When could a Comptroller sales-tax audit sample be used to project the former franchise-tax credit for manufacturing equipment?

Plain-English summary

A projection was allowed only from a Comptroller-selected sales-tax audit sample and only within the audited qualifying period.

The internal memorandum and attached taxpayer letter allowed limited projection of the former franchise-tax credit for manufacturing equipment.

The sample had to be selected and used for projection by a Comptroller auditor; independent taxpayer samples were not accepted. The taxpayer remained responsible for identifying qualifying equipment in the sample and supporting eligibility.

The full Comptroller sample established the percentage of qualifying purchases. That percentage applied to the audit population for October 1, 1991 through September 30, 1993. The qualifying amount was multiplied by 25% for October 1, 1991 through December 31, 1992 and 50% for January 1 through September 30, 1993, then by the applicable state tax rate. Credits already taken reduced the result.

No projection extended beyond the sales-tax audit period or two-year window. Qualifying purchases outside the Comptroller sample required detailed submission.

What this means for you

Taxpayers researching historical manufacturing credits

Sampling did not replace proof of qualification and could not extend to unaudited periods.

Tax professionals

Use only the Comptroller's sample and population, substantiate qualifying items, apply the phase-in percentages by period, and deduct credits already claimed.

Common questions

Q: Could the taxpayer create its own sample?
A: No.

Q: What period could be projected?
A: October 1, 1991 through September 30, 1993, within the audit period.

Q: How were purchases outside the sample handled?
A: They had to be submitted in detail.

Citations and references

• Internal December 2, 1996 audit memorandum and attached October 2, 1996 Tax Policy letter
• Historical 25% and 50% manufacturing-exemption phase-in percentages stated in the source

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9612304L

Original ruling text

December 2, 1996

TO: Audit Managers and Field Auditors

FROM: Ledford Kelly

SUBJECT: Projection of Franchise Tax Credit on Manufacturing Equipment

Attached is a letter from Wade Anderson to COMPANY A which explains the only
circumstances where a sample in a sales tax audit can be used to project the
amount of Franchise tax credit due based on manufacturing equipment purchases.

Projections within the sales tax audit period are limited to periods covered by
the audit between 10/01/91 through 09/30/93. No projection is allowed on
periods outside the sales tax audit period or periods outside of the 2 year
window. Qualifying periods outside of the audit period will still need to be
submitted in detail to qualify.

If you have any questions please give me or David Rock a call.

October 2, 1996

Dear **:

I apologize for taking so long to get back with you concerning projection
procedures for the franchise tax credit for qualifying manufacturing equipment.
In response to your request we have reviewed our position on the submission of
franchise tax credits based on the manufacturing phased-in exemption. We have
previously only allowed these credits when based on a detail submission by the
company claiming the refund. After our review we feel that a sample and
projection, in limited situations, may be appropriate.

The sample and projection must be based on a sample that was selected and used
for projection purposes by a Comptroller auditor. No independent samples will
be allowed. The company wanting to use the sample to establish the amount of
Franchise tax credit available will be responsible for identifying the
qualifying manufacturing items in the sample and for supplying all the
information necessary to support that those items qualify as manufacturing
equipment subject to the refund.

The entire sample used by the Comptroller will be used to identify the
percentage of items tested that qualify as manufacturing equipment subject to
the Franchise tax credit. When practical, the sample may be stratified to the
two year qualifying period, however the stratified sample must evaluate within
the limits used by the Comptroller's audit staff. Total qualifying
manufacturing equipment in the sample divided by the total of the sample will
establish the percentage of qualifying purchases.

The percentage of qualifying purchases established above will be applied to the
population base used for projection by the Comptroller for the two year period
10/l/91 through 9/30/93 to establish the maximum qualifying amount of purchases
subject to the Franchise tax credit. The qualifying amount established will be
multiplied by 25% for the period 10/1/91 through 12/31/92. The remaining
qualifying amount established will be multiplied by 50% for the period 1/1/93
through 9/30/93. The amounts established from these projections will then be
subject to the state
tax rate in effect to establish the Franchise tax credit due. This amount will
be reduced by any Franchise tax credits already taken on the taxpayers
Franchise tax reports.

All other qualifying purchases not included in the sample selected and used by
the Comptroller must be submitted in detail before any Franchise tax credit
will be allowed.

I believe this is fair and hope is satisfactory to your client. Should you have
any further questions, please write me at 111 E. 17th Street, Austin. Texas
78774, or call me at 1-800-531-544l, extension 3-4004.

Sincerely,

Wade Anderson
Director, Tax Policy

cc: Harold Lee, Director, Audit Division