Honorable Harvey Hilderbran, Chair, House Committee on Ways & Means
FROM:
Ursula Parks, Director, Legislative Budget Board
IN RE:
HB3571 by Hilderbran (relating to taxes, fees, and other amounts administered or collected by the comptroller of public accounts; lowering a tax rate.), Committee Report 1st House, Substituted
Estimated Two-year Net Impact to General Revenue Related Funds for HB3571, Committee Report 1st House, Substituted: a negative impact of ($1,016,716,000) through the biennium ending August 31, 2015.
Additionally, the bill will have a direct impact of a revenue loss to the Property Tax Relief Fund of ($512,548,000) for the 2014-15 biennium. Any loss to the Property Tax Relief Fund must be made up with an equal amount of General Revenue to fund the Foundation School Program.
Fiscal Year
Probable Net Positive/(Negative) Impact to General Revenue Related Funds
2014
($443,156,000)
2015
($573,560,000)
2016
($671,360,000)
2017
($779,860,000)
2018
($858,860,000)
Fiscal Year
Probable (Cost) from General Revenue Fund 1
Probable Revenue (Loss) from General Revenue Fund 1
Probable Revenue (Loss) from Property Tax Relief Fund 304
Probable Revenue (Loss) from Economic Stabilization Fund 599
2014
($5,856,000)
($437,300,000)
($240,475,000)
$0
2015
($4,860,000)
($568,700,000)
($272,073,000)
($23,000,000)
2016
($4,860,000)
($666,500,000)
($291,152,000)
($32,000,000)
2017
($4,860,000)
($775,000,000)
($299,272,000)
($41,000,000)
2018
($4,860,000)
($854,000,000)
($310,827,000)
($52,000,000)
Fiscal Year
Probable Revenue (Loss) from Cities
Probable Revenue (Loss) from Transit Authorities
Probable Revenue (Loss) from Counties and Special Districts
Change in Number of State Employees from FY 2013
2014
($75,200,000)
($25,500,000)
($12,800,000)
66.0
2015
($99,300,000)
($33,900,000)
($17,000,000)
66.0
2016
($118,700,000)
($40,000,000)
($20,000,000)
66.0
2017
($139,300,000)
($47,200,000)
($24,100,000)
66.0
2018
($154,700,000)
($52,400,000)
($26,200,000)
66.0
Fiscal Analysis
This bill would amend the Government Code and the Tax Code relating to taxes, fees, and other amounts administered or collected by the Comptroller.
ARTICLE 1 -- TAX ADMINISTRATION
Section 111.064, Tax Code, would be amended to provide for different rates of interest on refunds claimed during and for different periods, with the applicable rate of interest increasing for subsequent periods until for a refund claimed after August 31, 2016 and granted for a period due on or after January 1, 2011 the rate of interest would be that set in Section 111.060.
Section 111.105(e), Tax Code, would be amended to provide a longer period during which a taxpayer may produce all evidence to support a claim for refund.
Section 2003.101, Government Code, would be amended to provide that the Comptroller may not change a finding of fact or conclusion of law made by the administrative law judge or vacate or modify an order issued by the administrative law judge.
This article would take effect September 1, 2013.
ARTICLE 2 -- STATE AND LOCAL SALES AND USE TAXES
SECTION 2.01 -- RESEARCH AND DEVELOPMENT
Chapter 151, Tax Code, would be amended by adding a new Section 151.3182 to provide an exemption from tax for depreciable tangible personal property directly used in qualified research under certain conditions. The conditions are that the person be engaged in qualified research and that the person not claim as a taxable entity under the franchise tax a credit for research and development expenses, as provided in the bill, on the report for the period during which the sales tax exemption was taken. The new section also would provide that the Comptroller make a biennial report to the Legislature and Governor regarding the exemption.
This section of the article would take effect January 1, 2014.
SECTION 2.02 -- COMMUNICATION SERVICES
Chapter 151, Tax Code, would be amended by adding a new Section 151.3186 to provide for refund of state sales and use tax imposed on tangible personal property directly used or consumed in or during the distribution of cable television service, the provision of internet access service, or the transmission, conveyance, routing or reception of telecommunications services by the service provider or a subsidiary of the service provider. Tax paid on items directly used or consumed in or during the provision, creation, or production of data processing or information services would not be eligible for refund.
The new section would provide for an annual limit of $50 million on the aggregate amount of refunds that could be made for each calendar year under the new section. If the total amount of tax paid by all providers and subsidiaries for a calendar year is more than $50 million, each provider or subsidiary would be entitled to a pro rata share of $50 million.
