(ii) that is primarily engaged in gathering, storing,
transporting, or processing crude oil, including finished petroleum
products, natural gas, condensate, and natural gas liquids, except
for a refinery installation that manufactures finished petroleum products
from crude oil.
(B) For purposes of this paragraph, "processing" means
the physical or mechanical removal, separation, or treatment of crude
oil, including finished petroleum products, natural gas, condensate,
and natural gas liquids after those materials are produced from the
earth. The term does not include the chemical or biological transformation
of those materials.
(11) Rental or leasing companies. Notwithstanding any
other provision of this section:
(A) a motor vehicle rental company that remits a tax
on gross receipts imposed under Tax Code, §152.026, or a motor
vehicle leasing company, may subtract as costs of goods sold the costs
otherwise allowed by this section in relation to motor vehicles that
the company rents or leases in the ordinary course of its business;
(B) a heavy construction equipment rental or leasing
company may subtract as costs of goods sold the costs otherwise allowed
by this section in relation to heavy construction equipment that the
company rents or leases in the ordinary course of its business; and
(C) a railcar rolling stock rental or leasing company
may subtract as costs of goods sold the costs otherwise allowed by
this section in relation to railcar rolling stock that the company
rents or leases in the ordinary course of its business.
(12) Reporting methods. A taxable entity shall determine
its cost of goods sold, except as otherwise provided by this section,
in accordance with the methods used on the federal income tax return
on which the report under this chapter is based. This subsection does
not affect the type or category of cost of goods sold that may be
subtracted under this section.
(13) Restaurants and bars. Entities engaged in activities
described in Major Group 58 (Eating and Drinking Places) of the Standard
Industrial Classification Manual may deduct for cost of goods sold
only those expenses allowed under subsections (d), (e) and (f) of
this section, that relate to the acquisition and production of food
and beverages. Any costs related to both the production of food and
beverages and to other activities must be allocated to production
on a reasonable basis.
(d) Direct costs. The cost of goods sold includes all
direct costs of acquiring or producing the goods. Direct costs include:
(1) Labor costs. A taxable entity may include in its
cost of goods sold calculation labor costs, other than service costs,
that are properly allocable to the acquisition or production of goods
and are of the type subject to capitalization or allocation under
Treasury Regulation Sections 1.263A-1(e) or 1.460-5 as direct labor
costs, indirect labor costs, employee benefit expenses, or pension
and other related costs, without regard to whether the taxable entity
is required to or actually capitalizes such costs for federal income
tax purposes.
(A) For purposes of this section, labor costs include
W-2 wages, IRS Form 1099 payments for labor, temporary labor expenses,
payroll taxes, pension contributions, and employee benefits expenses,
including, but not limited to, health insurance and per diem reimbursements
for travel expenses, to the extent deductible for federal tax purposes.
(B) Labor costs under this paragraph shall not include
any type of costs includable in subsection (f) or excluded in subsection
(g) of this section. Costs for labor that do not meet the requirements
set forth in this paragraph may still be subtracted as a cost of goods
sold if the cost is allowed under another provision of this section.
For example, service costs may be included in a taxable entity's cost
of goods sold calculation to the extent provided by subsection (f)
of this section.
(2) Incorporated materials. A taxable entity may include
in its cost of goods sold calculation the cost of materials that are
an integral part of specific property produced.
(3) Consumable materials. A taxable entity may include
in its cost of goods sold calculation the cost of materials that are
consumed in the ordinary course of performing production activities.
(4) Handling costs. A taxable entity may include in
its cost of goods sold calculation handling costs, including costs
attributable to processing, assembling, repackaging, and inbound transportation.
(5) Storage costs. A taxable entity may include in
its cost of goods sold calculation storage costs, including the costs
of carrying, storing, or warehousing property, subject to subsection
(g) of this section, concerning excluded costs.
(6) Depreciation, depletion, and amortization. A taxable
entity may include in its cost of goods sold calculation depreciation,
depletion, and amortization reported on the federal income tax return
on which the report under this chapter is based, to the extent associated
with and necessary for the production of goods, including recovery
described by Internal Revenue Code, §197, and property described
in Internal Revenue Code, §179.
(7) Rentals and leases. A taxable entity may include
in its cost of goods sold calculation the cost of renting or leasing
equipment, facilities, or real property directly used for the production
of the goods, including pollution control equipment and intangible
drilling and dry hole costs.
(8) Repair and maintenance. A taxable entity may include
in its cost of goods sold calculation the cost of repairing and maintaining
equipment, facilities, or real property directly used for the production
of the goods, including pollution control devices.
(9) Research and development. A taxable entity may
include in its cost of goods sold calculation the costs attributable
to research, experimental, engineering, and design activities directly
related to the production of the goods, including all research or
experimental expenditures described by Internal Revenue Code, §174,
regardless of whether the taxable entity is the producer of the good
it sells.
(10) Mineral production. A taxable entity may include
in its cost of goods sold calculation geological and geophysical costs
incurred to identify and locate property that has the potential to
produce minerals.
(11) Taxes. A taxable entity may include in its cost
of goods sold calculation taxes paid in relation to acquiring or producing
any material, including property taxes paid on buildings and equipment,
and taxes paid in relation to services that are a direct cost of production.
(12) Electricity. A taxable entity may include in its
cost of goods sold calculation the cost of producing or acquiring
electricity sold.
(13) A taxable entity may include in its cost of goods
sold calculation a contribution to a partnership in which the taxable
entity owns an interest that is used to fund activities, the costs
of which would otherwise be treated as cost of goods sold of the partnership,
but only to the extent that those costs are related to goods distributed
to the contributing taxable entity as goods-in-kind in the ordinary
course of production activities rather than being sold by the partnership.
(e) Additional costs. In addition to the amounts includable
under subsection (d) of this section, the cost of goods sold includes
the following costs in relation to the taxable entity's goods:
(1) deterioration of the goods;
(2) obsolescence of the goods;
(3) spoilage and abandonment, including the costs of
rework, reclamation, and scrap;
(4) if the property is held for future production,
preproduction direct costs allocable to the property, including storage
and handling costs, as provided by subsection (d)(4) and (5) of this
section;
(5) postproduction direct costs allocable to the property,
including storage and handling costs, as provided by subsection (d)(4)
and (5) of this section;
(6) the cost of insurance on a plant or a facility,
machinery, equipment, or materials directly used in the production
of the goods;
(7) the cost of insurance on the produced goods;
(8) the cost of utilities, including electricity, gas,
and water, directly used in the production of the goods;
(9) the costs of quality control, including replacement
of defective components pursuant to standard warranty policies, inspection
directly allocable to the production of the goods, and repairs and
maintenance of goods; and
(10) licensing or franchise costs, including fees incurred
in securing the contractual right to use a trademark, corporate plan,
manufacturing procedure, special recipe, or other similar right directly
associated with the goods produced.
Cont'd... |