This article provides a short overview of the various Texas tax trials set for 2024.

The Comptroller has once again amended his local tax sourcing rule as part of his years-long effort to shift local tax sourcing for online sales to the customer’s location. The amendment, however, is not limited to online sales so it could affect taxpayers in a wide variety of circumstances.

On December 13, 2023, the Comptroller issued an interoffice memorandum reversing prior policy and providing the circumstances under which flowback services and water transfer services are not subject to Texas sales. Prior policy treated these services as the taxable rental of the flowback and water transfer equipment. The principal requirement for flowback and water transfer services to receive nontaxable treatment is for the service provider to have on-site personnel who continuously regulate and control the operation of the equipment as needed.

Why the change?

In 2020, the Comptroller issued a memo providing guidance to its Audit Division on the taxability of flowback services. The memo stated that charges for flowback were taxable as the rental of equipment and that sales or use tax was due on the total charge for the rental of the equipment. After an industry round table in August of 2023, the Comptroller decided that flowback and water transfer services are non-taxable, provided that they fit within the description of flowback services in the memo.

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Pre-filing for the upcoming 88th legislative session began yesterday, November 14, 2022. The following proposals filed on the first day seek to make significant changes to Texas sales tax and franchise tax policy.

Sales Tax & Franchise Tax Bills

H.B. No. 391 proposes to repeal the franchise tax entirely after report year 2022. It would not affect the status of an entity that has had its corporate privileges, certificate of authority, certificate of organization, certificate of limited partnership, corporate charter, or registration revoked, suit filed against it, or a receiver appointed prior to the repeal, although taxable entities could still challenge those actions.

H.J.R. No. 36 proposes a constitutional amendment to eliminate school district maintenance and operations property taxes. The prohibition is conditioned on a yearly determination by the Comptroller that the prohibition will not...

On September 23, 2022, the Texas Comptroller proposed amendments to Rule 3.334, which deals with local sales and use taxes. This is the latest development in a years-long effort by the Comptroller to change local tax sourcing for many online and shopping app sales.

In 2020, the Comptroller adopted amendments to Rule 3.334’s subsection (b)(5) which shifted the local tax sourcing for many internet and shopping app sales to the customer’s location instead of the seller’s location (i.e., “origin” sourcing). Texas law provides that a sale occurs where it is “consummated” and provides that sales are typically consummated at the seller’s place of business. See, e.g., Tex. Tax Code § 321.203(b) (“If a retailer has only one place of business in this state, all of the retailer's retail sales of taxable items are consummated at that place of business . . .”).

As a result of this origin sourcing, cities in Texas have been successful in attracting out-of-state businesses to build large facilities by offering incentives in the form of a partial share of the local...

In Hegar v. Sirius XM Radio, Inc., the Texas Supreme Court reversed the Third Court of Appeals, rejecting the Comptroller’s argument that receipts from services should be apportioned based on the “receipt-producing, end-product act” test. Instead, the court found that Sirius’ services should be apportioned based upon the locations of the employees and equipment providing the service.

Sirius XM Radio performs its satellite radio subscription services through an extensive network of equipment located around the globe. While roughly 8–9% of Sirius’ customers are in Texas, virtually none of its equipment, employees, or operations are located in Texas. Sirius broadcasts over 150 satellite channels, produced primarily from studios in New York City and Washington, D.C. Only one Sirius radio channel has ever been produced in Texas. Sirius transmits signals to satellites using uplink facilities in New Jersey, Washington D.C., and Georgia. These satellites are launched from Kazakhstan and orbit 22,000 miles above the earth. They transmit signals back to Earth, where...

On February 4, 2022, the Texas Comptroller recently provided guidance clarifying several Texas franchise tax Cost of Goods Sold (“COGS”) issues for Texas taxpayers. The Comptroller issued the guidance as responses to Frequently Asked Questions (“FAQs”). The FAQs touch on several important topics, including the proper calculation of COGS and whether labor and other expenses across certain industries qualify for subtraction, which components of mixed transactions qualify for a COGS subtraction, how to determine Internal Revenue Code (“IRC”) Section 179 expense limitations and federal bonus depreciation for Texas COGS purposes, and information on capitalizing versus expensing costs.

Texas COGS is calculated separately from federal reporting and industry calculations.

Subtractable costs must be expressly listed in Texas Tax Code § 171.1012. Several industry-specific COGS subtractions covered by the FAQS include:

Is the Expense Included in COGS Calculation?

Contractor’s payments to...