The entitlement to refunds would not apply to taxes imposed under Subtitle C, Title 3, Tax Code (local sales and use taxes).
This section of the article would take effect September 1, 2013.
SECTION 2.03 -- DATA CENTERS
Chapter 151, Tax Code, would be amended by adding a new Section 151.359 to provide an exemption for certain property used in certain data centers.
"Data center" would mean at least 100,000 square feet of space in a single building or portion of a single building, which space: is located in this state; is specifically constructed or refurbished and actually used primarily to house servers and related equipment and support staff for the processing, storage and distribution of data; is used by a single qualifying occupant for the processing, storage, and distribution of data; is not used primarily by a telecommunications provider to place tangible personal property that is used to deliver telecommunications services; and that meets other standards related to power supply, fire suppression, and enhanced physical security.
The bill would define a "qualifying operator," "qualifying owner," and "qualifying occupant," and provide that a data center may be certified by the Comptroller as a "qualifying data center" if, on or after September 1, 2013, a single qualifying occupant contracts to lease space from a qualifying owner or operator or occupies a space not previously used as a data center and the qualifying owner, operator, and occupant jointly or independently create at least 20 full-time, permanent jobs that pay at least 120 percent of the county average weekly wage in the county in which the data center is located; and 2) makes or agrees to make a capital investment, on or after September 1, 2013, of at least $150 million in that particular data center over a five-year period beginning on the date the data center is certified as a qualifying data center.
The bill would exempt from tax tangible personal property that is necessary and essential to the operation of a qualifying data center if the property is purchased for installation at, incorporation into, or in the case of electricity for use in, a qualifying data center if the tangible personal property is: electricity; an electrical system; a cooling system; an emergency generator; hardware or a distributed mainframe computer or server; a data storage device; network connectivity equipment; a rack, cabinet, and raised floor system; a peripheral component or system; software; a mechanical, electrical, or plumbing system necessary to operate the foregoing property; any other item of equipment or system necessary to operate any of the foregoing, including a fixture; and a component part of any of the foregoing. Excluded from exemption would be: office equipment or supplies; maintenance or janitorial supplies or equipment; equipment or supplies used primarily in sales activities or in transportation activities; property for which a refund may be received under Section 151.429 (tax refunds for enterprise projects); tangible personal property not otherwise exempted that is incorporated into real estate or an improvement of real estate, tangible personal property that is rented or leased for a term of one year or less; or notwithstanding Section 151.3111, a taxable service that is performed on tangible personal property exempted under Section 151.359.
The exemption would expire on the tenth anniversary of the date a qualifying data center was certified if the capital investment used to qualify the center was at least $150 million but less than $200 million, and would expire on the fifteenth anniversary of that data center if the capital investment was $200 million or more.
The exemption would not apply to the local sales and use taxes imposed under Chapters 321, 322, or 323, Tax Code.
A registration number would have to be obtained from the Comptroller for each person eligible to claim the exemption and must be stated on the exemption certificate provided by the purchaser to the seller of tangible personal property eligible for the exemption. All registration numbers issued in connection with a qualifying data center would be revocable by the Comptroller upon determination that the requirements for qualification were not met, and each person whose registration number was revoked would be liable for taxes, including penalty and interest from the date of purchase, on purchases for which the person claimed exemption.
The Comptroller would be granted rulemaking authority to implement the new Section 151.359.
This section of the article would take effect September 1, 2013.
ARTICLE 3 -- CIGARS AND TOBACCO PRODUCTS TAX
Section 155.011(b), Tax Code, would be amended to reduce the rate of tax on a can or package of chewing tobacco or smoking tobacco from $1.22 to 80 cents per ounce and a proportionate rate on all fractional parts of an ounce.
This article would take effect September 1, 2013.
ARTICLE 4 -- FRANCHISE TAX
For Chapter 171, Tax Code, the bill would change the definition of retail trade to include auto repair and rent-to-own businesses. The bill would include rental and leasing activities described by Industry Group 735 of the Standard Industrial Classification Manual in retail and wholesale trade.
The bill would reduce the maximum amount of total revenue that would be included in margin to 65 percent from 70 percent.
The bill would provide additional exclusions from total revenue for transporters of aggregate and barite, motor carriers, certain entities providing landman service, lessors of commercial real estate, physician practices, certain entities transporting commodities by waterways and agricultural aircraft operations.
The bill would provide certain entities engaged in harvesting trees for wood the right to subtract certain costs as cost of goods sold.
The bill would change the method for apportioning margin for entities that provide internet hosting.
The bill would set the maximum amount of total revenue at which a taxable entity owes no franchise tax to $1 million.
