SALES TAX AND FEDERAL CONTRACTORS

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1 January 13, 2012 Number 1 SALES TAX AND FEDERAL CONTRACTORS League staff has become aware of at least one federal defense contractor that has requested a refund of state and local sales taxes it paid on items purchased to fulfill a federal contract. The comptroller, based partially on an opinion from the Third Court of Appeals in the case of Combs v. Healthcare Services Corporation, has ordered at least one city to refund those sales taxes to the contractor and not to collect them going forward (the comptroller is refunding the state s share). The case and the comptroller s refund order are based on the sale for resale provision in the Texas Tax Code. Contractors claim that they purchase items office supplies, office equipment, furniture, software, utilities, and so forth that ultimately belong to the federal government. Thus, the contractors position (and the opinion of the Third Court of Appeals) is that the items are sold for resale and thus exempt from sales tax. The legal arguments as to why that is not the case are somewhat obscure, but may prove very important to some cities. Senate Bill 1, passed during the 2011 special legislative session, made some minor changes to the sale for resale provision, but still allows federal contractors to claim exemptions for several type of contracts. 1

2 The comptroller has appealed the case to the Texas Supreme Court, and the League will most likely file an amicus brief in support of the state. If your city has received a sales tax refund order from the comptroller s office related to a federal contractor s claim, please contact Scott Houston, TML general counsel, at shouston@tml.org. COMPROMISE REACHED ON PRIMARY ELECTION DATE FOR NOW A recent court order in the ongoing legal battle over state-level redistricting has tentatively rescheduled the Texas primary election to take place on April 3, That date is good news for most Texas cities because it should mean that counties will be able to provide electronic voting machines for the May 12, 2012, municipal elections. Uncertainty remains, however, because the redistricting war is far from over. As reported in the December 8, 2011, edition of the Legislative Update, the lawsuit challenging the redistricting maps adopted by the Texas Legislature had threatened to affect city elections that are slated to be held in May What caused cities concern? A federal court struck down the new maps drawn by the Texas Legislature during the 2011 legislative session. That court then proposed its own maps, which the attorney general appealed to the U.S. Supreme Court. In his brief to the Supreme Court, the attorney general proposed that should the primary elections need to be delayed to allow the Supreme Court time to review the new maps the elections for which the new districts are pending could be postponed until the date reserved for the primary runoff election (May 22, 2012). Holding the primary election on May 22, 2012, could have been detrimental to cities because the counties might not have been able to share their electronic voting machines for city elections held on May 12. To ensure that state officials were aware of that problem, the League submitted a letter to the attorney general stating its concerns and providing alternatives to his proposal. But prior to any decision being made by the Supreme Court regarding the Texas primary election date (the Court still hasn t taken action), the parties to the lawsuit agreed that the primary election date should be moved from March 6, 2012, to April 3, (The federal district court issued an order on December 16, 2011, that formally set the primary election date as April 3, 2012.) Following the order, statewide organizations representing 2

3 Texas counties filed a joint advisory memorandum with the trial court to express the practical and legal difficulties that county election officials would have complying with the new primary election date. The League staff also filed correspondence with the court to point out the difficulties that any further changes to the primary election date could have on Texas cities. We pointed out the problem with the proximity of the primary election and city elections that will take place on May 12, (More specifically, the League requested that should the primary election date need to be rescheduled again it not be rescheduled within ten days on either side of the May uniform election date.) Oral arguments in the redistricting case took place before the U.S. Supreme Court on Monday, January 9. At this point in time, all primary elections are scheduled to take place on April 3, Of course, depending on how (and when) the Supreme Court disposes of the redistricting suit, that date is subject to change. Cities that are conducting elections in May 2012 will want to keep in close contact with their county election officials to make sure that the legal wrangling over redistricting does not jeopardize their scheduled elections. TCEQ DENIES PROPERTY TAX EXEMPTION The executive director of the TCEQ recently denied several Prop 2 requests from oil refineries to remove from the tax rolls hydrotreaters, which are used to remove sulfur from motor fuels. Prop 2 is a constitutional amendment adopted by voters in 1993 that provides ad valorem tax relief for certain pollution control equipment. Applications for an exemption must be filed with Texas Commission on Environmental Quality (TCEQ) for a determination of whether the equipment qualifies. Since the passage of the law, some companies have been trying to stretch its meaning to avoid paying their fair share of property taxes. The refineries argued that because the hydrotreaters make fuel that is used in vehicle motors and other engines burn cleaner TCEQ should exempt them from property taxes. The executive director disagreed, reasoning that the refineries request goes beyond the original purpose of the exemption. The exemption was intended to only apply to pollution control equipment installed to reduce pollution at a manufacturing or industrial facility, not to end products that control or reduce pollution. The executive director s decision is promising news for cities and other local governments, which collectively stood to lose hundreds of millions of dollars in property 3

