During its recently adjourned 86th legislative session, the Texas Legislature enacted numerous changes to the Tax Code, including substantial property tax reform, expanded sales and use tax collection requirements, and many taxpayer-friendly measures.
Texas Property Tax Reform and Transparency Act of 2019
Senate Bill 2, the omnibus property tax bill, includes a multitude of reform and transparency measures. Most of these changes take effect January 1, 2020. Key provisions include:
- Reduced rollback (“voter-approval”) tax rates to slow local property tax growth.
- Voter approval will be required before the state’s most populated cities, counties, and special districts may raise property taxes on existing properties by more than 3.5%. These taxing units may also “bank” and carry forward any used revenue growth for up to three years, allowing them to potentially increase their voter-approval rate above 3.5% in certain years. The current revenue threshold is 8%, at which point voters can petition for an election to roll back the increase—elections are not currently automatic.
- Taxing units (other than school districts) with proposed maintenance and operation tax rates of 2.5 cents or less per $100 of taxable value, as well as junior college districts and hospital districts, remain subject to the current 8% threshold.
- Smaller taxing units are generally permitted to increase their property taxes by up to $500,000 without voter approval to help finance small, one-time purchases.
- House Bill 3 (school finance reform) provides a 2.5% threshold for school districts.
- Appraisal review boards (ARBs) are prohibited from determining an appraised value to be greater than the amount included on the notice of appraised value. The limitation does not apply to protests involving the cancellation or denial of an exemption or the application of special appraisals.
- A chief appraiser must deliver—not just make available—requested evidence to a taxpayer at least 14 days prior to an ARB hearing or the evidence may not be offered.
- ARB members are limited to serving all or part of three terms (six years maximum) in counties with a population of 120,000 or more. The one-term sit-out period for ARB members in counties with a population under 120,000 is repealed.
- Effective September 1, 2020, special ARB panels will be established in counties with a population of one million or more to hear protests involving certain types of properties valued at $50 million or more: commercial (real and personal), utility (real and personal), industrial and manufacturing (real and personal), and multifamily residential (real).
- Tax Code Section 42.23(i) is repealed. This provision (scheduled to take effect January 1, 2020) would have authorized a court to give preference to the testimony of an appraisal district employee over that of a taxpayer’s expert if the employee was also a state-licensed or certified appraiser.
- Property owners will receive notice each August, via mail or email, that their estimated tax liability for each applicable taxing unit has been posted to the countywide website. The website must post and maintain information regarding tax rates, tax levies, public hearings, and other actions taken by each taxing unit.
- The time period individuals must wait to serve as an arbitrator after previously representing taxpayers or working with an ARB or appraisal district is reduced from five years to two years.
- For purposes of binding arbitration, “contiguous tracts of land” is defined to ensure a property owner may appeal the value of contiguous tracts of land that comprise a single economic unit (i.e., shopping center and parking lot) in the same arbitration hearing and for a single application fee, regardless of whether the respective tracts are improved or unimproved.
Senate Bill 2 was signed by the Governor on June 12, 2019. A copy of the bill can be viewed in its entirety along with its various effective dates here: Senate Bill 2.
Appeals to District Court – Pay Tax Not Under Dispute Without Risk of Penalty and Interest
House Bill 861 allows property owners who appeal their cases to district court to pay the amount of tax not under dispute prior to the delinquency date and proceed to court. When the case is ultimately determined, if the final tax is more than originally tendered, they have until the end of the current month to pay any additional tax determined to be due without incurring penalty or interest. If there is not 21 days remaining in the current month, the delinquency date is postponed until the end of the following month. Currently, a taxpayer would owe a 12% penalty and interest at 1% per month on the shortfall—from the original delinquency date.
House Bill 861 takes effect September 1, 2019.
Appeals to District Court – Appraisal Review Board’s Lack of Jurisdiction
House Bill 380 authorizes a property owner to appeal to district court an ARB order that the board lacks the jurisdiction to determine a protest or motion filed by the property owner. Property owners currently have no recourse in this situation.
House Bill 380 takes effect September 1, 2019.
