| (a) Effective date. The provisions of this section
apply to franchise tax reports originally due on or after January
1, 2008, except as otherwise noted.
(b) Definitions. The following words and terms, when
used in this section, shall have the following meanings, unless the
context clearly indicates otherwise.
(1) Capital asset--Any asset that is held for use in
the production of income, and that is subject to depreciation, depletion
or amortization.
(2) Employee retirement plan--A plan or other arrangement
that qualifies under Internal Revenue Code (IRC), §401(a) (Qualified
pension, profit-sharing, and stock bonus plans), or that satisfies
the requirement of IRC, §403 (Taxation of employee annuities),
or a government plan described in IRC, §414(d) (Definitions and
special rules).
(3) Gross receipts--Revenue as determined under §3.587
of this title (relating to Margin: Total Revenue), except as provided
in subsection (e)(2) (concerning capital assets and investments) and
subsection (e)(17) (concerning loans and securities) of this section.
Non-receipt items excluded from total revenue under §3.587 of
this title are not included in the calculation of total revenue under
that section and are not deducted from gross receipts. These non-receipt
items include the exclusion for uncompensated care, the $500 exclusion
per pro bono services case, the exclusion for the direct cost of providing
waterway transportation, the exclusion for the direct cost of providing
agricultural aircraft services, and the exclusion for the cost of
a vaccine. See subsection (d)(5) of this section for gross receipts
that are excluded from the apportionment calculation.
(4) Internal Revenue Code--The Internal Revenue Code
of 1986 in effect for the federal tax year beginning on January 1,
2007, not including any changes made by federal law after that date,
and any regulations adopted under that code applicable to that period.
(5) Inventory--Property held primarily for sale to
customers in the ordinary course of a trade or business. Securities
and loans held for investment, hedging, or risk management purposes
are not inventory.
(6) Investment--Any non-cash asset that is not a capital
asset or inventory.
(7) Legal domicile--The legal domicile of a corporation
or limited liability company is its state of formation. The legal
domicile of a partnership, trust, or joint venture is the principal
place of business of the partnership, trust, or joint venture.
(8) Location of payor--The legal domicile of the payor.
(9) Principal place of business--The place where an
entity's management directs, controls, and coordinates the entity's
activities.
(10) Regulated investment company--Any domestic corporation
defined under IRC, §851(a) (Definition of regulated investment
company), including a taxable entity that includes trustees or sponsors
of employee benefit plans that have accounts in a regulated investment
company.
(11) Security--An instrument defined under IRC, §475(c)(2)
(Mark to market accounting method for dealers in securities). This
term includes instruments described by §475(e)(2)(B), (C), and
(D) of that code.
(12) Tax reporting period--The period upon which the
tax is based under Tax Code, §171.1532 (Business on Which Tax
on Net Taxable Margin Is Based) or §171.0011 (Additional Tax).
(13) Taxable entity--Any entity upon which tax is imposed
under Tax Code, §171.0002(a) (Definition of Taxable Entity) and
not specifically excluded under Tax Code, §171.0002(b) or §171.0002(c).
See also §3.581 of this title (relating to Margin: Taxable and
Nontaxable Entities).
(14) Texas gross receipts--The portion of a taxable
entity's gross receipts that is from business done in Texas.
(c) Apportionment formula. Except as provided in paragraphs
(1) and (2) of this subsection, a taxable entity's margin is apportioned
to Texas to determine the amount of franchise tax due by multiplying
the taxable entity's margin by a fraction, the numerator of which
is the taxable entity's Texas gross receipts and the denominator of
which is the taxable entity's gross receipts from its entire business.
(1) Regulated investment company services. A taxable
entity's margin derived, directly or indirectly, from the sale of
management, distribution, or administration services to or on behalf
of a regulated investment company, is apportioned to Texas by multiplying
that portion of the taxable entity's total margin by a fraction:
(A) the numerator of which is the average of the sum
of shares owned at the beginning of the year and the sum of the shares
owned at the end of the year by the investment company shareholders
whose principal place of business is in this state or, if the shareholders
are individuals, are residents of this state; and
(B) the denominator of which is the average of the
sum of shares owned at the beginning of the year and the sum of shares
owned at the end of the year by all investment company shareholders.
(2) Employee retirement plan services. A taxable entity's
margin derived, directly or indirectly, from the sale of management,
administration, or investment services to an employee retirement plan
is apportioned to Texas by multiplying that portion of the taxable
entity's total margin by a fraction:
(A) the numerator of which is the average of the sum
of beneficiaries domiciled in Texas at the beginning of the year and
the sum of beneficiaries domiciled in Texas at the end of the year;
and
(B) the denominator of which is the average of the
sum of all beneficiaries at the beginning of the year and the sum
of all beneficiaries at the end of the year.
(d) General rules for reporting gross receipts.
(1) A taxable entity that files an annual report must
report gross receipts based on the business done by the taxable entity
beginning with the day after the date upon which the previous report
was based, and ending with the last accounting period ending date
for federal income tax purposes ending in the calendar year before
the calendar year in which the report is originally due.
(2) A taxable entity with a beginning date prior to
October 4, 2009 that files an initial report must report gross receipts
based on its activities commencing with the beginning date, as described
in §3.584 of this title (relating to Margin: Reports and Payments),
and ending on the last accounting period ending date for federal income
tax purposes that is at least 60 days before the original due date
of the initial report. A taxable entity with a beginning date on or
after October 4, 2009 that files a first annual report must report
gross receipts based on its activities commencing with the beginning
date and ending on the last accounting period ending date for federal
income tax purposes in the same calendar year as the beginning date.