4 tax revenue to oil refineries. The refineries did not appeal the executive director s decision, but the issue is probably far from dead. The League will continue to monitor the issue and will provide updates should the refineries choose to appeal the decision. ATTORNEY GENERAL ANNOUNCES OPEN RECORDS E-FILING SYSTEM At the 2011 Open Government Conference last December, the attorney general announced the implementation of H.B. 2866, passed during the 2011 legislative session, through his office s new electronic filing system. According to a press release from his office: In an effort to streamline and modernize governmental bodies submission of ruling requests to the open records division, the office of the attorney general (OAG) has created an electronic filing system. Under the Public Information Act, governmental bodies that wish to withhold information from disclosure to the public must seek a ruling from the OAG s open records division. The new electronic filing system, which will be available for use in February 2012, will allow governmental bodies to submit their requests electronically through the system. Interested third parties that wish to submit briefing materials supporting or opposing governmental bodies ruling requests will also be able to submit their documentation electronically through the electronic filing system. Effective January 3, 2012, the open records division will no longer accept faxed or ed submissions from governmental bodies or interested third parties. Governmental bodies who choose not to use the new electronic filing system may still submit their documents to the OAG through First-Class U.S. Mail, common or contract carrier, interagency mail, or hand delivery during normal business hours. Public officials with questions about requesting an attorney general open records decision and submitting materials for OAG review should contact the OAG s toll-free open government hotline at 877-OPEN-TEX. More information about the electronic filing system may be found online at 4

5 There will be a cost of $30 to use the system (a $25 nonrefundable administrative convenience fee, plus an additional $5 fee imposed by Texas.gov). Some consider the new system a step forward, while others see it as yet another example of the legislature pushing down the operational costs of a state agency to local governments. In any case, more information about the system is available at STREET SIGNS: COMPLIANCE DEADLINES FOR CERTAIN FONT AND RETROREFLECTIVITY REQUIREMENTS The Federal Highway Administration (FHWA) proposed various new rules over recent months related to traffic sign requirements in the federal Manual on Uniform Traffic Control Devices (MUTCD). Confusion has resulted from misleading reports from different agencies regarding the proposed rules as they relate to sign retroreflectivity and sign font. While some changes are currently being proposed, certain deadlines have not changed: Font: The 2009 MUTCD the most current edition of the MUTCD requires a mix of upper-case and lower-case letters for street name and other guide signs. The requirements apply when signs are replaced because of normal wear and tear. In 2000, the MUTCD added a recommendation for minimum letter heights on street name signs. Agencies were required to decide by January 9, 2012, whether or not to use the recommended letter height or use an engineering study or engineering judgment to decide that a smaller letter height is acceptable. In 2003, the MUTCD added a recommendation for letter heights of street name signs on multilane roads with speed limits greater than 40 mph. Agencies must evaluate and decide by December 22, 2018, whether or not to use the recommended letter heights or us an engineering study or engineering judgment to decide that a smaller letter height is acceptable. Retroreflectivity: In 2007, the MUTCD added certain deadlines to implement minimum levels of retroreflectivity: 1) By January 22, 2012, a plan must be adopted to ensure that signs meet minimum levels of retroreflectivity by the dates in (1) and (2), below. 2) By January 22, 2015, regulatory, warning, and certain post-mounted signs must meet retroreflectivity requirements. 5

6 3) By January 22, 2018, overhead and street name signs must meet retroreflectivity requirements. Detailed information on current requirements and proposed rules is available at TEXAS WATER CONSERVATION ADVISORY COUNCIL SEEKING APPLICATIONS FOR CITIES THAT CONSERVE WATER According to the Texas Water Conservation Advisory Council (WCAC), Texas leaders have increasingly recognized that municipal water conservation is an important part of long-term water planning to meet future needs. In recent years, many areas of the state have demonstrated that municipal water conservation planning produces enormous benefits and is an integral part of water management. Many communities around the state have taken significant strides to ensure wise water use and have found conservation programs to be a cost-effective method of meeting increased water demands while postponing expensive supply or capacity expansion. The water savings that water conservation measures can provide are real, practical, and offer significant untapped potential. To recognize those cities that have made strides in the area of water conservation, the WCAC created the Blue Legacy Awards. The awards are a means to showcase municipal water suppliers as effective stewards of water resources. Recognition is given to water suppliers that have demonstrated outstanding and innovative commitment to the state s mission of promoting responsible management of water resources, as well as conservation of Texas water resources. The WCAC will be accepting applications for the awards until February 29, For more information, go to 6

7 DEPARTMENT OF RURAL AFFAIRS MERGES WITH DEPARTMENT OF AGRICULTURE Texas Agriculture Commissioner Todd Staples recently announced that the transition of the Texas Department of Rural Affairs (TDRA) to the Texas Department of Agriculture (TDA) is complete. The transition was required by 1S.B. 1, which passed during the 2011 special session. According to Commissioner Staples, the TDA s new Office of Rural Affairs is fully operational. The office will oversee the delivery of numerous programs and services, including the following: Community Development Block Grant Program State Office of Rural Health Texas Agricultural Finance Authority Texas Rural Health and Economic Development Advisory Council It is my hope you will actively participate in the council s efforts to identify and address rural issues and opportunities in Texas, Staples said. The TDA team looks forward to partnering with you as we strive to ensure stability and growth for rural Texas. INTERESTED IN PUBLIC-PRIVATE PARTNERSHIPS? Senate Bill 1048, passed during the 2011 legislative session, creates new procedures for cities to enter into public-private partnerships. (The procedures in the bill are not exclusive, and cities must opt-in by resolution to utilize them.) The National Council for Public-Private Partnerships will conduct a seminar on the bill at the Hilton Austin on January 25, For more information, go to TML member cities may use the material herein for any purpose. No other person or entity may reproduce, duplicate, or distribute any part of this document without the written authorization of the Texas Municipal League. 7