HBA-RBT H.B. 1801 76(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 1801 By: Eiland Ways & Means 4/13/1999 Introduced BACKGROUND AND PURPOSE Section 151.101, Tax Code, establishes the state's use tax on taxable items that are stored, used, or consumed in the state. The purpose of the use tax is to remove the incentive to purchase goods out of state where they might be taxed at a lower rate or not at all. In 1998, the state lost an appeal of Sharp v. Morton Buildings. Morton Buildings, a maker of modular buildings, bought wood and glass that the company would then use to build windows that were shipped to Texas and assembled into modular buildings. If Morton had purchased the materials out of state but performed the assembly in Texas, there would have been no questions regarding taxability. Morton's purchase of materials out of state and assembly out of state followed by shipment to Texas for inclusion in the final product, however, created complications. The court ruled that Morton was importing windows rather than materials and since there was no purchase price for windows, no tax was due. This ruling creates a loophole that could cause significant loss to the state in the future. The bill codifies the comptroller's position prior to the case and makes certain that all purchases of taxable materials remain subject to the use tax, regardless of whether they are assembled in Texas or not. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill does not expressly delegate any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Section 151.101, Tax Code, to clarify that a tax is imposed on the storage, use, or other consumption in this state of a taxable item purchased from a retailer for storage, use, or other consumption in this state, either in the form or condition in which it is acquired or as an attachment to or integral part of other tangible personal property. SECTION 2. Amends Section 151.007, Tax Code, by adding Subsection (f), to define "sales price" or "purchase price" of tangible personal property used by a person in Texas who processed, fabricated, manufactured, remodeled, or otherwise modified the property outside of Texas as the amount paid for the taxable items that became an attachment to or an integral part of the property used in Texas. SECTION 3. Effective date: October 1, 1999. SECTION 4. Emergency clause.