Binding Arbitration Filing Deadline
House Bill 1802 extends the deadline for requesting binding arbitration from 45 days to 60 days, aligning it with the current deadline for filing appeals to district court (60 days). Further, it requires the Comptroller’s office to notify a property owner, or their designated agent, in writing or via email, of any deficiency in their application. The applicant is provided 15 days in which to cure the deficiency, even if that time period extends past the 60-day filing requirement.
House Bill 1802 took effect May 17, 2019.
Notice of Appraisal Review Board Hearings
House Bill 1060 requires that notice of an ARB hearing be delivered by certified mail or email if requested by the property owner in the notice of protest.
House Bill 1060 takes effect September 1, 2019.
Removal of Appraisal Review Board Members for Misconduct
House Bill 2179 authorizes ARB members to be removed from the board based on evidence of repeated misconduct and a majority vote of the appraisal district board of directors or the local administrative district judge. Clear and convincing evidence of repeated misconduct was previously required. Further, property owners, or their agents, and property tax consultants may discuss the misconduct with the administrative district judge.
House Bill 2179 took effect June 10, 2019.
Partial Exemption for Property Damaged by Disaster
House Bill 492 provides a partial exemption for property damaged by a disaster. The exemption amount is based on a percentage level of damage and applies to both real and personal property. The relief is automatic if the disaster area is declared before property tax rates are set. If the declaration occurs after rates are set, the governing body of each taxing unit must independently adopt the exemption. The bill is contingent upon voter approval of the constitutional amendment.
House Bill 492 takes effect January 1, 2020, contingent upon approved constitutional amendment (HJR 34 – Ballot: November 5, 2019).
Reduced Penalty for Change in Use of Qualified Open-space Land or Timber Land
House Bill 1743 reduces the number of years for which the rollback tax penalty applies when changing the use of qualified open-space land or timber land from five to three years and reduces the annual interest rate on the tax from 7 to 5%.
House Bill 1743 takes effect September 1, 2019.
Timber Land Qualifying for Special Appraisal
House Bill 1409 provides that land qualifies for special appraisal timber land—even if a portion of the land is used by a lessee for oil and gas production activities—provided the remainder of the land is used for the production of timber or forest products.
House Bill 1409 takes effect September 1, 2019.
Interstate Allocation of Property Values
House Bill 1815 extends the deadline for submitting an application claiming an interstate allocation of property values from April 1 to May 1.
House Bill 1815 takes effect January 1, 2020.
Sales and Use Tax
Marketplace Providers – Tax Collection Responsibilities (South Dakota v. Wayfair, Inc.)
House Bill 1525: Effective October 1, 2019, sales or use taxes owed on taxable items sold through a marketplace (i.e., store, catalog, website, or software application) must be collected and reported by the owner or operator of the marketplace (“marketplace provider”). The person selling items through the marketplace is responsible for furnishing the marketplace provider the information necessary to collect and remit the correct sales or use tax. Marketplace sales are sourced to the Texas location where the items are shipped or delivered to, or the location at which the purchaser takes possession.
House Bill 1525 takes effect October 1, 2019.
Remote Sellers – Local Use Tax Rates (South Dakota v. Wayfair, Inc.)
House Bill 2153: Beginning October 1, 2019, remote sellers without a physical presence in the state but who are required to collect use tax based on their Texas sales may collect local use tax using a single rate. The single rate applies to remote sales statewide and may be used in lieu of calculating the combined local use tax rate on a sale-by-sale basis. The single rate is the average local sales and use tax rate imposed during the previous year and will be published by the Comptroller prior to the start of each calendar year.
A consumer who purchases taxable items from a remote seller is not liable for additional local use tax above the single local rate. However, a consumer who pays more tax at the single rate than would otherwise be due at the combined local rate authorized at the consumer’s location may apply for a refund once a year.
While the single local rate is intended to reduce the compliance burden for remote sellers, each remote seller must notify the Comptroller of its election to use the single rate prior to using this tax-collection method. The election will apply to all taxable sales made by the remote seller going forward until the election is revoked.
House Bill 2153 takes effect October 1, 2019.