The bill would create a franchise tax credit for certain research and development activities.
The bill would allow the transfer of unexpired jobs creation and capital investment credits established under prior credit provisions. This provision would take effect on September 1, 2013.
The other changes to Chapter 171 would take effect on January 1, 2014.
Methodology
ARTICLE 1 -- TAX ADMINISTRATION
While the scope and specifics of administrative hearings decisions that could not be corrected by the Comptroller cannot be known, the likely effect is to constrain the Comptroller to accept adverse rulings as final and expose the state to substantial refund liabilities and declines in future revenue collections. The Comptroller would be required to sign administrative hearings decisions with which it disagrees and would have no option of appeal. Comptroller reversals of proposals for decisions by administrative law judges have been relatively infrequent -- from 2009 through 2012, the Comptroller overturned 22 out of 942 proposals for decisions, or 2.3 percent -- but of significant fiscal consequence. In one case the comptroller barred acceptance of refund claims on a class action basis, for which there is no statutory authority. In another, a decision that would have expanded the sales tax manufacturing exemption into mining activity in a manner contrary to comptroller policy and adverse to the state's position in the Southwest Royalties case was barred. The effect of the bill would be to make such administrative law judge decisions binding on the Comptroller. A prudential reduction in the estimate of revenue available for appropriation would be necessary in order to create a reserve for the payment of refunds as well as to anticipate declines in tax collections. The extent of reductions in net revenue collections would escalate as unappealable adverse rulings accumulate over time. While the provisions of the bill could have implications for many revenue sources and funds, the reduction in the estimate of revenue available for appropriation in the forthcoming biennium as well as anticipated reductions in subsequent years is summarized in the tables as reductions in general revenue-related funds, in the property tax relief fund, and in the economic stabilization fund. Additionally, reductions in sales tax allocations to units of local governments should also be anticipated.
The Comptroller of Public Accounts indicates it would be necessary to hire 66 auditors and accounts examiners to assume the anticipated significantly expanded audit functions.
ARTICLE 2 -- STATE AND LOCAL SALES AND USE TAXES
Data from the National Science Foundation on funds spent for business research and development (R&D) by companies in Texas and on the distribution of such expenditures by type were used to estimate amounts of business R&D expenditures on items of depreciable tangible personal property (namely, software and equipment with a useful life in excess of one year) currently subject to sales and use tax, reduced by the portion expected to be exempt under other provisions of the Tax Code, extrapolated through 2018, adjusted for the effective date, and multiplied by the state sales tax rate to estimate the probable effects on sales tax collections. Effects on units of local government were estimated proportionately.
Census Bureau data on telecommunications industry national capital expenditures on equipment and noncapitalized equipment and software expenditures was apportioned to Texas based on population, multiplied by the state sales tax rate, extrapolated through the forecast period, and adjusted for the effective date. As these amounts substantially exceed the $50 million annual limit on refunds, refunds would be expected to be made on a pro rata basis and the total would be $50 million each fiscal year.
Data on the composition of data center infrastructure and electricity costs obtained from industry sources was used to model expected annual expenditures by data centers that would be subject to tax under current law but that would be exempt under the provisions of the bill. It is expected that on average one new data center that would meet the 100,000 square foot minimum and the five year $150 million capital investment commitment would occur each year under current law, without the provision of the tax incentive proposed in the bill.
ARTICLE 3 -- CIGARS AND TOBACCO PRODUCTS TAX
With respect to the change in the tax rate on chewing tobacco and smoking tobacco, the change in the taxation of tobacco products other than cigarettes and cigars in HB 2154, 81st Legislature, Regular Session (2009) led to a significantly reduced level of consumption of chewing and smoking tobacco. A typical package of chewing tobacco weighs approximately three times that of a can of snuff, but has historically been priced similarly. The switch to a weight-based tax had a disproportionate effect on the price of this product. It appears as though the reduction in tax rate proposed in this bill would correspond in increased unit sales of chewing tobacco such that no significant change in revenue would be expected.
ARTICLE 4 -- FRANCHISE TAX
The estimated fiscal impact is based on information from the Comptroller's franchise tax databases.
Note: Section 4.01(b) of the bill appears to attempt to place firms classified under SIC code 735 as retailers, for franchise tax purposes. This analysis reflects such a change; however, the bill's language may not be effective.
Technology
The Comptroller of Public Accounts indicates there would be a one-time technology cost of $996,000 in fiscal year 2014 for programing and system support costs.
Local Government Impact
There would be a proportional loss of sales and use tax revenue to local taxing jurisdictions.