(3) Taxable entities that are members of an affiliated
group that are part of a unitary business must file a combined franchise
tax report. See §3.590 of this title (relating to Margin: Combined
Reporting), for determining gross receipts for a combined report.
(4) When a taxable entity computes gross receipts for
apportionment, the taxable entity is deemed to have elected to use
the same methods that the taxable entity used in filing its federal
income tax return.
(5) Any item of revenue that is excluded from total
revenue under Texas law or United States law is excluded from gross
receipts from an entity's entire business and Texas gross receipts
as provided by Tax Code, §171.1055(a) (Exclusion of Certain Receipts
for Margin Apportionment). For example, any amount that is excluded
from total revenue under the IRC, §78 (Dividends received from
certain foreign corporations by domestic corporations choosing foreign
tax credit) or §§951 - 964 (26 U.S. Code Subpart F - Controlled
Foreign Corporations), is excluded from gross receipts. Non-receipt
items that are excluded from total revenue under §3.587 of this
title, such as $500 per pro bono services case; the actual cost of
uncompensated care; the direct cost of providing waterway transportation;
the direct cost of providing agricultural aircraft services and the
cost of a vaccine, are not deducted from gross receipts under this
section. See subsection (b)(3) of this section, concerning definition
of gross receipts. For example, under Tax Code, §171.1011(g-3)
(Determination of Total Revenue from Entire Business), an attorney
may exclude $500 from total revenue for handling a pro bono case.
Since the $500 is not a receipt, there is no exclusion for pro bono
work when calculating gross receipts. Therefore, if a taxable entity
starts with its total revenue amount to calculate its gross receipts,
the taxable entity must add back the $500 per pro bono services case.
(6) A taxable entity that uses a 52 - 53 week accounting
year end and that has an accounting year that ends during the first
four days of January of the year in which the report is originally
due may use the preceding December 31 as the date through which margin
is computed.
(7) Any item of allocated revenue excluded under §3.587(c)(9)
of this title is excluded from Texas gross receipts and gross receipts
from an entity's entire business.
(e) Computation and sourcing of gross receipts.
(1) Advertising services. Gross receipts from the dissemination
of advertising are sourced to the locations of the advertising audience.
The locations of the advertising audience should be determined in
good faith using the most reasonable method under the circumstances,
considering the information reasonably available. The method should
be consistently applied from year to year and supported by records
retained by the service provider. Locations that may be reasonable
include the physical locations of the advertising, advertising audience
locations recorded in the books and records of the service provider,
and locations listed in published rating statistics. If the locations
of nationwide advertising audiences cannot otherwise be reasonably
determined, then 8.7% of the gross receipts are sourced to Texas.
For reports originally due prior to January 1, 2021, advertising receipts
attributable to a radio or television station transmitter in Texas
may be sourced to Texas.
(2) Capital assets and investments.
(A) Except as provided in subparagraph (C) of this
paragraph, only the net gain from the sale of a capital asset or investment
is included in gross receipts. A net loss from the sale of a capital
asset or investment is not included in gross receipts.
(B) The net gain or net loss from the sale of a capital
asset or investment is the amount realized from the sale less the
adjusted basis for federal income tax purposes.
(C) For reports originally due prior to January 1,
2021, a taxable entity may add the net gains and losses from sales
of investments and capital assets to determine the total gross receipts
from such transactions. If both Texas and out-of-state sales have
occurred, then a separate calculation of net gains and losses on Texas
sales must be made. If the combination of net gains and losses results
in a loss, the taxable entity may not net the loss against other receipts.
(D) The net gain from the sale of a capital asset or
investments is sourced based on the type of asset or investment sold.
The net gain from the sale of an intangible asset is sourced to the
location of the payor as provided in paragraph (21)(B) of this subsection,
concerning gross receipts from the sale of intangible assets, and
paragraph (25) of this subsection, concerning securities, of this
subsection Examples of intangible assets include, but are not limited
to, stocks, bonds, commodity contracts, futures contracts, patents,
copyrights, licenses, trademarks, franchises, goodwill, and general
receivable rights. The net gain from the sale of real property is
sourced as provided in paragraph (23) of this subsection, concerning
real property. The net gain from the sale of tangible personal property
is sourced as provided in paragraph (29) of this subsection, concerning
tangible personal property.
(E) Examples.
(i) Example 1. During a report year, a real estate
investment company sells two Texas investment properties, reporting
a gain on sale of one property and a loss on the sale of the other
property. The company should include the net gain on the profitable
sale in gross receipts from its entire business but should not include
the net loss on the unprofitable sale. The company should not offset
the net loss against the net gain. To determine Texas gross receipts,
the asset should be sourced based on its nature. Receipts from the
sale of real property are sourced to the location of the property,
as provided in paragraph (23) of this subsection. The company should
include only the net gain on the sale of the Texas investment property
in Texas gross receipts and should not include the net loss on the
sale of the other Texas investment property.
(ii) Example 2. The facts are the same as in Example
1, except the real estate investment company also had net gains and
net losses from the sale of out-of-state properties. For reports originally
due prior to January 1, 2021, the real estate investment company may
offset all of the net losses from these sales against all of the net
gains. If the result is a net gain, the net gain is included in gross
receipts from its entire business. If the result is a net loss, the
net loss may not be not included in gross receipts from its entire
business. To determine Texas gross receipts, the company may offset
the net loss from the sale of the one Texas property against the net
gain from the sale of the other Texas property. If the Cont'd... |
