do not have a record of production on file with the RRC.

Effective:  September 1, 2019

Calculation of Daily Production for Low Producing Wells/Leases (SB 925)
Currently, the calculation for average daily production used to determine if a producer's well or lease qualifies as "low-producing" (eligible for a tax credit) is based on data the producer reports to the Railroad Commission of Texas the (“RRC”). However, taxpayer-producers frequently file reports with the Comptroller’s office showing more production than is reported to the RRC, which affects eligibility.

In order to ensure that only those wells or leases that meet the appropriate production levels qualify for the tax credit, the Comptroller’s office manually reviews data reported to the RRC and data reported to it to determine eligibility, which is costly and inefficient.

SB 925 codifies current Comptroller practice of using the greater of either the monthly production reported to the RRC or the Comptroller in determining qualification for a lower-producing well or lease.  

Effective: September 1, 2019

Audit Procedures for Determination of Natural Gas Overpaid Taxes (HB 2256)
Natural gas severance tax is levied on the market value of natural gas at the wellhead, the taxable value of which is determined by subtracting the producer's costs incurred to get the gas to market from the producer's gross receipts from the sale of the gas. Allowing these deductions is intended to equalize the tax burden for those producers selling at or near the point of production with those who have to treat the gas and send it farther away to market. Concerns have been raised regarding the lack of guidance from the Comptroller when calculating the percentages of the numerous marketing costs that may be deducted.

The law authorizes the Comptroller to enter into an agreement with a taxpayer to perform a managed audit of a natural gas tax return.  Furthermore, it permits a computation of an overpayment using a sampling of marketing cost transactions if the Comptroller approves the taxpayer’s sampling method.  The law also provides the Comptroller with rule-making authority to specify additional procedures relating to claiming a credit.  

Effective: September 1, 2019

Oil-Field Cleanup Regulatory Fees

Oil-Field Cleanup Regulatory Fees on Oil and Gas (HB 2675)
The cap on the oil and gas regulation and cleanup fund limits the ability of the Railroad Commission of Texas to retain dedicated funds to support critical projects whose costs exceed biennial appropriations, including projects for transitioning off of an older mainframe computer system, plugging wells, and digitally archiving paper and microfiche well log data. 

The bill amends Chapter 81 of the Natural Resources Code by repealing the provisions providing for the suspension of the collection of oil-field cleanup regulatory fees when the balance of the fund exceeds a specified amount.

Effective: September 1, 2019

To learn more about these legislative updates and how they can affect you, contact George W. Rendziperis.