Resale Exemption – Clarifications
Senate Bill 1525 alters several sales and use tax provisions related to the resale exemption and was passed as a clarification of law. The bill makes multiple adjustments to provide that “amusement” and “personal” services provided through coin-operated machines are excluded—not exempted—from sales and use tax. These changes effectively overturn the Texas Supreme Court’s opinion in Combs v. Roark Amusement & Vending, L.P., No. 11-0261 (Tex. – March 8, 2013). As a result, the resale exemption does not apply to the purchase of items that will be transferred as an integral part of these services.
In addition, the bill revises Section 151.006, Tax Code, to provide that only tangible personal property or a taxable service acquired for the purpose of being resold as a taxable item qualifies for the resale exemption—an item acquired to be resold with a taxable item does not qualify. The statute was further modified to provide that a “sale for resale” does not include a transaction in which personal property is acquired for the purpose of using, consuming, or expending it in, or incorporating it into, an oil and gas well in the performance of a taxable oil well service.
Senate Bill 1525 also amends Section 151.338, Tax Code, to provide that the exemption for environment and conservation services only applies to the labor portion of the service—if the charge for labor is itemized—and not to any personal property transferred as part of the service. Additional provisions were also added to codify the Comptroller’s policy that 65% of a lump-sum charge for maintenance services performed on radiology equipment is exempt when purchased by a healthcare facility or oncology center.
Senate Bill 1525 took effect June 10, 2019.
Federal Aerospace Defense Contractors
House Bill 1607 will allow federal aerospace defense contractors to begin deducting expenses recognized under Federal Acquisition Regulations when calculating their taxable margin. The bill aims to make Texas a more competitive environment for the defense-related aerospace industry, as these expenses are typically deductible under corporate income taxes in other states. Because of its cost, House Bill 1607 phases in the deduction in 20% increments over five years starting with reports due in 2020. Eligible costs will be fully deductible starting with reports due on or after January 1, 2024.
House Bill 1607 takes effect January 1, 2020.
Chapter 312 – Local Property Tax Abatements
House Bill 3143 reauthorizes Chapter 312 of the Tax Code—the economic development authority that allows cities, counties, and special districts to offer temporary property tax abatements for new investment projects—and extends its expiration to September 1, 2029. The bill also makes additional changes to Chapter 312 intended to make the program more transparent:
- Notice of the public meeting to approve an abatement agreement must be posted 30 days in advance and include:
- name of the property owner and the applicant,
- name and location of the reinvestment zone in which the property is located,
- general description of the improvements or repairs included in the agreement, and
- estimated cost of the project.
- Governing bodies are required to hold a public hearing before adopting, amending, repealing, or reauthorizing any guidelines or criteria regarding tax abatement agreements.
- Taxing units with a website are required to post their current guidelines and criteria governing tax abatement agreements.
- For the first three years following the expiration of a local abatement agreement, the chief appraiser is required to report to the Comptroller the post-abatement value of the property included in the agreement.
House Bill 3143 takes effect September 1, 2019.
Managed Audits and Sampling for Market Cost Transactions
House Bill 2256 addresses multiple severance tax audit and refund inefficiencies by updating the procedures by which natural gas production tax liability may be computed. Beginning September 1, 2019, a taxpayer who has overpaid natural gas production taxes may initiate a refund claim in which the overpayment is computed using a projection based on a sample of marketing cost transactions—provided the sampling methodology is approved by the Comptroller.
Further, the Comptroller may authorize a taxpayer who files natural gas production tax returns to enter into an agreement with the Comptroller for a managed audit. The decision to allow a managed audit rests solely with the Comptroller, and unless the audit or review discloses fraud or willful evasion of tax, the Comptroller may not assess a penalty and may waive all or part of the interest that would otherwise be due under the audit.
House Bill 2256 takes effect September 1, 2019.
Abandoned and Unclaimed Property
House Bill 3598 makes multiple changes designed to enhance the Comptroller’s authority to administer the state’s unclaimed property program. The Comptroller is authorized to issue subpoenas to compel the production of records or testimony under oath, and members of an affiliated group are now required to file reports on a combined basis. The Comptroller has seven years from the date a report is filed to begin an examination. The limitation period does not apply, however, when a report is filed with intent to avoid delivering property as required under the law. The amendment provides a presumption of intent to avoid compliance if a person underreports the amount of property to be delivered by at least 25%.
House Bill 3598 took effect June 10, 2019.
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